Thursday, April 24, 2008

Israel Chemicals Benefits From Rising Demand for Potash

At present, China, US, Brazil and India are the largest potash consuming countries, together accounting for 60% of total world potash demand. According to the IFIA ( the market will remain tight in the coming years, with utilisation rates in the high 80s. The limited capacity additions over the next several years reflect: (1) the limited availability of potash reserves, and (2) the fact that the development of a new potash complex has a lengthy lead time (from five to seven years according to Potash Corp and Uralkali).

The premier companies operating in this industry are Potash Corp and Mosaic, but today I'd like to highlight a more speculative, young company, trading on the Tel Aviv exchange,
Isreal Chemicals Limited (TLV:ICL).

ICL is the second largest company in Israel in terms of market capitalisation. ICL’s main shareholder is Israel Corp, an Israeli-based holding company whose main holdings are ICL, Oil Refinery, Zim Shipping and Tower Semiconductor. Israel Corp is a strategic and long-term investor at ICL. The second largest shareholder is Potash Corp (PCS), the global leader of potash.

PCS has a strategic interest in ICL but has no representative on the board and maintains no working relationship with the company. PCS also has a strategic investment in Arab Potash Company (APC) in Jordan.

ICL operates in three main areas: fertilizers (47% of sales), industrial products (21% of sales), and performance products (28% of sales). In the fertilizers segment, the company produces potash and phosphate fertilizers and compounds. In the industrial products division, ICL’s main focus has been on brominated products for the flame-retardant (FR) industry, oil drilling industry and other areas.

The acquisition of Supresta in 2007 expanded this line of business into organophosphorus flame retardants. ICL’s performance products segment consists primarily of phosphate downstream products for the food industry and other areas.
I believe ICL is well positioned to capitalise on the dramatic price action in the fertilizer market. Potash prices in Brazil and Southeast Asia more than doubled in 07, and substantial adjustments are expected in China and India. With no substantial increase in capacity due in the coming years, IFIA expects more price hikes to follow.

In the most recent quarter, March 08, ICL posted an 82.5% rise in fourth-quarter net profit, boosted by a 44% surge in sales. ICL's quarterly net profit rose to $164.7 million vs. $90.2 million and sales in the October-December period increasing to $1.211 billion vs. $839.6 million YoY.

Investors can expect ICL to gradually realise the sharp increase in potash and phosphate prices in the coming quarters and with rising costs and demand characteristics expect additional hikes to follow. This should lead to strong top-line momentum and higher margins in 08 and 09. According to Investext (Thomson subsidiary) the average expected revenue growth is 34% in 08 and 11% in 09 to coincide with earnings growth of 77% and 19%, respectively.

The fertilizer industry is undergoing a structural change led by growing consumption of meat in Asia, and biofuel production. The rapid economic growth in China, India and other Asian countries, which combined account for the majority of world population, has boosted meat consumption.

In China, for example, meat consumption has tripled over the past 20 years and is currently growing at 4-5% annually. Given the essential role of grain in animal feed (the production of 1 kilogram of beef requires seven kilograms of grain), this trend imposes significant strain on available stocks.

Further strain on grain availability is imposed by the growing production of biofuel, and ethanol in particular. The USDA projects that ethanol production will continue its rapid expansion in the coming years, and will consume more than 30% of US corn in 2009/10 from 18% in 06.

Main risk with ICL, and the industry, is the cost control, most notably, ICL's freight costs have surged this year especially with the BDI index registering an increase of 122% in 2007. Then there is the FX risk: increasing freight costs, the Israeli shekel has significantly appreciated against the USD.

More recently, the appreciation of the shekel has continued and every 1% appreciation in the shekel inflates ICL’s reported costs by cUS$4.5m. Other risks besides rising cost pressures & appreciation of the shekel are lower than expected fertilizer prices and soft demand for brominated electronic components.

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.


Anonymous said...

Great article. Thanks

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