Document of P' n -a

The World Bank FILE CuryFOR OFFICIAL USE ONLY

Report No. 1 922-JO

STAFF APPRAISAL REPORT

JORDAN

THE ARAB POTASH PROJECT

August 11, 1978

Industrial Projects Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUITALENTS(As of December 31, 1977)

1,000 Fils = 1 Jordanian Dinar (JD)JD 1.00 = US$3.03

WEIGHTS AND MEASURES

1 Metric ton (t) = 1,000 Kilograms (kg)1 Metric ton (t) = 2,204.6 Pounds1 Kilometer (km) 2 = 0.62 Miles1 Square Kilometer (km ) = 0.38 Square Miles

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

AFESD Arab Fund for Economic and Social DevelopmentAGP Sir Alexander Gibb & PartnersAID United States Agency for International DevelopmentAPC Arab Potash CompanyDSW Dead Sea WorksFOB Free on BoardGOJ Government of JordanJEA Jordan Electricity AuthorityJEC Jacobs Engineering CompanyJII Jacobs International Inc.JPR Jordan Petroleum Refinery CompanyKCI Potassium Chloride (Muriate of Potash)KFED Kuwait Fund for Economic DevelopmentK 0 Potassium OxideLiFB Libyan Arab Foreign Banktpy Metric tons per year

FISCAL YEAR

January 1 to December 31

JORDAN FOR OFFICIAL USE ONLY

STAFF APPRAISAL REPORT OF THE ARAB POTASH PROJECT

TABLE OF CONTENTS

Page No.

I. INTRODUCTION .............................................. 1

A. Background ........................................... 1

B. Project History ...................................... 1

II. THE ARAB POTASH COMPANY .. 3

III. THE INDUSTRIAL SECTOR IN JORDAN .... ............. 4

IV. THE WORLD POTASH INDUSTRY AND MARKET .... ........... 6

A. Background. 6

B. Historical World Consumption of Potash .... ........... 7

C. Historical Capacity and Production Growth .... ........ 9

D. Projected Potash Demand and Supply Balance .10

E. Historical and Projected Potash Prices .... ........... 10

V. THE MARKETING OF JORDANIAN POTASH ......................... 14

VI. THE PROJECT ............................................... 19

A. Project Location and Scope ........................... 19

B. Production Process and Technology .................... 20

C. The Township ......................................... 25

D. Utilities and Raw Materials ........................... 26

E. Ecology .............. . 28

VII. TRANSPORTATION AND PORT FACILITIES ........................ 28

A. Inland Transportation ................................ 28

B. Port Facilities ...................................... 29

VIII. PROJECT IMPLEMENTATION AND INITIAL OPERATION ...... ........ 30

A. Organization and Management for Project Execution .... 30

1. Project Management .............................. 31

2. Supervision ..................................... 32

3. Financial Matters ............................... 32

4. Operations Management ........................... 32

B. Project Implementation Schedule ........ .. ............ 33

IX. CAPITAL COST ESTIMATE AND FINANCING PLAN .... .............. 36

A. Capital Costs ........................................ 36

B. Financing Plan ....................................... 38

C. Procurement .......................................... 40

D. Allocation and Disbursement of Bank Loan .... ......... 42

This report was prepared by Messrs. Edilberto Segura, Jiro Kuroda and Edouard

Siou of the Industrial Projects Department.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

TABLE OF CONTENTS (Continued) Page No.

X. FINANCIAL ANALYSIS . ................... ...... . ....... 42

A. Revenues and Operating Costs ............ .. ............ 42B. Financial Projections ....... .................... . . 44C. Financial Covenants ................ . . . .................... *..*. 45D. Financial Rate of Return and Sensitivity Analysis .... 46E. Major Risks .. **....................................... 46

XI. ECONOMIC ANALYSIS .......... ..................................... . . 48

A. Economic Costs and Benefits .......................... 48B. Economic Rate of Return ...... .......... .......... . . 48C. Competitive Position of APC ..... ..................... 48D. Other Benefits ..... . .... *...... . .. .. . .. . . ........... . 50

XII. AGREEMENTS ................................................ 51

ANINEXE S

1 The Pilot Project

2 APC's Current Organization

4-1 World Potash Reserves & Effective Capacity 1976/774-2 World Potash Capacity & Capacity Utilization 1971-774-3 Historical Potash Prices 1955-1977

6-1 Brief Description of Refinery Process6-2 Township Layout

8-1 Scope of Work - Technical Advisory Firm8-2 Terms of Reference - Financial Control & Accounting System

9-1 Capital Cost Estimates9-2 Permanent Working Capital9-3 Disbursement Schedule

10-1 Projected Prices of APC's Potash (FOB Aqaba)10-2 Production and Transportation Cost10-3 Assumed Terms & Conditions of Loans10-4 Financial Projections (Normal Schedule)10-5 Financial Projections (One Year Delay in Project Completion)10-6 Profit & Cash Breakeven Capacity Utilization10-7 Financial Rate of Return

11-1 Economic Rate of Return11-2 Foreign Exchange Earnings11-3 Fiscal Impact of the Project

MAPS

IBRD 13362 R Project LayoutIBRD 3078 R2 Project Location

DOCUMENTS AVAILABLE IN THE PROJECT FILE

Reference Title, Date and Authors

A Preliminary Feasibility Report - December 1976Prepared by Jacobs International Inc., Sir Alexander Gibband Technical Services Office

B Final Feasibility Report - February 1978Prepared by Jacobs International Inc., Sir Alexander Gibb

and Technical Services Office

C Arab Potash Company Concession Agreement (Law No. 16-1958) -

February 4, 1958Granted by the Hashemite Kingdom of Jordan

D Draft World Potash Survey - January 1978Prepared by Industrial Projects Department,World Bank

E Engineering Services Agreement and Subcontracts -November 5, 1977between Arab Potash Company andJacobs International Inc., and Sir Alexander Gibband Partners

F Operation Plans for Training, Start-up and Operationsof APC Potash Production facilities - 1977 and 1978.Proposals Submitted by Jacobs International Inc.

G Detailed Capital Cost Estimates for Arab Potash Project -

February 1978.Prepared by Jacobs International Inc.

JORDAN

APPRAISAL OF ARAB POTASH PROJECT

I. INTRODUCTION

A. Background

1.01 The Government of the Hashemite Kingdom of Jordan has requestedWorld Bank financing for the proposed Arab Potash Fertilizer project (theProject) aimed at producing 1.2 million metric tons per year (tpy) of potash(potassium chloride or muriate of potash - KCl), equivalent to 0.72 milliontpy of K 20, by solar evaporation of Dead Sea brine. The Project will belocated in the southern basin of the Dead Sea (Map IBRD-3078 R2). Its outputwill be exported principally to countries in the Indian Subcontinent, EastAsia and Pacific Oceania, and to the US. This report presents the mainfindings of the Bank mission, consisting of Messrs. Harinder Kohli, EdilbertoSegura, Jiro Kuroda, Christopher Pratt and Edouard Siou, who visited Jordanin November 1977 to review the proposed Project. It is based on informationobtained by the mission from the Arab Potash Company (APC or the Company),that contained in the feasibility report of February 1978 prepared by APC'sconsultants Jacobs International Inc. (JII) of the US and Sir Alexander Gibband Partners (AGP) of the UK, and discussions with the Company and theconsultants.

