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FERTILIZER INDUSTRY

Review on Pakistan¶s Fertilizers Industry
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Group Members

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Farina Ansari Hira Jawaid Sana Naveed Umber Zareen Zara Zehra

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Presentation Flow Global Outlook Economic Outlook Sector Outlook Company Outlook 1. 2. 4. 3. 4 .

GLOBAL OUTLOOK 5 .

food security remains high on the policy agenda. ‡ Oilseed consumption is projected to rise firmly. feed and bio energy demand. í In developing countries. by almost 5%. global cereal utilization is forecast to rise by some 2% in 2010/11 . . the current focus in developed countries is on economic recovery and financial discipline. Unfavorable weather causes short cereal harvests in the CIS and the USA Low grain production in the CIS and a US maize harvest well below initial expectations are driving the short-term agricultural outlook.Global Context Economic growth Globally is back but recovery fragile. To meet world food. ‡ Another food crisis could be looming í On the policy side.

Global Players Americas Agrium Inc Europe Urklali Australia Incitec Asia Taiwan Fertlizer Middle east Israeli Chemicals Saudi Fertilizer Industries Qatar CF Industries Intrepid Potash Silvinit Nufarm ENGRO ACRON Fauji fertilizer Mosaic Yara Potash corp Soquimich .

To meet world food. ‡ Speculative Investments in the Industry (if withdrawn post threat) ‡ Forecasts to 2011/12 are still very speculative due to fluctuation in price levels.Global Demand The main demand driver for fertilizer is food demand which translates into demand for grains and other farm products.7% ‡ Rising International Prices of agriculture commodities í Consecutive year of deficit for cotton and sugar í Drought and Floods in CIS í Export Restriction by Russia and Ukraine í Lower expected maize yield in USA ‡ High Price ±an Incentive for farmers to invest more. The Risk is downside . global cereal utilization is forecast to rise by some 2% in 2010/11 Total world fertilizer demand is forecast to rise firmly in 2010/11 by 4. Demand is rebounding firmly under the impulsion of Asia and the Americas. feed and bio energy demand.

Global Supply ‡ Mosaic inc Issue to be ‡ Globally. í DAP prices are compared with 74% in internationally linked 2009. . the fertilizer resolved in 2011 and industry has operated at Ma¶aden Project 82% of installed capacity.

Local Demand Drivers ‡ Growing Population The population growth rate stand at 1.6% 2010 est. (CIA fact book) ‡ Water Availability Adequate Rainfall in 2010 .

Excess Demand Situation-Seller is the king 11 .

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where its fertilizer usage per hectare is 115 kgs 13 .Low Crop Yields í According to Nation Master Pakistan ranks 46th in the world in terms of fertilizers consumption.

14 .950 per 40 kg.Commodity Support Prices Attractive wheat support price of Rs.

‡ Surging Grain prices 15 .

Fertilizer Prices are low Reduction in Urea & DAP prices 16 .

Economic Outlook 17 .

improper use of fertilizers etc.1 % over past 5 years. accounting for 22% GDP.4 % to 1.Economic Outlook Fertilizer is strongly linked to agriculture in Pakistan The Agriculture sector is the second largest sector. . absorbing 45 percent of the country¶s total labour force. It remains by far the largest employer. adulterated pesticides. pest attacks. Agricultural growth variation of 6. The volatility in agricultural growth is mainly caused by crop sector which is associated with the vagaries of mother nature.

266 billion over the past 5 years.3 percent.5 percent. The domestic production of fertilizer during the first nine months (July March.The total contribution by the fertilizer manufacturers to the farming community has been Rs. The import of fertilizer increased by 133 percent. the total availability of fertilizer also increased by 25. . hence. 2009 10) of the current fiscal year was up by 4.

