Fertiliser shakeup tipped

21 Aug, 2002 10:00 PM
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A COMBINED Incitec Pivot fertiliser operation commanding 80 per cent of the Australian market would not lead to reduced competition and higher prices, according to newly-appointed Pivot chief executive officer, Chris Leon.

The much-mooted marriage between the country's two biggest fertiliser companies was back in the limelight this week with the news Pivot and Incitec had put a preliminary merger proposal to the Australian Competition and Consumer Commission.

Currently, this market is shared:

pIncitec, with about 40pc, sales predominantly in NSW and Queensland.

pPivot, also with about 40pc, concentrated in Victoria, SA and NSW.

pWestern Mining's Hi-Fert, 13pc, in SA and Victoria.

pWesfarmers' CSBP in WA.

pSmaller players, such as Sumitomo's Summit, and Impact, in Tasmania.

While Mr Leon would not be drawn on the Incitec/Pivot details, he stressed it was only one of a number of options being considered - but such rationalisation would not create competition issues.

It's tempting to think: 'Yes, you'd expect him to say that'.

But Mr Leon's argument centres around the fact that even a dominant Australian company would be small fry in the world market where prices are set.

"I can't talk for Allan Fels ," he said.

"All I can say is I don't think market share necessarily confers market power."

"We are very well served by global players and there is very strong competition in the fertiliser industry.

"I don't think consolidation in any way will change pricing in this market.

"If fertiliser companies are thinking of rationalising because they're seeking higher prices through reduced competition, I think they're kidding themselves.

"The drivers for rationalisation are mainly about cost reduction."

Mr Leon says rationalisation is inevitable because financial returns across the fertiliser industry are inadequate. Pivot is achieving margins, as measured by trading profit, or earnings before interest and tax (EBIT), over assets employed, of around 13pc.

That's well below the 18pc Mr Leon believes it should be achieving.

"It is not only us. Right across the industry nobody is meeting shareholder expectations," he said.

"There's a need for parties to get together to reduce the costs of running business. There is a tremendous amount of money wasted through duplication of inventory, storage and distribution facilities.

"It is a very good argument for rationalisation."

So the question really is: Who will team up with whom and when?

Mr Leon confirms Pivot has had discussions with Incitec but is quick to point out it has also had discussions with a range of other players. This includes Western Mining (Hi-Fert) and Cargill, which has been mooted by some as a possible partner in a Wesfarmers bid for Hi-Fert and Pivot.

There have also been talks with other overseas players but he says the predominantly agriculturally orientated board's preference is for an Australian consolidation.

"Clearly, what we are looking for is somebody who complements Pivot, somebody who has complementary infrastructure, markets and culture", he said.

"I think any of the parties we have talked to will bring an element of complementary interests."

All parties are tight-lipped, but the current Pivot/Incitec proposal appears to involve Incitec issuing shares to Pivot shareholders, watering down Orica's 76pc holding in Incitec and the 21pc held by Futuris, and possibly selling its Crop Care business to Nufarm.

Such talk of rationalisation is not new. But Mr Leon believes this time we shall see results.

"I think this time there is some concern about the effect of El Nino and falling commodity prices, giving an impetus we haven't had before," he said.

"One more thing is that other players have also gone through change, too.

"Western Mining, for instance, is talking about demerging. Orica has had management changes. CSBP didn't meet the hurdles set for it by Michael Chaney (CEO of Wesfarmers).

"There are quite strong drivers in the industry all pointing to why rationalisation should happen this time."

Timing is better for Pivot than it has been for some time in the past.

Long painted as the dowryless bride that, burdened by debt and poor performance, would be forced to take whatever deal it was offered, a turnaround in financial results this year has put Pivot in a stronger bargaining position.

Drought conditions in Incitec's heartland of northern NSW won't do Pivot any harm at the negotiating table either.

Third quarter results released last week show Pivot is heading for a net profit of $17m for the year ending September 30, quite a turnaround from last year's loss of $17.5m and the $23m loss in 2000.

Sales of non core assets are also expected to help Pivot reduce debt to $110m by the end of September, down from $154m last year and $304m in debts at its peak in 1999.

Mr Leon says Pivot's structure, as an unlisted company, makes it difficult to raise capital for growth other than via debt, but there have also been some poor investments, including the establishment of costly prescription farming agency outlets.

Most of this year's profit has come from a rigorous cost cutting strategy, rather than from increasing growth. This focus on cost cutting has actually seen the company lose a few percentage points market share in the last year.

"You can't save your way to profitability. Now we have to balance cost cutting with growth. Full recovery must be about outward focus," Mr Leon said.

A key plank will be a shift away from the historical reliance on superphosphate towards a greater trading role in other fertilisers. And on the use of dealers as well as on existing dedicated agents.

As a company set up to supply cheap single superphosphate to farmers, Pivot's strongest sales have traditionally been of super in the areas around its Geelong and Portland plants. These produce 400,000 tonnes and 200,000t a year respectively.

"The super market is a really mature one . We don't see a lot of growth there," Mr Leon said.

"Having said that, there is tremendous growth, high in the single digits, in fertiliser usage, but this growth is in other things, such as high analysis fertilisers.

"The key to success is for Pivot to be a very strong trader in the other fertiliser products."

Mr Leon took over the top job at Pivot on May 1, moving from logistics and manufacturing to replace Mike Folwell on his departure for mineral sands miner Iluka Resources.

His appointment was about maintaining consistency of direction, in turning the company around.

Candid about the company's problems and decisive about how they should be solved, Mr Leon is clear that path ahead must include industry rationalisation - and he believes that path already has shareholder blessing.

"It (rationalisation) has to go to a shareholder vote," he said. "But my reading of the current situation, from the people we have spoken to about it is that we should stop talking and get on with it.

"There is an impatience to resolve the matter."

Pivot has 43,000 shareholders, of which 30,000 currently are involved in agriculture.

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