1.02 The Project will be owned and operated by APC, a Jordanian companymajority-owned by the Jordanian Government. APC's shareholders will contri-bute US$193 million equivalent in equity, representing 45% of the estimatedtotal project financing requirements of US$429 million. The proposed WorldBank loan of US$35 million equivalent will be the first Bank loan to Jordanand will cover about 8% of such financing needs and approximately 11% of totalforeign exchange requirements calculated at US$310 million. Concessionarydebt financing has been arranged from a number of bilateral and regionalfinancing institutions, including Kuwait Fund for Economic Development (KFED),US$35 million; the Arab Fund for Economic and Social Development (AFESD),US$15 million; the Libyan Government through the Libyan Arab Foreign Bank(LAFB), US$50 million; OPEC Fund, US$7 million; and the United States Agencyfor International Development (AID), US$38 million. The Government of Jordanproposes to obtain commercial loans of about US$20 million to complete thefinancing plan.

B. Project History

1.03 The proposed Project is designed to exploit one of the few largephysical resources available to Jordan - the Dead Sea brine - which is richin minerals and salts, including potash. It will be the largest singleindustrial project ever undertaken in the country and represents a successfulculmination of efforts going back many years. The Project may be followed byothers to commercially extract from the Dead Sea other valuable elements suchas bromine and magnesium. Recovery of Dead Sea potash on the basis of solarevaporation of brine was started about 1930 by the now defunct PalestinePotash Ltd. By 1945, after expansions, annual production reached 100,000

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tons, but in 1948, the north-end facilities were damaged and those in thesouth were abandoned as a result of hostilities. Subsequently, in 1952,Dead Sea Works Ltd. (DSW) was formed and modest commercial production startedin the mid 1950s. In 1961, with initial financial assistance from the Bank(289-IS of July 11, 1961), DSW undertook a large expansion program which,after solving major dike construction and product harvesting problems, hasgradually raised Israeli potash production to about 1.2 million tpy.

1.04 In 1956, the Government of Jordan formed the Arab Potash Company todevelop a project on the Jordanian side similar to the DSW operations. Aftersome experimental work on the northern and southern shores, in 1960, APCinvited tenders for a study to assess the potential of a potash plant atthe southern end. This study, conducted by the Western Knapp Engineering Co.of the US, considered a 250,000 tpy project, but it became evident that aplant of this size was uneconomical. APC then, with the assistance of AID,retained Jacobs Engineering Company of the US (parent company of JII) toreview the Western Knapp report and to investigate in greater detail thefeasibility of establishing a potash plant. Jacobs Engineering, in turn,retained Sir Alexander Gibb and Partners to consult on dike design, evapora-tion pans and civil works. These studies indicated that a plant of a yearlycapacity of 1.0 million tpy of potash was viable, provided the problem ofbuilding dikes on unstable mud and salt beds could be overcome economically(a major problem at that time being encountered by DSW). Discussions werethen held between APC and W.R. Grace Co. of the US to act as the technical andmarketing partner, and with AID and the World Bank Group regarding possiblefinancing assistance. These discussions reached an advanced stage before the1967 hostilities intervened and stopped further progress.

1.05 In 1974, the Project was revived by the Government. A Pilot Engi-neering Project costing US$10 million, supported by a US$6 million assistanceby AID and a US$1 million IDA credit (S-19-JO, June 6, 1975), was initiatedin late 1975 to construct trial dikes and undertake detailed field work, aswell as detailed engineering and marketing studies, and to re-establish thetechnical, economic and commercial viability of a full-scale project underupdated conditions. This Pilot Project, described in detail in Annex 1,was carried out during 1976 and 1977 with the assistance of the consultants,Jacobs and Alexander Gibb. Based on the results of the Pilot Project, apreliminary feasibility report was issued by the consultants in December1976 (Project File: Reference A) and a final report in February 1978 (ProjectFile: Reference B) indicating that a full-scale project for the production of1.2 million tpy of potash was viable. The proposed Project is based on theresults of the Pilot Project and this study. As allowed in the respectivecredit agreements, AID and IDA funds on-lent to APC for the Pilot Project willbe refinanced as Government equity contribution towards the full-scale project.

1.06 The Bank has worked closely with APC and its consultants during thesuccessful implementation of the Pilot Project. The Bank has also maintainedclose contact with potential colenders to the Project and prepared a reportsummarizing the findings of its appraisal mission for a Co-lenders Meetingthat took place in Amman in April 1978. The Project is considered technically,economically and financially viable.

II. THE ARAB POTASH COMPANY

2.01 The Arab Potash Company (APC), the Project sponsor and proposedborrower, was founded in 1956 by the Government of Jordan to commerciallyexploit the minerals contained in Dead Sea brine. In 1958, the Governmentgranted a 100 year concession (Project File - Reference C - Concession Agree-ment) to APC giving it exclusive rights for the extraction of these minerals,and granting it tax and fiscal incentives. APC's initially authorized capi-tal was JD 4.5 million (US$13.9 million) of which JD 1. 8 million was paid in.The initial capital stock was subscribed by the Government of Jordan (49.5%),several Arab Governments - Egypt, Iraq, Lebanon, Saudi Arabia, and Syria -and private shareholders (50.5%). When further project preparation washalted after the 1967 war, APC dismissed most of its staff, and many smallprivate shareholders exercised the option given to them to sell their sharesto the Jordanian Government at the original subscription price. In March 1978and again in August 1978, APC's shareholders authorized major increases in theCompany's share capital to provide an adequate equity base for financing theproposed Project. The currently authorized capital of APC amounts to JD 63million (US$193 million) of which JD 7.7 million (US$23 million) have beenpaid in. This equity is expected to be sufficient to implement the Project.

2.02 APC expects its equity ownership pattern to be as follows: TheGovernment of Jordan, 51%; the multinational Arab Mining Company, 1/ 25%;the Islamic Development Bank, 6%; and several Arab states and private share-holders, at least 4% (reflecting their original contributions); the remaining14% is expected to be partly subscribed by the original shareholders amongthe Arab states -- including Libya, which has expressed interest in buying5% of equity -- and partly by Arab and Jordanian institutions and individuals.The Government has confirmed that it will purchase any unsubscribed shares.