Wheat support price have almost doubled to PRs950/bag from Rs525/bag in the past three year Farmers have also enjoyed huge subsidy on local urea.Leveraging on the Domestic Economy ´Fertiliser sector gains from favourable government policies such as high crop support prices and gas subsidies´ . with the manufacturers and the government providing a total subsidy of about PRs400 bn since 2006. in the form of lower urea prices Net benefit of Rs 62 billlion .

otherwise it would import huge quantity of urea.but gas curtailment remains a key risk. The prices could further go up in the coming weeks if the Government did not review the gas curtailment plan. Gas curtailment plan affecting fertilizer production By: Imran Ali Kundi | Published: November 20. The Nation 21 . 2010.´ said a representative of a fertilizer company while talking to The Nation on Friday.Leveraging on the Domestic Economy «. Due to 20 percent gas curtailment to the fertilizer companies.. which resulted into its higher prices in the country. the production of fertilizer is much affected.

with the same concession/exemption as applicable to new plants.Fertilizer Policy 2001 Concessional feed gas allowed under the 1989 Fertilizer Policy to companies that undertook expansion will be continued until their 10 year period is exhausted. To facilitate new investment.77/MMBTU which ever is higher. equipment and machinery.e. Investors will be allowed to relocate second hand plant. the Middle Eastern Price prevailing on the date of signing of the GSA or $0. a discount of 10% will be allowed on the determined price of gas i. .

Fertilizer Policy 2001
If an investor undertakes an expansion, major BMR or debottlenecking of an existing plant, which results in increase in the production capacity of the plant, such additional feed gas shall be treated at par with a new plant for 5 years for purposes of concessions/exemptions.

NPK Fertilizers and Phosphatic Fertilizers are allowed to be imported free of duty.

Selling price of fertilizer shall remain deregulated on the understanding that while manufacturers will allow free market forces to prevail they will pass the benefits in the form of lower price of fertilizer to the farmers.

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Flood damage has hit agri output but swift recovery next fiscal«.

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Flood damage has hit agri output but swift recovery next fiscal«.
Output for major kharif crops cotton, rice and sugar cane (combined weight of 19% in agriculture) have all been hit with an estimated crop damage of 15-20%.

The fertiliser sector has already felt the pinch of this crop damage, as demand fell by 44%YoY during (July-August 2010).

On a positive note, though, wheat the key major crop (15% weight in agriculture) is sown in the Rabi season (October-March) and was spared from the floods.

With wheat prices rising 38% , better soil fertility and support from government in the form of free seeds and loan concessions, farmers have a strong incentive to attempt for a bumper wheat crop leading to increase in fertilizers.

10-11 Budget Impacts ‡ 5% tax credit facility for listing at the bourse: Engro Corporation¶s long term vision of going public with its subsidiaries. Fertilizer subsidy: Government has allocated Rs185mn as subsidy for FFBL while did not announce any subsidy on urea imports for FY11. FED on natural gas raised to Rs10 per mmbtu: FED on natural gas has been increased by Rs4. Government Subsidy (Billion Rs) 50 40 30 20 10 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Ur P&K F rtiliz rs Tot l .9 per mmbtu to Rs10 per mmbtu.

Sector Outlook 27 .

SWOT Analysis Strengths: ‡Assured demand ± Direct linkage of fertilizer sector with agriculture (22% GDP contribution) ‡Preferential treatment ± Gas subsidies and support prices (Rs.950 per 40 kg bag of wheat) lower the production cost ‡Established distribution network ± Ensures easy transport and availability of fertilizers even to remote areas ‡Strong financial position of market players ± Able to absorb gas price increases ‡Political Influence of Agricultural sector ± Directly beneficial for the fertilizer sector .

Weaknesses ‡ Low capacity compared to demand Pakistan has to import ‡ Black marketing activities exploitation of price differential between local and international fertilizer prices .

Uneducated end-users majority of the farmers lack awareness about fertilizer application. knowledge about fertilizer suitability 2010 floods led to a decrease of 44% (July-August 2010) in fertilizer demand . crop and soil requirements.

OPPURTUNITIES  Expand capacity Fertilizer demand expected to increase (surging international grain prices.3 mn tonne urea plant  Agricultural incentives will ease out liquidity constraints of farmers e.g. Engro¶s 1. post flood recovery)  Exports New projects will result in excess supply e.g. concessional loans ‡ Introduction of bio-technology crops .

