UBS downgrades Makhteshim on costs, Brazil worries

A decision by Makhteshim Agan Group to get in with Chinese manufacturers of glyphosate sprays to sell in the Brazilian market may strAIn a longstanding sales deal with Monsanto, UBS has warned.

The bank, downgrading its rating on shares in Makhteshim Agan Group, which is better known as MA Industries, rAIsed Brazil as the weak spot of the company, the worlds top maker of generic chemicals.

One reason for concern was the collapse of the groups plans to buy US rival Albaugh had denied MA Industries a catalyst for cutting costs in Brazil "to better fit the prevAIling pricing environment".

glyphosate prices have collapsed worldwide because of a ramp up of Chinese production, which has lead to an oversupply of the generic weedkiller.

"At current glyphosate/herbicide prices, MAs infrastructure in Brazil may prove excessive and lead to [a] higher-than-expected loss" in the second half of the year, UBS analyst Roni Biron sAId.

Relationship tested?

However, Mr Biron also flagged the risk MA is taking by stimulating its own supplies of glyphosate for the through long-term contracts to buy ingredients for the weedkiller from China, and sell the finished product, mAInly in Brazil.

The Israel-based company has, since 1998, sold Monsanto glyphosate in Brazil and Europe under a succession of marketing agreements.

"MAs glyphosate relationship with Monsanto in Brazil could be tested following MAs attempt to become a competitor," Mr Biron sAId.

MAs annual report reveals that its latest glyphosate contract with Monsanto was signed in 2009, and lasted for a period of "several more years".

Hefty costs

Mr Biron slashed estimates for the Israeli companys earnings per share in 2010 by nearly one-third to reflect weaker margins, saying he was "concerned about MAs hefty cost structure", which he considered notably high in domestic operations too.

Weaker margin prospects, and the absence of Albaugh, had dampened hopes for 2011 and 2012 too.

Mr Biron cut his estimate on MA Industries shares to "neutral" from "buy", reducing his price target for the stock by 3.00 shekels to 15.00 shekels.

The shares closed 0.9% lower at 13.08 shekels in Tel Aviv.