FERTILIZER SECTOR OF PAKISTANPresented by: Muhammad Zain

Presented to: Invest Capital pvt. Ltd.

PRESENTATION OUTLINE Overview Types of Fertilizer Spot Analysis Budget overview regarding fertilizer Production process of Urea & DAP Supply-Demand Situation Demand Drivers Business Model of Fertilizer Sector Industry Structure Fertilizer Policy 2001 Industry Porter’s Model SWOT Analysis Prospects of the industry Recommendations

OVERVIEW

An Economy Deriving 21.8% of Its Output from Agriculture: As of FY09, agriculture contributed 21.8% to the overall GDP. The demand for fertilizer is directly related to agriculture

growth. Urea is the most used fertilizer, followed by DAP.

Major Crops Production in Year 2008-09:

(mn tons) FY08 FY09 %Change

Wheat 20.9 23.4 11.7%

Rice 5.5 6.9 24.9%

Cotton(bales)

11.6 11.8 1.1%

Sugarcane 63.9 50 (21.7%)

Source: Economic Survey

TYPES OF FERTILIZER

Eight different fertilizer products which falls into three categories.1. Nitrogenous Category:

Urea Calcium Ammonium Nitrate (CAN) Ammonium Sulphate (AS)

2. Phosphatic Category: Di-Ammonium Phosphate (DAP) Triple Super Phosphate (TSP) Single Super Phosphate (SSP) Nitro Phosphate (NP)

3. Potassic Category: Sulphate of Potash (SOP)

SPOT ANALYSIS OF FERTILIZER SECTOR

No. of Fertilizer Manufacturers

8

Capacity Utilization 110%

Industry capacity (urea mnt) 4.3

Industry capacity (DAP mnt) 0.44

Production (1HCY09 mnt) 3.06

Imports (1HCY09 mnt) 0.66

Source of Machinery Italy, England, Denmark, U.S.A, Japan.

Plants in Pipeline 2

BUDGET OVERVIEW REGARDING FERTILIZER

Budgeted Measures Subsidy of PKR 10bn on urea imports Subsidy eliminated on phosphate and potash fertilizer imports Continuation of high support crop prices Feed gas is priced at PKR 94.7/mmbtu a 72% discount to fuel gas

price of PKR 339.4/mmbtu

UREA MANUFACTURING PROCESS:

Ammonia Plant

AmmoniaUrea Plant

Product Handling & Shipment

Urea

Water

Power Plant & Utilities

50 Kg Urea Bag

Carbon Dioxide

POWER

STEAM

POWER

STEAM

NATURALGAS

DAP MANUFACTURING PROCESS

Ammonia Plant

AmmoniaDAP Plant

Product Handling & Shipment

DAP

Water

Power Plant & Utilities

50 Kg DAP Bag

POWER

STEAM

POWER

STEAM

NATURALGAS

Phosphoric AcidSulphuric Acid

SandFurnace Oil

EXCESS DEMAND SITUATION-SELLER IS THE KING

Capacity 5.8 million tons Demand 6.9 million tons

The heavy demand is driven by: Attractive wheat support price of Rs.950 per 40

kg. Decent Cotton & robust Wheat crops. Reduction in Urea & DAP prices.

DEMAND DRIVERS

Low Crop Yields Growing Population Fertilizer Prices Commodity Support Prices Water Availability

According to NationMaster Pakistan ranks 46th in the world in terms of fertilizers consumption,

where its fertilizer usage per hectare is 115 kgs.

PRICE TREND

Source: Industry Reports

INTERNATIONAL VS LOCAL DAP PRICES

Jul-0

7

Jul-0

7

Aug-0

7

Sep-

07

Sep-

07

Oct-0

7

Nov-0

7

Dec-0

7

Dec-0

7

Jan-

08

Feb-

08

Feb-

08

Mar-0

8

Apr-0

8

Apr-0

8

May-0

8

Jun-

08

Jun-

08

Jul-0

8

Aug-0

8

Aug-0

8

Sep-

08

Oct-0

8

Nov-0

8

Nov-0

8

Dec-0

8

Jan-

09

Jan-

09

Feb-

09

Mar-0

9

Mar-0

9

Apr-0

9

May-0

9

May-0

90

500

1000

1500

2000

2500

3000

3500

DAP US Gulf

Local Rs/bag

Source: NFDC

BUSINESS MODEL OF INDUSTRY

There are two types of business model operational in fertilizer sector.