THREATS Gas curtailment . due to recent surge in phosphate prices Rising environmental concerns armful emissions during fertilizer production may entail adverse penalties and charges for companies .Key Risk! To tackle energy crisis Extended from May-October 2010 as supply concerns remained intact Main concern is the extent to which price can be passed on to the consumer if there is an increase in both the quantum and duration of the curtailment Removal of gas subsidies Production cost will increase (local feed gas prices are at a discount of about 6886% in comparison with US and European producers) Rising global prices of fertilizer products Particularly DAP prices.

Threats (Contd) Natural disasters Foreign exchange risk ± Dependence on imports .

PORTER·S 5 FORCES MODEL Barriers to Entry ² High Capital intensive Gas supply shortages Bargaining power of Suppliers ± High Preferential treatment Oligopoly structure Bargaining power of Buyers ± Medium Essential input in farming Farmers switch in case of price hikes Threat of Substitutes ± Very Low .Market players work together to bridge the demand-supply gap .Basic input ‡ ‡ ‡ Rivalry ± Low .

KEY PLAYERS 35 .

KEY PLAYERS Engro Fertilizer Fauji Fertilizer Company Fatima Fertilizer Fauji Fertilizer Bin Qasim Limited Agritech Pak Arab Dawood Hercules NFML 36 .

ENGRO FERTILIZER 37 .

INTRODUCTION TO ENGRO CORP.Engro Corporation 38 . in partnership with leading international and local financial institutions bought out Exxon¶s equity and the company was renamed as Engro Chemical Pakistan Limited On 1 January 2010. Incorporated in 1965 and was formerly Exxon Chemical Pakistan Limited until 1991 Exxon decided to divest their fertilizer business on a global basis and sold off its equity of 75% shares in our company Exxon employees. Engro management demerged the fertiliser business and converted Engro Chemicals into a holding company .

ENGRO CORPORATION ‡ Engro Corp is one of Pakistan·s largest conglomerate with diversified lines of businesses ENGRO EXIMP Accomplished significant progress not only in its base urea fertilizer business but also in diversification projects 39 .

Sheikh Imranulhaq PowerGen Mr. Hussain Dawood Board of Directors Management Directors Shareholder Directors Independent Directors President of Engro Corp Mr. Asad Omer DIVISIONAL CEOs Vopak Mr. Khalid Siraj Foods Mr. Khalid Mansoor Fertilizer Mr. Bakhtiar Wain Polymer & Chemicals Mr. Sarfaraz Khan EXIMP Mr.STRUCTURE 0F CORP Chairman Mr. Asif Qadir 40 . Abdul Samad Avanceon Mr.

Dawood Hercules Chemicals Limited. PSO 41 . and Trustee of LUMS í Ex. KSE. Pakistan Poverty Alleviation Fund í First Pakistani to become a member of the World Economic Forum in 1992 Chairman Engro Corporation Limited í Board member. Commonwealth Business Council. Hussain Dawood í Chairman.Director of OGDC. Engro Corporation Limited. SBP. Pakistan Chemical & Energy Sector Skill Development Company í Board member. Asad Umer í President since January 2004 í MBA from the Institute of Business Administration í Chairman.SENIOR LEADERSHIP ‡ Mr. Pakistan Business Council ‡ Mr. Pakistan Business Council. Karachi Education Initiative.

ENGRO FERTILIZERS LIMITED ² THE CASHCOW The flagship fertilizer business is a wholly owned Engro subsidiary & a premier fertilizer manufacturing and marketing company It remains very much at the heart of Engro Corp¶s success story Second largest producer of Urea fertilizer in Pakistan The urea business has historically provided high margins and stable cash flows. which have been instrumental in providing the management with the platform to undertake massive expansions in both fertilizer and non-fertilizer ventures 42 .

EFL PRODUCTS UREA ZARKHEZ ZINGRO PHOSPHATE DAP ZORAWAR 43 .

FAUJI FERTILIZER 44 .

FAUJI FERTILIZER COMPANY I f L r r H M r tl r r t ti i 7 j i t t r H l rT f l f rtili h r i r r BL (4 t r t h r ) th r ith it f i f ri t r i t (l r t ji t h i t h r ) tr lli ri (45-5 i i r BL i t f r th Ur r t h r ) i i 5 t it H 3 l t rill r i i t ith f 577 MT i th li t f t f r 4 r rf r i 45 .