2.03 APC at present has no major source of income except for sale ofsmall amounts of common salt to industrial users and from investments of itssurplus funds in Governmental Development Bonds and bank deposits. No divi-dends have so far been paid by the Company. APC audited financial statementsas of December 31, 1977, are summarized below:

APC - Summary of Financial Statements - 1977(in thousands)

US DollarsJD Equivalent

Current Assets 616 1, 866Net Fixed and Other Assets 3, 837 11,626Investments 3, 752 11,368Current Liabilities 50 151Long-term Debt 1,615 4, 893Equity 6,540 19, 816Total Assets 8,205 24, 861

1/ The Arab Mining Co. is headquartered in Amman, Jordan, and is owned bythe following Arab Governments: Saudi Arabia (20%), Abu Dhabi (20%),Kuwait (20%), Iraq (20%), and Egypt, Jordan, Syria, Lebanon and otherArab States (2-3% each). As of December 31, 1977, the AMC's subscribedcapital amounted to US$396 million equivalent.

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2.04 APC's organization is in the early stages of development and, up tothe end of 1977, the Company was largely devoted to the execution of the PilotProject. The statutes of APC specify that its Board of Directors should haveeleven members; ten members have already been appointed -- seven, including theChairman, by the Government and three by the Arab Mining Company. The eleventhmember most likely will be appointed by the Islamic Development Bank after itsequity contribution has been subscribed. The Chairman of the Board of Directors,Mr. Ali Khasawneh, is also the General Manager of the Company. The GeneralManager is a dynamic executive with extensive business experience overseas.His appointment as head of APC has been largely responsible for the speed andefficiency with which the Pilot Project was executed and the proposed full-scaleProject prepared. Due to the important role played by the General Manager inthe Project, agreement has been reached with APC that it will not change itsGeneral Manager without prior consultation with the Bank. In early 1978 APCstaff totalled 49, including 2 chemical engineers, 2 civil engineers, 3chemists, 12 financial and administrative staff, and 21 laborers at the plantsite. While this organization and staffing, shown in Annex 2, was adequatefor supervising the implementation of the Pilot Project, APC needs to substan-tially strengthen both, at an early date, to adequately supervise the imple-mentation of the full-scale Project. As further discussed in Chapter VIII,the Company is aware of this critical need and is taking steps to build up itsstaff and organization.

III. THE INDUSTRIAL SECTOR IN JORDAN

3.01 The Jordanian economy has grown at an average annual rate of 5.1% inthe Three-Year Plan Period (1972-75), followed by a high rate of 12% in. thefirst year of the Five-Year Plan (1976-80). Industry (mining, manufacturing,and construction) has been the most dynamic sector in the economy and nowrepresents 26% of GDP (about US$300 million value added), compared with 20%in 1972. Agriculture, on the other hand, has decreased its share of GDP from13% in 1972 to 8.4% in 1976. Industrial exports have also grown rapidly fromUS$32.2 million in 1972 to US$152 million (or 29% of total exports) in 1976.Of these industrial exports, phosphate rock has been the single most importantitem, reaching US$58 million in 1976.

3.02 Despite its rapid growth, the industrial sector is still in aninception stage. It is made up of 15 large industrial enterprises employing100 or more people, about 580 establishments employing from 5 to 99 people,and some 6,000 small industries with less than 4 workers; in 1976, employmentin the sector totalled 36,000. The first two groups, with less than 600establishments together, account for 87% of industrial value added, 94% ofthe sector's fixed assets and 68% of employment. Most industries are heavilyconcentrated in the Amman/Zarqa area because of proximity to consumers,availability of utilities and communications and ease of transportation.

3.03 The long-term growth of the industrial sector is constrained by thesmall size of the domestic market and by the country's limited resource base.(Jordan has a total population of 2 million and an area of 97,000 sq. km). Itis because of these constraints that the Government is attaching high priority

to the implementation of large, export-oriented industrial projects that wouldutilize the country's limited resources, namely, potash, phosphate and lime-stone. For the same reasons, the scope for development of medium- and small-scale industries is not promising at the present time. Furthermore, in theshort term, the industrial sector is constrained by an evident shortage ofmedium-level technicians who are mostly drawn, due to higher wageb, to theneighboring Arab countries especially since 1973 when the region startedexperiencing an immense development thrust. Although firm manpower data arenot available, it is believed that a larger number of Jordanians (250,000)are employed overseas than in the local market (150,000), representing a sub-stantial drain of semi-skilled labor.

3.04 Under the 1976-80 Five-Year Plan, four basic goals have been setfor the industrial sector: (i) a 26% annual growth rate, (ii) increase anddiversification of exports of industrial and mining products, (iii) widergeographical distribution of new industries, and (iv) higher degree of com-plementarity and linkage within the sector. Industrial investment amountingto JD 230 million (US$690 million) or 30% of the total of the Plan isenvisaged over the Plan period, most of which is expected to be financed fromforeign sources. To promote these investments, the Government is planning aseries of measures, including revision of the custom tariff structure, taxexemption incentives for export-oriented industries, and modification ofindustrial licencing. Moreover, in order to locate industries away from theAnmman/Zarqa area, the provision of industrial services and utilities to othercities as well as the establishment of a vocational training fund are underactive consideration.

3.05 The Government's industrial sector goals are closely linked to theprimary objective of the Five-Year Plan itself, which is to increase thedegree of self-sufficiency of the economy and Jordan's export base as wellas to decentralize industrial activity in the country. In pursuing thisobjective, the Government intends to exploit the country's limited naturalresources as efficiently as possible which, as mentioned above, consist ofthree main minerals - phosphate rock, limestone and Dead Sea brine which, apartfrom potash, also contains bromine and magnesium. The proposed Potash Project,which would absorb as much as 30% of the Government's industrial investmentsduring 1978-1982, is included in the Plan as a high priority. Other majorindustrial projects listed in the Plan include the expansion of phosphateproduction from a current capacity of 2.5 million to 7 million tpy, theconstruction of a chemical fertilizer plant (sulphuric acid unit of 3,200 tpd,phosphoric acid unit of 1,100 tpd, triple-super phosphate unit of 2,000 tpd),the expansion of cement production (from 630,000 to 1.25 million tpy) and theexpansion of the country's only petroleum refinery (from 1 million to 3.45million tpy). In view of the current small domestic market for industrialproducts, much of the annual industrial growth target of 26% would be forth-coming from these major projects. These projects will also bring substantialforeign exchange earnings: by end of the Plan period in 1980, the exportearnings by mineral-based industries are projected to reach US$300 million,compared to US$58 million in 1976. The Potash Project, at full capacity in1985, will contribute an additional US$150 million to gross export earnings.

