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FERTILIZERS IN PAKISTAN

DEMAND, PRODUCTION AND IMPORTS Eqan Ali Khan


Business Head Fert And Agri Commodities

March 30, 2011

Engro EXIMP

Pakistan An Agrarian Economy

Agriculture is the largest sector of Pakistans economy employing approx. half of its labor force and producing one quarter of its GDP There are two principal crop seasons in Pakistan:

"Kharif : AprilSeptember (Rice, Sugarcane, Cotton, Maize)

"Rabi : October March (Wheat, Potato, Maize, Sugarcane, Tobacco)

Major crops, such as, wheat, rice, cotton and sugarcane account for 82 % of the value added in the major crops:
Production (Kt) Crops Wheat Cotton
2009/10

Production CAGR
2000/01 - 2009/10

Yield(Kt/Acre)
2009/10

Gross Value Addition of Major Crops


39% 22%

23,864 2,159

2.6% 1.9%

1.07 0.28

Rice
Sugarcane

6,883
49,373

4.2%
1.3%

0.97
21.2

18%
10%

Source: Economic Survey of Pakistan 2009/10

Challenges to Agriculture

Crop yields in Pakistan lag behind major producing countries potential to improve:
Yield Gap (kg/acre) Country World China India Pakistan USA Brazil Egypt Wheat 7622 11762 6921 6054 7454 Sugarcane 176630 180592 170126 127190 182200 196881 299206 Rice (Paddy) 10643 16193 8324 8694 18950 10446 24036 Cotton Seed 5185 9648 2979 5054 5558 9280 5763

Source: Economic Survey of Pakistan 2009/10

Imbalanced use of Fertilizers one of the major reasons for low yields:
Nutrient Sale in Pakistan
Nitrogen, 3,277
10 year CAGR Nitrogen: 3.8% Phosphates: 1.3% Potassium: 5.3%

3500
3000 2500 Sales (Kt) 2000 1500 1000 500 0

Nutrient Nitrogen
Phosphates, 763 Potassium, 40

Actual (Kg/Acre)

Recommended (Kg/Acre)

41 9 0.4

41 20.5 10.3

Phosphorous Potassium

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Nitrogen Phosphates Potash

Worst Floods in Living Memory

The 2010 floods affected 78 out of 120 districts, displacing around 20 million people 15% of all agricultural land, i.e. 4.5 million acres, was damaged by floods:
Crops Cotton Rice Sugarcane Affected Area (Mn. Acres) 1.3 1.4 0.4 Area Affected 17% 23% 16%

Consumption of N, P and K fertilizers went down by 10-20% in 2010 due to the floods
Relief and rehabilitation work with the help of International community:

Fertilizer industry played an active role Engro contributed over Rs. 136 million under its social investment commitment in 2010

Government Policy Related Environment

Fertilizer industry in Pakistan is de-regulated with no permanent subsidy regime market prices are linked to International prices except Urea Subsidy on Feed Gas component on natural gas provided by Government to Urea producers expected gradual reduction in extent of subsidy due to domestic gas shortage Fertilizer industry subjected to gas curtailment (12% 20%) as well as limited outages during winters GST imposed in mid March on agricultural inputs including fertilizers, pesticides and tractors along with 2% value added tax and 15% Flood surcharge (on Income Tax):
Fertilizer Urea DAP MOP Pre-GST Co. to Dealer Transfer Prices (Rs/Ton) 20,400 66,025 48,200 Taxation Impact 13.2% 19.14% 17.05% Post GST Co. to Dealer Transfer Prices (Rs/Ton) 23,100 78,660 56,420
Source: Engro Analytics

Retail prices increased proportionately which could result in demand destruction!

Farmer Economics and Nutrient Sales

Crop prices in Pakistan linked to International Agri Commodity prices, farmer economics have remained healthy during the last 2 years Farmer economics expected to remain healthy during 2010/11 despite increase in input costs:
Farmer Economics Market Price (USD/tonne)
2009/10 (A) 2010/11 (E) 2011/12 (F)

Period Wheat Cotton Rice Sugarcane

Crop Economics (USD/Acre)


2010/11 (E) 2011/12 (F)

2009/10 (A)

249 526 270 58

263 1053 380 47

263 994 351 51

171 396 101 1108

194 713 239 540

194 620 189 555

Source: Engro Analytics

Healthy farmer economics expected to partly off-set the demand destruction due to recent increase in taxes

Urea Demand/Supply
Kt
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 -

Urea Offtake in Pakistan


Offtake CAGR 2000-2010: 4.2% 2010-2014: 3.3%

Urea Production

Urea Imports

Urea Offtake

Pakistans urea industry declined by 5% (6.5 Mt in 2009 to 6.12 Mt in 2010) after worst ever floods. Demand recovery expected in 2011 despite imposition of GST Production impacted by Gas curtailment (5.15 MT in 2010 vs. 5.05MT in 09) despite capacity increase Urea imports expected to continue in Pakistan due to expected gas shortages (SNGPL-20%, Mari-12%):

0.24 MT imported during 1Q 2011 - further imports unlikely during 1H 2011 due to Engros capacity increase 2H imports likely quantity dependent on magnitude of actual gas shortage

Local urea prices are significantly lower than international market prices partly due to subsidized gas rates recently levied GST to increase local prices by 13.2% due to input GST adjustment

Urea Market Environment


Urea Market Share
16% 16% 9% 6% 7% 5% 49% 6% 5% 9% 27%

Total Benefit to Farmer - Rs. 104 bn

23

64

17

2010

45% Engro Fertilizers Fauji Fertilizers Agri Tech Dawood Hercules Reliance Group National Fertilizer Marketing Ltd.

