Fertiliser bites Incitec profits

The company's net profit plummeted 68 per cent to $128.1 million in the year to September 30, dragged down by a 63pc cent decline in earnings from its global fertiliser division and $105.6m impairment on its Gibson Island fertiliser plant in Queensland, recorded in the first half.

"The markets were tough, given the downturn in the global resources industry and also fertiliser prices, which were at or towards cyclical lows," Mr Fazzino said.

Incitec Pivot said cyclical and structural factors, including a steep decline in commodity prices and mine closures or cuts, knocked its underlying earnings before interest and taxes by $231.4m during the period, to $428.1m, in line with analysts' expectations.

The 2017 financial year is unlikely to be much better, the company warns, given it expects weak global fertiliser prices to persist and its mining customers to continue to focus on reducing costs, despite the stunning surge in coking coal and thermal coal prices in recent months.

About 65pc of the company's earnings come from the Asia-Pacific region, largely from explosives sold to the coal sector.

Mr Fazzino said while the structural change in the US coal industry meant it was unlikely to undergo "a reversion back to what [it] was five or 10 years ago", the Australian business was "through a lot of the worst" of the cyclical downturn.

"It depends on your perspective on whether you see the recent increases we have seen in prices as being enduring, but certainly we see the outlook for coking coal being a lot more positive and iron ore being a lot more positive than it was six months ago, and would probably expect for us to see some sort of increases in volume," he said.

The Asia-Pacific explosives division manufactured 344,700 tonnes of ammonium nitrate during the period, up 11.1pc from 2015.

The division's revenue increased just 1.1pc to $920.8m, with about half from the coal sector.

Mr Fazzino was unwilling to comment on whether the surge in coal prices would persist, but he said the increase could be a positive signal for fertiliser prices, given China's strong hold on production volumes in both markets.

Australian coking coal prices have more than trebled over the past 12 months to about $US289/t ($375) after the Chinese government moved to curb domestic supply.

"We have seen a lot of capacity come out of the global fertiliser market.

China has closed 9m tonnes of urea production and, to give you a sense, they produce 90 million tonnes of urea ... so if you believe in those price increases, then that is definitely positive for both our explosive business [and] our fertiliser business," Mr Fazzino said.

Incitec Pivot declared a final dividend of 4.6 cents, bringing the full-year dividend to 8.7c.

RBC Capital markets analyst Andrew Scott said it was a credible result against a difficult backdrop.

"We believe mean reversion in the prices of key fertiliser products will be the key catalyst for [Incitec] and see attractive value for those willing to wait to see this play out," Mr Scott said.