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IV. THE WORLD POTASH INDUSTRY AND MARKET

A. Background

4.01 Potash is one of three main plant nutrients - nitrogen, phosphorusand potash (N-P-K) - although it is used less extensively than the other two.In 1977, about 24 million tons of potash (in terms of K 0) were used asfertilizer (95% of estimated total world potash production) compared to 46million tons of nitrogen (N) and 26 million tons of phosphate (P). The wordpotash is generally used to describe various potassium ores and products interms of their percent potassium oxide (I 0) content, even though 0 itselfdoes not occur naturally. While most nitrogenous fertilizers are producedchemically, most potash is obtained - as is phosphate - from natural depositsin the form of underground deposits, dry lake beds and natural brines.

4.02 Although potassium, the seventh most abundant element, is widelydistributed in the earth's crust, potash is only economically produced ina small number of locations in the world - fewer than the number of majorsupply sources of other fertilizer building blocks such as ammonia, phosphaterock or sulphur -- and, therefore, has to be moved long distances to in-termediate and final users. As shown in Annex 4-1, the main potash producersand their share in world capacity are the USSR (29%), Canada (26%), and theGerman Democratic Republic (11%), the first two emerging as such only in thelast decade. Other important producers are the Federal Republic of Germany(9%), the US (9%), and France (7%). While Jordan and Israel are not expectedto reach production levels of these major producers, the potash reserves ofthe Dead Sea are one of the larger single potash sources in the world whencompared with individual mines elsewhere.

4.03 The West European producers have traditionally been exercising astrong leadership over the world potash market through their establishedcommercial arrangements. The focal point of these arrangements is a marketingassociation of Western European producers, generally known as the PotashSyndicate. This association, whose principal leadership in terms of policyformulation has been held by German-French producers, not only tries toestablish quantitative restrictions on sales in the European market throughcoordination with other producers - such as UK, GDR, USSR, Italy and to alesser extent with Canada and US - but also promotes an orderly marketing ofpotash, thereby affecting pricing. The Potash Syndicate, formed in the 1920s,was quite strong until the early 1960s but its influence, except in theEuropean market, has recently been declining. During the last decade, Canadahas emerged as the second major producer and world's largest exporter of potashand its increasing role in the world market has diminished the importance ofthe Potash Syndicate. Canada is also the only country (other than USSR) thatcan significantly increase production in the future and, therefore, its roleas market leader will become very significant.

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4.04 Potash products are basically categorized into Potassium Chloride(KC1, 60-62% K 0 content), Potassium Sulphate (K 2SO ), Potassium Magnesium

Sulphate (KMgSo4, 54% K 0 content), and lower grade Potassium Chloride Salts.

In 1975/76, about 85% of potash was produced as potassium chloride, 6% aspotassium sulphate, and the remaining 9% in lower grades. Gradewise, potas-sium chloride products are classified into three groups: standard (diameterof 0.2-0.8 mm), granular (1.4-3.3 mm), and coarse (6.0-6.5 mm); about 75-80%of world production is in the form of standard grade. The coarse and granulargrades are generally required for direct application or bulk blending compoundfertilizer and carry a substantial price premium.

B. Historical World Consumption of Potash

4.05 Total world potash consumption has grown at an average annual rate

of 5.9% during the past twenty years, reaching about 25 million tons of K 20 in

1976/77. Of this consumption, about 96% was for fertilizer applications andthe remaining 4% for various industrial uses. The historical developmentof these two markets is briefly described below.

4.06 World consumption of potash fertilizer has increased from 7.2 mil-

lion tons in 1956/57 to 23.8 million tons in 1976/77, at an average annualgrowth rate of 6.4% as shown in the following table. About half (by volume)of all potash fertilizer is currently consumed in the developed market econ-omies, primarily in North America and Western Europe. Centrally plannedeconomies, again in the more developed Eastern Europe, account for another40% of world potash fertilizer consumption. Developing countries currentlyconsume only about 10% of potash fertilizers, compared to about 20% of worldnitrogenous fertilizers; this higher share of nitrogen use in developingcountries is on account of the fact that it generally gives more immediateresults, particularly at low total nutrient application rates. As a conse-quence, potash consumption in developing countries is very low at only 3 kg/haof cultivated land in Asia and 7 kg/ha in Latin America, compared to 48 kg/hain Western Europe. The N-P-K ratio in developing countries in 1976/77 was1-0.4-0.2, compared to 1-0.6-0.6 in developed countries. This underutiliza-tion of potash by developing countries could have serious long-term conse-quences as a rising potash deficit will eventually limit the efficiency ofnitrogen applications. However, in recent years potash consumption in devel-oping countries has grown faster (13.2% per year) than in either the developedeconomies (3.8% per year), or the centrally planned economies (10.4% per year).

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Historical World Potash Fertilizer Consumption, 1956/57 - 1976/77(in million tons K20)

Average Growth Rate %1956/67 1966/67 1970/71 1973/74 1975/76 1976/77 56/57-76/77 66/67-76/77

North America 1.9 3.5 4.0 4.8 4.9 5.2 5.7 4.7Western Europe 3.0 4.1 5.0 5.6 4.7 5.6 3.3 3.5Other Developed

Countries 0.3 0.9 0.9 1.1 0.9 1.1 6.5 2.5Total DevelopedCountries 5.2 8.5 9.9 11.5 10.5 11.9 7.5 3.8

Eastern Europe 1.8 3.7 5.1 6.8 8.5 8.9 8.8 10.3Socialist Asia - 0.2 0.4 0.6 0.5 0.6 17.0 11.2Total Centrally

Planned Countries 1.8 3.9 5.5 7.4 9.0 9.5 9.2 10.4

Developing Countries 0.2 0.7 1.3 1.9 1.9 2.4 12.5 13.2Total World 7.2 13.1 16.7 20.8 21.4 23.8 6.4 6.8

4.07 Most of the non-fertilizer potash consumption, about 4% of total,is in industrial applications, primarily for the production of caustic potash.Caustic potash, made from potassium chloride, is an intermediate product in themanufacture of other chemicals. Over 90% of its consumption is in the deter-gent, soap, glass, ceramic, textile, dye and drug industries. Other potassiumsalts, such as potassium carbonate and potassium nitrate, are also used formiscellaneous industrial applications. The development of industrial potashconsumption since the mid-1960s is shown below:

Estimated World Industrial Potash Consumption 1965/66-1976/77(in thousand tons K20)

Year 1965/66 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

Consumption 465 545 637 702 727 709 643 750

As indicated above, between 1965/66-1973/74 world industrial potash consumptionincreased at an annual average rate of 5.7% to 727,000 tons K 20. However,consumption dropped in 1974-76 due to the general industrial recession inthe developed countries. This trend was reversed in 1976/77 when industrialpotash consumption rose to 750,000 tons K 0, most of which was accounted forby North America (38%), Western Europe (39%) and the centrally planned econ-omies of Eastern Europe (10%). Japan accounted for the bulk of the remainingofftake in the world; developing countries' consumption is less than 5% ofworld total.