A.FFC BUSINESS PORTFOLIO The investment portfolio of the Company is fairly diversified with investments in: í Fauji Fertilizer Bin Qasim Limited (FFBL) í Pakistan Maroc Phosphore S. (PMP) ± Morocco í Fauji Cement Company Limited (FCCL) í FFC Energy Limited (FFCEL) These investments are aimed at tapping the positive developments in the financial and industrial sectors 46 .

FFC PRODUCT MIX Sona Urea Sona DAP Sona SOP 47 .

Gen Hamid Rab Nawaz (retired) í Chairman. Denmark 48 . FFC í Engineer by profession and works for Haldor Topsoe. Jorgen Madsen í Director. FFC í Distinguished career in Pakistan army spanning over a period of 37 years Lt.MANAGEMENT Lt. FFC í Distinguished career in Pakistan army Mr. Gen Malik Arif Hayat (retired) í CEO & Managing Director.

FAUJI FERTILIZER BIN QASIM 49 .

FFBL í Distinguished career in Pakistan army Lt. Gen Hamid Rab Nawaz (retired) í Chairman. Gen Anis Ahmed Abbasi í Chief Executive & Managing Director.MANAGEMENT Lt. FFBL í Distinguished career in Pakistan army spanning over a period of 37 years Lt. FFC í Distinguished career in Pakistan army 50 . Gen Malik Arif Hayat (retired) í Director.

Karachi. purchase and market fertilizers  Majority of the stake is held by FFC  Pioneer and sole producer of DAP and granular Urea (Sona Urea)  Manufacturing complex located in Eastern Zone of Bin Qasim. with Head Office at Harley Street. Rawalpindi  FFBL Urea market share in 2009 was 9.FAUJI FERTILIZER BIN QASIM  Formerly known as FFC Jordan Fertilizer Company Limited  Principal activities are to manufacture.7%  FFBL DAP market share during 2009 was 40% 51 .

OUR PICK 52 .

HOLD 53 .BUY .BUY .Recommendation .

ENGRO FERTILIZER 54 .

3 mn t. EFL would be at par with FFC as the largest urea manufacturer with an estimated market share of 32% by 2012 í 1.ENGRO is our preferred pick in the sector!  EFL growth: expected CAGR of 33% during 2010-13  EFL¶s market share is expected to match FFC¶s by 2012 í With a post expansion urea capacity of 1.3 mn t urea expansion is expected to boost the operating cash flows í Healthy urea cash flow to tackle leverage risk 55 .

ENGRO diversification turning to Profit  Engro Corp¶s strong profitability. mainly from its fertilizer and food businesses Investments in diverse business ventures over the last three years are gradually making their mark Capacity expansions in subsidiaries provide long term value to Engro Corp Engro Foods recorded profits with its UHT milk and ice cream businesses taking up 41% and 18% market share respectively Foods registered revenues worth 15bn. Eximp & Vopak also supported the bottom line Engro Corp¶s chemical storage and trading businesses also contributed 18% and 22% respectively. to its bottom line 56       . even higher than EFL Energy.

New capacities adding significant long term value  Engro Corp. has invested heavily in new projects  Future Projects include: í 1000 MW Thar Coal Block II Power project í a DAP plant. we believe the company is likely to provide consistent earnings momentum in years to come 57 . once new expansions start delivering maximum return  All these initiatives point towards an aggressive management approach and given the excellent track record and management quality.

IS ENGRO ALL POSITIVE? 58 .

a key concern for the investors Falling DPO Flood Effects: Fertilizer industry was hit hard in August with depressing urea offtake (down by 8%YoY in 8M2010) 59 .Potential threats to ENGRO HIGH DEBT.

however.1% stake in Engro. as of June 2010.2x.a source of concern for investors Engro¶s debt to equity. In all. which can step in to manage short term cash flow problems of the company. Strong cash flows from the foods business can supplement the debt retirement. owning a 38. 60 . Repayments beginning from 2012M ± most of it are to be made by Engro Fertilizer Limited (EFL) Possible Solutions: EFL can use some of the funds raised from the recently issued TFC by Engro.Countering the Debt Situation Engro¶s rising debt . any deviations from the plans laid out could hinder the expected cash flows. Engro is backed by a strong Dawood group. As a conglomerate. our conclusion is the the entire debt situation does not appear to pose a great threat to the company·s financials. Engro enjoys the advantage to list its subsidiaries at the stock exchange in order to raise more capital. stands at 3.