2011

Govt Contribution (Differential of Feed and Fuel gas prices, net of taxes paid) Direct subsidy Fertilizer producers' contribution

Engro urea market share is expected to increase to 27% in 2011 with the additional capacity. Average selling price of domestic Urea during 2010 was Rs. 810/bag, while average landed cost of imported Urea was Rs. 1,640/bag (C&F USD 340/ton) By maintaining domestic Urea prices significantly lower than international prices, the industry gave benefit of Rs. 64 billion in 2010 to the Farmer fraternity

Urea Expansion Project


Mechanical completion and trial production EnVen - urea expansion project at Dharki. The worlds largest single train ammonia-urea plant. Largest private sector industrial investment in Pakistan USD 1.1 billion. With the plant operating at full capacity, Pakistan is expected to be self-sufficient in Urea!
Capacity Expansions in 2010/11
Original Capacity Incremental Total (Million (Million Tons) (Million Tons) Tons) 0.975 0.1 1.3 0.45 2.275 0.55 Capacity: 1.3 Million tons

Company Name Engro Fertilizers Ltd. Reliance Group

Estimated Forex Saving USD 500Mn/year

Total Man Hours : 50 million

Investment USD 1.1 bn

EnVen

Trial Production: December 29th

Urea plant at Dharki (Pakistan)

Phosphates Demand/Supply
Phosphates Demand/Supply in Pakistan
Offtake CAGR 1999-2010: 3.1% 2010-2015: 2.8 %

Kt
2000 1800 1600 1400

1200
1000 800 600 400 200 0 1999 2000 2001 2002 2003 2004 Production 2005 2006 Imports 2007 2008 2009 2010 2011 2012 2013 2014 2015

DAP+MAP+TSP Offtakes

Pakistan dependent on imports FFBL only local producer of DAP with 0.65 MT production capacity Phosphate industry demand reduced from record levels of 1.8MT in 2009 to 1.4 MT in 2010 - severe floods during Kharif season & rising international prices resulted in demand drop Phosphate industry in 2011 expected to reduce further to the range of 1.2 1.3 MT in 2011 due to increase in domestic prices on account of additional taxes levied by GOP Healthy crop prices are expected to support Phosphate consumption growth in the medium term however GST impact expected to reduce the rate of growth

Phosphate Imports
Pakistan Phosphate Import Volume (KT) and Share (%) of Key Players
1600 1400 1200

AAA

4B Fertilizers
JBL Dawood KJB/Gen Pac. Chart Pak Am FFC United Agro
41%

1000
800 600 400 200
21% 30%

Chawala
37% 28% 55%

37%

Pak Arab
Engro

0 2004

2005

2006

2007

2008

2009

2010

Imports of Phosphates done by the Private Sector in Pakistan:

Expected imports for 2011 are 0.55 - 0.65 Million tons 336 KT of phosphate imports in 2010 with an import share of 55% 100% share of imports during 1Q 2011

Engro is the largest importer of Phosphates during last 5 years:


Potash Consumption
Tonne
160,000 140,000 120,000 100,000

Potash Consumption in Pakistan

Off-take CAGR 2000-2010: 7.1% 2010-2015: 2.1%

80,000
60,000 40,000 20,000 2000 2001 2002 2003 2004 2005 2006 MOP 2007 SOP 2008 NPK 2009 2010 2011 2012 2013 2014 2015

Potash in Pakistan applied in Straight Form (MOP/SOP) as well as through NPKs. Engro is the only producer of NPK in Pakistan with annual capacity of 160 KT/annum

Industry declined in 2008/09 in the wake of abnormal increase in International prices Recovery in 2010 as Potash prices corrected and GOP announced a one time subsidy on Imports Dip in demand expected in 2011 due to GST which will recover gradually in the coming years

Potash industry in Pakistan has been slow in terms of growth due to following reasons:

Crop prices linked only to quantity and not quality farmer does not see return on investment Lack of a regular subsidy regime to promote Potash

Engro Corporation Limited


Vision To be the premier Pakistani enterprise with a global reach, passionately pursuing value creation for all stake holders
Business sectors were chosen by combining company strengths with country fundamentals

Engineering Expertise Project management experience Government relations

Strategic Sectors

Agri based economy

Fertilizer Food and Agri Business Power & Infrastructure Petro Chemicals (niche player)

One of the fast growing developing countries with a growing middle class

Ability to raise capital for large scale projects


Knowledge of agricultural sector

Growing energy demandsupply gap

Ability to attract top quality Human Resources

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