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C. Historical Capacity and Production Growth

4.08 The design capacity of the world potash producers totalled 30.4million tons K 20 in 1976/77, after steadily growing from 24.4 million tonsin 1970/71. However, this design capacity can be attained only wnen optimumconditions affecting production are consistently fulfilled for extended periodsfor all production units at the same time. Therefore, world effective capa-city should more realistically be calculated by assessing actual productionwhen no market constraints hampered production. Such conditions had occurredin 1973/74 and 1974/75 when demand exceeded supply. During this period worldcapacity utilization averaged 88-89%. The current effective capacity calcu-lated on the above basis is estimated at 28.9 million tons K20, as shownin Annex 4-2. Western Europe (20%) and North America (35%), along with theUSSR (30%) and the German Democratic Republic (10%), accounted for over 95% ofworld potash production capacity in 1976/77. The two East European countriesand Canada have substantially increased their capacity in the recent past; theUSSR and the German Democratic Republic from 6.5 million in 1970/71 to 11.5million tons in 1976/77, while Canadian capacity has increased from 1.2million tons in 1962/63 to 7.6 million tons. Other producers, particularlythe traditional West European and US producers, have reached optimum capacitylevels and, therefore, have shown only minimal increases.

4.09 World potash production has grown at a steady average rate of 5.9%over the period 1969/70-74/75, although a lower than average growth rate wasexperienced in 1972/73 when labor and production problems hit various minesin the world. Recent changes in world potash production are summarized inthe following table.

World Potash Production, 1956/67-1976/77(in million tons K20)

Average Growth Rate (%)1956/57 1966/67 1973/74 1974/75 1975/76 1976/77 56/57-76/77 66/67-76/77

Germany, FRG 1.68 2.19 2.52 2.68 1.95 2.15 1.3 (0.1)France 1.31 1.84 2.07 2.08 1.73 1.57 1.0 (2.0)Other WesternEurope 0.26 0.63 0.58 0.45 0.71 0.79 18.0 2.2

Subtotal W. Europe 3.25 4.66 5.17 5.21 4.39 4.51 1.7 (0.4)

USSR 0.80 2.63 5.92 6.55 7.94 8.30 13.8 13.9Germany, GDR 1.56 2.00 2.96 2.86 3.02 3.15 3.7 5.2

Subtotal E. Europe 2.36 4.63 8.88 9.41 10.96 11.45 8.7 10.6

Canada 0 2.00 5.07 5.62 4.84 5.66 9.8 12.3USA 1.94 2.81 2.34 2.37 2.22 2.18 0.6 (2.8)

Subtotal N. America 1.94 4.81 7.41 7.99 7.06 7.84 7.6 5.6

Israel 0.04 0.31 0.53 0.61 0.72 0.61 15.5 7.8

Others 0.02 0.21 0.61 0.58 0.61 0.58 19.5 12.0

Total World 7.61 14.62 22.60 23.80 23.74 24.99 6.4 6.1

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In 1975/76, for the first time in recent history, world production fellslightly to 23.7 million tons K 20 from the 23.8 million tons K 20 in 1973/74.This was caused by uncertain market conditions resulting from sharply in-creased potash prices, as well as decreased application of other fertilizernutrients. During this period, most producers cut back on capacity utiliza-tion to prevent an excessive accumulation of stocks. The production levelrose to a new high of 25 million tons K 20 in 1976/77.

D. Projected Potash Demand and Supply Balance

4.10 The table on the following page gives the potash demand and supplysituation projected by. Bank staff through 1984/85 (Project File: Reference D).World potash fertilizer demand is expected to grow from 23.8 million tonsof K20 in 1976/77 to 34.5 million tons in 1984/85, at an average annualgrowth rate of 4.8% compared to 6.4% during the past 20 years. In absoluteterms, most of this increased demand will originate in developed economies(from 11.9 million tons in 1976/77 to 15.3 million tons in 1984/85) and cen-trally planned economies (from 8.9 million tons to 14.5 million tons). How-ever, potash consumption is projected to continue growing at a faster annualrate in developing countries (8.6%) than in the first two groups (4.2%) andshould reach 4.6 million tons in 1984/85, compared to 2.4 million tons in1976/77.

4.11 A detailed country-by-country review of projected demand and ofpresent and planned new potash production facilities indicates that thepresent surplus in potash supply capability will gradually disappear duringthe next two to three years, and demand and supply will again be in balancearound 1981-83. Thereafter, new production facilities, in addition to thosecurrently firmly planned or already started, will be needed to meet increas-ing market demand. Much of the new capacity needs through mid-1980's arelikely to be met by expansions and debottlenecking of existing facilitiesin Canada (in addition to two large new mines announced in the USSR). Butafter the mid 1980s, a large portion of new capacity needs would have to be metthrough new greenfield mines. This projected demand/supply balance suggeststhat, from the world market viewpoint, the Project will come into productionat an appropriate moment.

E. Historical and Projected Potash Prices

4.12 The development of world potash prices during the past twenty yearsor so can be divided into three main periods. During the decade 1955-64,when traditional Western European producers still dominated world potashmarkets, export prices remained fairly steady, averaging US$76/ton KCl (allprices expressed in 1977 dollars). Then, as two major new producers, Canadaand the USSR, increased their market share, export prices suffered a majorand steady decline in real terms -- averaging US$59/ton during 1965-69 --until they reached a low of US$49 in 1969. This sharp decline prompted theSaskatchewan Provincial Government, where most Canadian production is located,to (i) prorate the output of each producer to about 40% of capacity, (ii)

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PROJECrED WORLD.._ POtAS1 1RTTIT7EL.S PP'PLY AND DEMAND BALANCE 1977/78 -_19_4/85(in Million K20)

Forecast C- Ae111977/78 1978/79 1979180 1980/81 1981/82 1982'83 1983184 19767 -85

A. OJtYSlOPt ttUKXET _ZOVtOMMSForth Aerlica

C4pacity 10.20 10.21 10.37 10.49 11.20 11.20 11.20 11.20 0.8Sup ly 9 10 9.14 9.24 9.36 9.78 9.95 10.09 10.09 1.6S.uspply . 5.40 5.60 5.80 6. 00 6.25 6.56 6.87 7.21 4.2Surplus (Deficit) 35.70 3.54 3.44 3.36 3-53 3.39 3.22 2.88

western Europe

Capacity *.55 6.80 7.05 7.10 7.05 6.95 6.95 6.95 1.2Supply 3.88 6.10 6.33 6.37 6.39 6.37 6.41 6.48 1.8Conosuption 5.80 5.90 6.00 6.15 6.30 6.40 6.50 6.65 2.2Surplus (Deficit) 0.08 0.20 0.33 0.22 0.09 (0.03) (0.09) (0.17)

Oceania

Capacity - -_ _ Supply -Coosomption 0.30 0.33 0.35 0.38 0.40 0.43 0.45 0.48 7.0Surplus (Deficit) (0.30) (0.33) (0.35) (0.38) (0.40) (0.43) (0.45) (0.48)