Table : Urea Margins for Engro & FFC 61 . Engro¶s urea margins are expected to average 72% during 2011-13. as the major concentration of production shifts to a cost-effective new plant.Engro·s Urea Margin to exceed in 2011 Engro new plant will be enjoying 10-year special feed gas subsidy after becoming fully operational. FFC¶s low-cost structure would ensure that its margins also remain high but they will be lower than Engro¶s.

Table : Divide ds Payout for ro. I dustry 62 . but there has been a drastic fall in dividend payouts. We expect the payout ratio to remain muted until 2015 as ENGRO has extensive debt servicing commitments in the medium term. Engro focuses on organic growth High ROE potential has fully justified such retention. as bulk of the earnings have been retained for new expansions.Engro·s Low Payout Countered by High ROE Earnings have remained strong for Engro .

Risk Factors Enhancement of Gas Curtailment Commissioning of the new plant Increase in the Interest Rates Increase in Feed Gas Prices Foreign Exchange Risk Issues with other Subsidiaries Natural Calamity 63 .

FAUJI FERTILIZERS COMPANY 64 .

FFC ² Low Cost & High Urea Margin Currently the Market Leader in urea (48% share of FFBL & FFC) One of the most stable companies with consistent cash flow & strong cash-flushed books Has consolidated its position through acquisitions and continues to churn out strong earnings Due to a low cost base. the company enjoys one of the highest EBITDA and gross margins Low-cost structure would ensure that its margins also remain high averaging 70% over the next three years FFC investment in FFBL gives it exposure in the high growth segment of DAP fertilizer 65 .

FFC Growth strategy Focuses on Inorganic Growth Potential acquisition of Agritech Limited (79. along with significant investment in Pak Moroc Phosphore and Fauji Cement projects FFC earnings are likely to see a modest average annual growth of 6% over the next five years.85% shares of the company) could add synergies and would boost the earnings outlook for the company 50 MW Wind power project in Jhampir is expected to add some value Successfully completed a 120 kt debottlenecking. primarily driven by an increase in urea prices 66 .

FFC ² The Dividend King FFC DPO has exceeded 100% over last four years High payout ratio caters to the income need of the majority of the shareholders Shareholding structure of FFC: 44% stake held by Fauji Foundation Fauji Foundation. relies heavily on dividends from its investments Therefore. a smaller peer could result in some cut back in dividends over the medium term Nonetheless. this could eventually result in significantly higher payouts subsequently 67 . we expect a DPO of 90% going forward However. a charitable trust. potential acquisition of Agritech. given the stable nature of the urea business.

Risk Factors Gas shortages in the country Lending support to associates and subsidiaries Increase in feed gas prices Foreign exchange risk Operational risks emanating from old plants Natural Calamity 68 .

FAUJI FERTILIZERS BIN QASIM LIMTED 69 .

70 .HOLD FFBL deals in Granular Urea and DAP FFBL is the sole producer of DAP and for DAP it imports phosphorus from Morocco FFBL is a price taker since its commodity prices are linked with the international market Shareholding: Reliance on high DPO because of investor demand.FFBL .

However there has been continuous increase in DAP prices internationally Locally. 71 .Scenario for FFBL Lower than expected offtakes especially due to floods throughout the country have resulted in the high inventory situation for FFBL DAP & Urea. revenues have declined recently but DAP and urea prices which have been up by 21% and 11%. FFC and FFBL) The profit has been a result of high phosacid prices and declining input costs (low sulphur and phosrock prices). boosted margins of the company. OCP with FF. Start of Rabi season 2010-11 . PMP (JV PMP was a Joint venture of a group of Morocco.favorable weather and adequate financial support by GoP to farmers shall bring favorable impact on FFBL sales Massive growth in Other Income largely attributed to its JV.

Risk Factors Gas shortages in the country Unexpected pressure from competitors Increase in feed gas prices Increase in phosphoric acid cost without concurrent increase in DAP prices could erode DAP margins Natural Calamity 72 .