Polyethylene price surge will lift Qenos

"But you do get periods of famine between times" By Ian Porter March 24 2003

A surge in polyethylene prices has reduced the adverse effects on Orica's earnings of the struggling Qenos, although the Botany operation is still recovering from January power outages.

A leading analyst has singled out Qenos as an earnings recovery story in the next financial year on the strength of a recovery in world polyethylene prices.

The prices had rebounded from $US550 ($930) a tonne last year to $US700 a tonne, Orica managing director Malcolm Broomhead said on Friday.

"It is a business that, when the polyethylene price is up - and it can reach $US1000 a tonne - throws off an enormous amount of cash, and you get these feasts.

"But you do get periods of famine between times," he added.

In a research note released late last week, ABN Amro predicted that Qenos would produce "a vastly improved" result in 2003-04.

While acknowledging the danger of an oil price spike, ABN Amro expects oil prices to return to a more normal level of about $US26 a barrel by the end of 2003.

The current combination of oil price ($US30) and polyethylene price ($US675) means that a recovery from a loss of $25 million this financial year to a profit of $5 million "is not just a case of wishful thinking".

Mr Broomhead would not be drawn on the board's attitude to the Qenos book value of $136 million but he said directors were still optimistic about a sale eventually.

"It is one of those business which will suit someone's portfolio but does not suit ours.

"There will be people who will look at its cash flow and will like it."

Mr Broomhead said Orica wanted to sell its stake because the earnings were too volatile.

"Over the last three or four years the changes that have occurred in our business portfolio have moved us away from being a deeply cyclical stock with those sort of assets."

Orica's businesses now were "pretty predictable", where the volatility was significantly reduced "and Qenos just does not fit with that".

Mr Broomhead said the explosives division was travelling "very well" around the world, despite the one-month strike in Venezuela, which might trim an estimated $500,000 from earnings before interest and tax.

Prices for explosives services had been "pretty good" and Orica has recently rolled over several contracts, including the key Rio Tinto deal.

"We are having a good year in Australia [and] Asia," he said. The domestic market has long been the division's earnings powerhouse.

Demand was strong and the company was spending $50 million to increase production at Kooragang Island (formerly controlled by Incitec) and $10 million to boost output at the Yarwun plant in Queensland.

He said that profit margins in the North American market were holding up.