Other Developed Market Eco-omiee

Capacity 0.75 0.75 0.75 0.80 0.85 0.85 0.90 0.90 2.3Supply 0.71 0.71 0.71 0.76 0.81 0.85 0.86 0.87 3.5Consumption 0.85 0.88 0.89 0.91 0.93 0.95 0.97 0.98 2.2Surplus (Deficit) (0.14) (0.17) (0.18) (0.15) (0.12) (0.10) (0.11) (0.11)

Total Developed Market EcononiesCapacity 17.50 17.76 18.17 18.39 19.10 19.00 19.05 19.05 1.0Supply 15.69 15.95 16.28 16.49 16.98 17.17 17.36 17.44 1.8Conosoption 12.35 12.71 13.04 13.44 13.88 14.34 14.79 15.32 3.2Surplus (Deficit) 4 3.34 3.24 3.24 3.05 3.10 2.83 2.57 2.12

8. DEVELOPING MARKET ECONOMIES

Africa

Capacity _ - - - -Supply - _ _ . - . . .Conesaptimo 0.27 0.29 0.32 0.34 0.36 0.39 0.42 0.45 8.1Surpluo (Deficit) (0.27) (0.29) (0.32) (0.34) (0.36) (0.39) (0.42) (0.45)

Latin America

Capacity 0.03 0.03 0.03 0.03 0.03 0.03 0.13 0.23 28.9S,.pply 0.02 0.02 0.02 0.02 0.02 0.02 0.12 0.22 28.3Cons,aoption 1.31 1.43 1.56 1.70 1.84 1.97 2.13 2.30 8.5Surplue (Deficit) (1.29) (1.41) (1.54) (1.68) (1.82) (1.95) (2.01) (2.08)

Near Ecat

Capacity _ - 0.10 0.30 0.40 -Supply - -0.110 0.50 0.40Cannu,mption 0.05 0.06 0.06 0.07 0.07 0.07 0.08 0.09 7.6S.rpl.s (Dfticit) (0.05) (0.06) (0.06) (0.07) (0.07) 0.03 0.22 0.31

CapacitySupply _ _ _ _ , _ _ ,Cons-mption 0.98 1.10 1.21 1.32 1.43 1.54 1.64 1.75 9.0Surpluc (Deficit) (0.98) (1.10) (1.21) (1.32) (1. 43) (1.54) (1.64) (1.75)

Total Developing Market Econloi

Capacity 0.03 . 0.03 0.03 0.03 0.03 0.13 0.43 0.63 8.4Supply 0.02 0 02 0.02 0.02 0.02 0.12 0.42 0.62 9.9Consu ption 2.61 2 88 3.15 3.43 3.70 3.97 4.27 4.59 8.6Surplus (Deficit) (2.59) (2.86) (3.13) (3.41) (3.68) (3.85) (3.85) (3.97)

C. CENTRALLY PLANNED ECONOMIES

AniaCapacity 0.34 0.36 0.38 0.40 0.45 0.50 0.55 0.60 8.2Supply 0.34 0.36 0.38 0.40 0.45 0.50 0.55 0.60 8.2Conevaption 0.63 0.66 0.70 0.73 0.77 0.80 0.84 0.88 5.1Surplus (Deficit) (0.29) (0.30) (0.32) (0.33) (0.32) (0.30) (0.29) (0.28)Eastern Europe

Capacity 12.95 14.00 14.90 15.95 16.60 17.15 17.70 18.75 5.6Supply 11.82 12.81 13.63 14.53 15.07 15.57 16.06 17.00 6.1Coocomption 9.25 9.70 10.24 10.72 11.29 12.05 12.80 13.68 5.5Surpluc (Deficit) 2.57 3.11 3.41 3.81 3.78 3.52 3.26 3.32Totally Centrally Planned EconomiesCapacity 13.29 14.36 15.28 16.35 17.05 17.65 88.25 19.35 5.7Supply 12.16 13.17 14.01 14.93 15.52 16.07 16.61 17.60 6.1Con.o-ption 9.88 10.36 10.94 11.45 12.06 12.85 13.64 14.56 5.5Surplus (Deficit) 2.28 2.81 3.09 3.48 3.46 3.22 2.97 3.04

TOTAL

Capacity 30.82 32.15 33.48 34.77 36.18 36.78 37.73 39.03 3.2Supply 27.87 29.14 30.31 31.44 32.52 33.356 34.39 35.66 3.8Avail,ble Supply 25.41 26.57 27.63 28.66 29.65 30.41 31.36 32.51 3.2Comnuption 24.84 25.95 27.13 28.32 29.64 31.16 32.70 34.47 4.8Surplus (Deficit) 0 57 0.62 0.50 0.34 0.01 (0.75) (1.34) (1.96)

OTE. Supply' refers to actual production until 1976/77. In forecast yera "supply refere to the supply capability of tbs existing and of firmly planned new potashoper.tion. should dend be there. The supply capabilities are b.oed on past operating experience. Note also that since actual production is recent year. -less thsn the supply capability cf the industry, forecast capacity atili.ation is ne.essarily higher than experiene.d in recent years.

Available Supp 1 r.fers t actual production less technical potash,-and less 57 to allov for distribution lasees, product in transit nd normal stock increasesetc.. util 1976/77. In forec.-t yare vailoblo supply is the total of regional supply less a 47. allowance for tschnicsl potash need. and 5% for losees, etc.Risturical statistics sh"t that prod-ction has consistently erceeded consanption by, on average, 57.. The 57. is the caurable aggregate of a number of complex.usoceasucable factors., hich allo-uc h.. to be mad. for if supply is to met demand.

"Conu-ption ref.re to -tual use up to 1976/77 and to forecast sne In other later years.

"S.rpl.. (Deficit)' refers to -ct.ol .. rpl..es (deficit,) uctil 1976/77. In forecast yrar. it refers to the surpluses (deficits) of supply capability over fore-cast connuopti-. The ,rld total 'Surplus (Deficit)` doea not add up vith the regional totals duo to djustments described above to arrive at total `-vilableocyply."

SoRCe ACtUAL5: fAO until 1975/76. BSC 1976/77.Projectic..e: World Bank

I.du-trial Projects DepartmentJau-sry 1978

establish a floor price of US$63.2 per ton (as a temporary excess supplymeasure), and (iii) impose a large Provincial tax. These measures had animmediate impact on world export prices, which rose by 35% to US$65 per tonof KC1 in 1970, as other producers accepted Canadian price leadership. Asshown in Annex 4-3, prices steadily increased thereafter until 1973 and thenrose sharply to over US$90/ton in 1975 on account of a temporary supplyshortage only to fall drastically again in 1976. Nevertheless, the pricepeak in potash was still not as dramatic as in other fertilizers. Theaverage Canadian export price during the seven year period 1970-76 was US$68and about US$65 during the last twelve years, all in 1977 terms.