1. Manufacturing Model: Two types of fertilizers are produced in Pakistan which are

Urea & DAP.2. Distribution Model:

Import fertilizer and sell them in association with the local dealer network.

INDUSTRY STRUCTURE:

Eight fertilizer companies. The fertilizer sector in Pakistan is overseen by the Ministry of Food,

Agriculture & LiveStock. Oligopolistic Structure The four largest firm are price setters. However, subsidy on feedstock

to firms prevent these firms from exploiting their marketing power. Share of listed companies in Urea and DAP.

42.03%9.56%

15.39%

Urea Market Share-1HCY09

FFCFFBLECPL

26.46%

58.50%

15.03%

DAP Market Share-1HCY09 Others

FFBLECPL

Source: NFDC

FERTILIZER POLICY 2001

The last fertilizer policy was announced in 2001.

The Policy had been divided into two segments:1. Providing feedstock gas to companies at subsidized

rates.

2. Providing feedstock gas to new plants at a fixed price of US $0.77 per mmbtu for a period of 10 years.

Under the second segment , Engro & Fatima Fertilizer will be rewarded with feedstock gas at US $0.77 per mmbtu for a period of 10 years from the date of commission .

INDUSTRY PORTER’S MODEL

1. Barriers to Entry: High Limited supply of major raw material (Natural Gas) Capital Intensive nature of the industry

2. Bargaining Power of Suppliers: High Suppliers have the bargaining power as there are 4 major

players in the sector and the price is being determined by them.

3. Bargaining Power of Buyers: Low Heavy Demand

4. Threat of Substitutes: Very Low5. Competition: Low

SWOT ANALYSIS

1. STRENGTHS: Capital Intensive nature of the sector. The players operating in this sector are financially strong All the fertilizer plants are producing at more than 100 per cent

installed capacity of utilization GoP supports in the form of subsidy Cheap labor Heavy demand Well established distribution sector An agro based economy

SWOT ANALYSIS

2. WEAKNESSES: Low capacity as compared to demand (demand supply gap) Due to existence of black market and heavy demand farmers

had to pay above the stated price Technological backwardness: Lack of local resources

SWOT ANALYSIS

3. OPPORTUNITIES: As the demand is high compared to supply, fertilizer sector has

an opportunity to expand capacity to fulfill the local demand. Export Introduction of BT crops

SWOT ANALYSIS

4. THREATS: Scarce water resources Load-shedding of gas Hike in fuel prices Taxes Removal of subsidy Rising global prices of fertilizer products Government intervenes to stabilize the prices

PROJECTED EXCESS SUPPLY OF FERTILIZER IN WORLDThe export potential in the fertilizer sector of Pakistan remains limited

ASIA FERTILIZER FORECAST 2007/2008-2011/2012

2007/2008

2008/2009

2009/2010(000 tons)

2010/2011

2011/2012

N supply 72,123 76,317 79,933 85,491 89,850

Total demand 75,255 76,111 77,961 80,413 82,476

Surplus (Deficit)

(2,132) 206 1,972 5,078 7,374

P Supply 13,882 14,744 15,484 16,185 17,964

Total demand 19,209 19,890 20,560 21,168 21,784

Surplus (Deficit)

(5,327) (5,146) (5,076) (4,983) (3,820)

K Supply 5,428 5,524 6,226 6,450 6,530

Total Demand

14,485 15,138 15,794 16,464 17,073

Surplus (Deficit)

(9,057) (9,614) (9,568) (10,014) (10,543)Source: IFA

RECOMMENDATIONS

Strict quality control and monitoring should be there to prevent import of sub-standard products and to curb adulteration and other malpractices prevailing in this sector.

The problem of logistics should be looked into. Transportation through railway (being cheaper) especially during peak seasons should be made available.

There is a need to educate the farmers on balanced fertilizer use so as to neutralize the adverse impacts of constant use of nitrogenous fertilizers.