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December 09, 2008

South African fertiliser maker predicts slower sales as credit crunch forces farmers to cut costs

by Esmarie Swanepoel

South African fertiliser, chemical, and explosive producer Omnia warned at the end of November that its agriculture division, which is currently its main contributor to profit, was unlikely to keep up its growth in the six months ahead.

MD Rod Humphris said that results from its agriculture division were bound to decline by about 10% year-on-year in second half of its financial year. This was mostly owing to the credit crunch currently affecting the markets, as well as a result of farmers cutting back on fertiliser demand, he said at the group interim results presentation in Johannesburg.

Although demand would still be strong, interim results for the six-month period ended September would also not be equalled. The agriculture division doubled its revenue in the interim period from R971-million to R2,15-billion, while operating profit surged by 311%.

Humphris noted that the South African market had seen a change in purchasing behaviour in the past six months, with several consumers stocking up on supplies, in an effort to mitigate higher prices.

Traditionally, the agriculture division’s activities were mostly related to the second half of the year, which is the normal planting season. But,a sudden decrease in raw material prices, coupled with the reduced volumes would place fertiliser operating margins under pressure in the next six months, Omnia cautioned. However, the need for fertilisers was a long-term reality, and was crucial for achieving an African green revolution, in the face of a rapidly rising population and declining soil fertility.

In 2007, Omnia started construction on a nitrophosphate plant, which was currently 50% completed. The new plant would help the company improve the economics of its raw materials.

The construction of the plant was likely to take until the end of 2009 before it could be fully implemented, and another R25-million would be spent to bring it to full production.

“This process has the ability to improve or margins by 2% in the fertiliser business, which is quite substantial,” Humphris said.

The Omnia agricultural division was also looking at jatropha production in Zambia, with the group already having invested about R29-million. Humphris said the Zambian crop had the possibility of becoming an important revenue stream for the company, especially considering its biodiesel opportunities.

However, he added that Omnia was still investigating the agronomics of the crop in an effort to understand the best way to grow and harvest the plant. “We have just started to work on it, and we would probably have to go through a few years of growing cycle to really understand it. It could become a very important crop, and of major interest to a group such as ourselves.”

Omnia reported that net profit for the period of R373-million, up 285% from R97-million in 2007. Headline earnings increased by 99%, from R319-million in 2007, to R372-million.

“All three of Omnia’s business divisions achieved revenue growth in excess of 50% when compared with the period to September 2007. While this was driven mainly by a weaker rand on the back of steeply rising international prices, Omnia has again met its earnings a share, and dividend targets as part of a consistently strong performance, over the past 15 years,” said Humphris.

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