4.13 While the potash industry normally uses FOB Vancouver prices asreference (due to Canada's export price leadership role), these prices aregenerally substantially lower than domestic US, or European domestic andexport prices. The difference between FOB Vancouver and domestic US priceshas recently been about US$10/ton of KC1 mainly due to the freight differencebut also due to greater stability of the US domestic market as compared toexports. The difference between FOB Vancouver and Northwest European exportprices has been between US$8-15 per ton, depending on prevailing marketconditions. Similar, though possibly somewhat lower differences are under-stood to be common between domestic and export prices in Europe. Since formost producers (excluding Canada) domestic markets represent about 80% oftotal sales, the average realization price for most potash producers isestimated to be about US$10 higher than the FOB Vancouver price. On thisbasis, the average world potash purchase price between 1965 and 1976 isestimated at about US$75 (in 1977 dollars), compared with the FOB Vancouverexport price of US$65 for the same period (para 4.12).

4.14 During 1977, potash export prices averaged US$55-50 FOB Vancouverand US$70-60 FOB Northwest Europe. These prices are low compared to thehistorical prices discussed above and are the results of continuing highinventories with the producers and the current low, though improving, levelof consumption compared to effectively available capacity. Future potashprices are likely to be affected by three major factors. In the short term,prices will be influenced primarily by demand/ supply expectations. For thelong term, once current capacity is fully utilized, prices will approachlevels needed to attract new capacity. The third and the most uncertainfactor is the Provincial Tax situation in Canada.

4.15 As discussed earlier, the current excess supply situation is ex-pected to continue until the early 1980s. Therefore, no major price increasesare expected in real terms in the short-term. But, thereafter, to maintainthe continuity of adequate supply beyond this point, new capacity will need tobe added. Therefore, from the early eighties, potash prices will be increas-ingly influenced by the economics of production from new capacity, initiallymainly through expansion of existing mines and subsequently through construc-tion of entirely new facilities.

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4.16 The Canadian suppliers, as the most economic producers and thelargest world exporters (40% of world total), are, as noted above, currentlythe price leaders. This situation is likely to continue in the future bothbecause Canada has the largest potential for expansion and because Saskatchewanis expected to remain the most economic large-scale potash source. Therefore,future long-term prices are likely to be determined by the economics of a newmine in Saskatchewan. Specialized consultants engaged by APC, and the Bank,have estimated that the investment cost of such a mine with a capacity of1.5-2.0 million tons of KCl per year will be about US$180 per ton of annualcapacity (in 1977 dollar terms), excluding working capital and interest duringconstruction. Production costs are estimated at US$14.50 per ton. Assuminga before-tax return on investment (ROI) expectation of 10-25% (a 15% ROI willyield an after-tax discounted cash flow return of about 10%), the long-termpotash prices needed to justify investments in a new mine would range betweenUS$71.70 and US$101.30/ton KCl, as calculated below, with US$80/ton KCI as themost likely price:

Long-Term Potash Prices Related to Various Return Expectations(in 1977 US$ per ton KCl, FOB Vancouver)

10% ROI 15% ROI 25% ROI

Production Costs 14.50 14.50 14.50Depreciation 18.00 18.00 18.00Return of Investment 19.10 29.10 48.20Ex-Factory Price 51.60 61.60 80.70

Rail Freight to Vancouverand FOB Charges 19.00 19.00 19.00Sales Expenses (2%) 1.10 1.20 1.60Provincial Tax - - -

Total FOB Vancouver Price 71.70 81.80 101.30

4.17 The above calculations do not take into account the SaskatchewanProvincial Tax which was imposed about 7 years ago and presently stands atabout US$14/ton KCl. The Canadian industry is currently seeking relief fromthis tax, and some changes in its structure are possible. Even though sometax (perhaps at a lower level) may remain, for purposes of calculating floorprices, this report ignores the tax factor. If a lower tax rate of, say,US$10 per ton were assumed, the price needed to give a 15% before-tax return(or 8-10% after-tax return) would be over US$90 per ton.

4.18 A strong improvement in prices from the current low level is ex-pected by the early 1980s as the need for capacity expansion becomes moreevident. However, prices are not expected to jump suddenly as soon as demandand supply come into balance, because initially most capacity increases shouldcome from debottlenecking and expansion of existing facilities, and becausepotash producers are likely to maintain their traditional policy of increasing

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prices only gradually. It is, therefore, believed that the above projectedmost likely long-term price of US$80 per ton (based on 15% before-tax return)will be achieved only by about 1990. On this basis, potash prices (FOBVancouver, in 1977 dollars) are projected to develop as follow:

Projected Potash Prices 1978-1990(in 1977 US$ per ton KCI, FOB Vancouver)

Year 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Price/ton 53 58 61 64 65 67 69 71 73 75 77 79 80

These projections would imply that the average historical price of US$64,which prevailed during the past 12 year period, will be reached again only in1981. The price of US$75 envisaged for 1987 is equivalent in real terms tothe price during the decade of 1955-1965, when supply and demand were aboutin balance.

V. THE MARKETING OF JORDAiIAN POTASH

5.01 The analysis in the previous chapter of the anticipated evolutionof world potash demand and supply suggests that APC would enter the marketunder reasonably favorable conditions, as the long period of excess productioncapacity now prevailing is expected to end in the early 1980s. APC's market-ing prospects are further enhanced by the fact that its output will representa very small share of world demand, and it should therefore be possible toaccommodate such output within the framework of the envisaged demand growth.Indeed, APC's production at full capacity would represent only 1.9% of totalforecast world demand of 37.1 million tons K 20 in 1985 and less than one-halfof the expected annual increase in potash consumption. The fact that APC willhave to export the bulk of its output should not constitute a unique marketingproblem for APC since potash is a commodity that is widely traded in the inter-national market. In fact, of the 25.0 million tons K 0 produced in 1976,about 50% (i.e. 12.3 million tons) was traded internaiionally as shown below:

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World Potash Trade in 1976(in thousand tons K 20)

OtherFxporters Fed. Rep. W. Europe Dem. Rep.imoorters France Germany Producers Germany USSR Canada U.S. Israel Total

World Total 476 779 293 2,303 2,304 4,923 848 341 12,267DevelopedMarkets 371 566 195 639 597 4,412 323 273 7,376

of which- N. America - 20 20 - - 4,030 14 48 4,132- W. Europe 283 453 161 618 462 25 38 172 2,212DevelopingMarkets 100 190 98 349 104 420 524 68 1,853

of which- Latin America 30 78 40 201 101 147 471 19 1,087- South Asia - 91 - 131 3 110 - - 335- East Asia 19 16 3 4 - 163 50 41 296Centrally-PlannedMarkets 5 23 - 1,315 1,603 91 1 - 3,038

5.02 Notwithstanding the generally favorable prospects for APC's market-ing efforts, the degree of success of selling the Company's production isdependent on a positive marketing strategy and adequate planning and prepara-tion work prior to the start of plant operations. The virtual absence of adomestic market makes it important for APC to analyze and understand the widevariations in the size of individual markets as well as the growth prospectsand specific needs of potential customers. APC management is aware of thecrucial need for an effective marketing effort and has now outlined a basicpotash marketing strategy with respect to (i) potential markets; (ii) market-ing organization and representation; (iii) product specification and packaging;(iv) pricing, inventory and shipping policies; (v) promotion and marketseeding; and (vi) timing of its marketing effort. Although the main elementsof APC's marketing strategy have been established in principle, there is aneed for a more precise definition and selection of marketing options. Thismatter will be further elaborated by APC during the coming months and theCompany will submit its detailed marketing strategy to the Bank by November1978.

