With Indonesia’s state-owned fertilizer company PT Pupuk Kalimantan Timur (Pupuk Kaltim) seen as the preferred bidder of the fertilizer business of Australia’s Incitec Pivot Ltd. (IPL) (GM July 28, p. 1), Morgan Stanley is among the analysts skeptical about a potential sale, flagging “some obstacles,” the Australian Financial Review reported.
Melbourne-based IPL, which confirmed last month that it has received several approaches for the potential acquisition of its fertilizer business (GM July 14, p. 1), has yet to publicly reveal whether the fertilizer business is on the selling block. IPL said in a July 12 statement issued to the Australian Securities Exchange (ASX) that its Board is assessing a potential sale along with the ongoing proposal to structurally separate Incitec Pivot Fertilisers and the Dyno Nobel explosives business.
Analysts see a sale of IPL’s fertilizer business as a bit more attractive than the separation plan. Andrew Scott, Morgan Stanley’s Head of Industrials Research Andrew Scott, described the expected A$1.5 billion valuation (approximately $981.2 million at current exchange rates) of the IPL fertilizer business as the “best case for shareholders” in a note to clients.
But Scott sees several obstacles, including supply certainty, Australia’s Foreign Investment Review Board (FIRB) considerations, and the gas disruptions at IPF’s Phosphate Hill ammonium phosphates plant in Queensland.
IPL has flagged A$75-$90 million of additional costs this fiscal year to source shortfall gas for Phosphate Hill (GM June 9, p. 25). Moreover, the gas supplier, Power and Water Corp., has indicated that the gas reserve shortfalls are expected to continue for the remainder of the term of the gas supply agreement with IPL, which runs until mid-2028.
According to the Australian Financial Review, Scott said a potential buyer of the fertilizer business “would struggle to get comfort on future gas reliability.” He said the Phosphate Hill plant historically has been poorly positioned on the cost curve “and additional gas costs could make it unviable at long run fertilizer and currency prices.”
Scott also noted that IPF supplements its sulfur needs for Phosphate Hill from the Glencore Mount Isa copper smelter in Queensland. While the smelter’s life has been extended to 2026, he said there is no “certainty of production beyond then.” Scott believes external sourcing of sulfur would present a major hit to Phosphate Hill’s profitability.
He also sees some difficulties with the sale of IPL’s fertilizer business to an international buyer, as the transaction could need FIRB approval to have an international buyer gain control over a “significant domestic DAP supply,” the Australian Financial Review reported.
Phosphate Hill is Australia’s sole manufacturer of phosphate fertilizers, producing 735,900 mt in FY2022 and 958,400 mt in FY2021. IPL was also the sole producer of urea in Australia before it permanently stopped production at is Gibson Island site at Brisbane. The company still produces SSP and blends a range of NPKs at its Geelong site in Victoria.
Australian farmers too are concerned about the bid by Pupuk Kaltim for IPL’s fertilizer business. Australian National Farmers Federation Vice President David Jochinke said the recent COVID pandemic demonstrated Australia’s need for its own supply of key resources, including fertilizer, Australia Broadcasting Corp. reported.
Jochinke has urged the FIRB to keep Australian farmers at the center of any decision they make. According to the report, he believes the Pupuk Kaltim offer might prompt some Australian superannuation funds to bid for IPL’s fertilizer business.
Despite no longer being a producer of urea, IPL has lined up a 20-year offtake agreement for 2.3 million mt/y of granular urea from Perdaman Chemicals and Fertilisers Pty Ltd.’s Karratha plant, which is under construction on Western Australia’s Burrup Peninsula and expected to be commissioned in mid-2027 (GM May 7, 2021).
Pupuk Kaltim has 13 fertilizer plants in Indonesia, with a current annual output of some 3.4 million mt of urea, 2.7 million mt of ammonia, and 300,000 mt of NPK, according to a NikkeiAsia report (GM July 28, p. 1), all fertilizers used by Australian farmers. The company wants to increase its supplies to support food security in Indonesia, however.