5.03 Potential Markets: APC expects to market 1.2 million tons per yearof potash by 1985, equivalent to 720,000 tpy of nutrient K 2, and to concen-trate its marketing efforts in the South Asia, East Asia, and Pacific regionswhere it enjoys a comparative location and freight advantage. The Arab coun-tries in the Middle East and Africa also constitute natural potential markets.In addition, APC is exploring marketing possibility in the United States.

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5.04 India will constitute for APC one of its principal target markets inview of Jordan's freight-favorable location compared to other major suppliers.In 1977, India consumed about 500,000 tons of standard grade potassium chloride(320,000 tons K20) all of which was imported. The Indian Government's 6th Plananticipates potash consumption to increase at a rate of about 15% per year,reaching 1.1 million tons of K20 by 1985, or 800,000 tons K 0 more than the2 , ~~~~~~~~21977 level. Even though the Bank's estimates indicate that annual potashconsumption may reach only about 800,000 tons K20 by 1985, such a figurestill represents a substantial increase in potash consumption of 480,000 tonsK 0. APC plans to capture a portion of this demand growth. Potash salesthere would be facilitated by the fact that India imports all potash through asingle government agency -- Minerals and Metals Trading Corporation of IndiaLtd. At present, the principal suppliers to India are Canada and the GermanDemocratic Republic, both of which offer attractive financing or trade terms.To effectively compete in this market, APC is presently exploring means toenable it also to offer similar facilities. In particular, the IslamicDevelopment Bank has expressed interest in considering financing part of APC'sexport sales. These facilities will be supplemented by export credits to begranted by the Central Bank of Jordan. The imported potash requirements ofother countries in South Asia -- Pakistan, Bangladesh, Afghanistan, Sri Lanka,Nepal and Burma -- are modest, aggregating less than 40,000 tpy of K 20 atpresent. In all these countries, central government agencies are also respon-sible for potash imports. While APC enjoys a measurable freight advantage inthese countries and should explore sales opportunities there, they representonly limited sales potential.

5.05 In the Far East and Southeast Asia, Japan is a major potash consumer(660,000 tons of K 20 in 1976), followed by the Republic of Korea (160,000),Malaysia (150,000), Philippines (70,000), Thailand (50,000) and Indonesia(45,000). (Thailand's own potash reserves are currently considered uneconomicalfor commercial exploitation.) In most of these countries the freight advantageenjoyed by APC vis-a-vis Canada is negligible. Nevertheless, since their com-bined consumption is expected to reach about 1.8 million tons of K20 by 1985,these markets will represent an important target for APC. Oceania, New Zealandand, to a lesser degree, Australia, with a combined potential consumption ofabout 480,000 tons of K20 by the mid 1980s, are also important markets forAPC. At present, the principal supplier to New Zealand is the United States.Purchasers are individual private companies who negotiate directly with potashproducers.

5.06 The Arab countries currently consume limited amounts of potash.Only Morocco and Algeria import measurable quantities -- a total of about60,000 tons of K 0 per year which is expected to grow to about 140,000 tonsof K20 per year by 1985. The other twelve Arab countries currently consumeonly about 16,000 tons of K 20 annually. Therefore, the Arab countries are notexpected to play an important role in the consumption of APC potash, exceptfor Iraq as mentioned below. Furthermore, since most of the Arab countrieshave saline soils, as much as 85% of their potash fertilizer consumption isin the form of potassium sulphate. APC does not presently plan to havefacilities to transform potassium chloride into potassium sulphate; but,

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even if APC were to establish such production capabilities, the Arab worldwould still remain only a small market and the location of other major con-suming countries in Northwest Africa would impose a small freight disadvantagecompared to the established supply sources, principally Spain and Italy. Inthe longer term, however, as potash usage spreads across the Arab world, itwould represent an attractive market for APC, especially if the Company wereto establish potassium sulphate production facilities. In this regard, Iraqmay become an important market even earlier since it is planning to build alarge compound fertilizer plant at Al Kaim to produce various formulationsthat would require as much as of 130,000 tpy of regular potash in the mid-1980s. Most of the Iraqi plant's output is expected to be exported.

5.07 The United States is the major world consumer and importer ofpotash, with major consumers located in the Midwest and Southeast. Canadais the major supplier but, since 1975, the USSR and the German DemocraticRepublic have been marketing potash in the US through Occidental ChemicalCompany and Philipps Brothers. Compared to potash from Saskatchewan, Canada,APC potash would be sold in Southeast US at competitive prices, sinceCanadian potash is shipped through Vancouver and California ports at hightransportation and trans-shipment costs. The US market is quite complex andinvolves a large number of buyers; it could best be served through agents.With this approach, the US could become an important market outlet for APC.Most US market potash demand is for coarse/granular material; since APC willhave the capability of producing as much as 30% of its output in granularform, it could supply the US customers. However, to fully exploit thismarket APC may also have to install compacting facilities (para 5.11).

5.08 Marketing Organization and Representation: APC's marketing groupwill be headed by an experienced Sales Executive and consist of commercial,technical, shipping and accounting staff. The appointment of that Executiveas soon as feasible is critical to the development of a detailed marketingstrategy, the marketing organization for implementing it and, therefore, tothe eventual success of APC as a potash exporter. APC has agreed to appointsuch a Sales Executive by October 1, 1978, for this purpose.

5.09 As to the degree of local representation for its sales, APC believesthat the various potential markets can be classified into two groups accordingto the degree of market penetration required by them, as follows: (i) directsales by APC staff (Arab countries, Indian subcontinent, Philippines, Korea,Japan, Taiwan, New Zealand); and (ii) sales by agents representing APC (US,Europe, Malaysia, Indonesia, Thailand). In the first group, APC expects tobe able to handle sales directly, since there is normally a single purchasingagency in each country; however, even in these countries, it will be necessaryfor APC to have some degree of local representation to handle documents andlocal formalities. In the second group of countries, the local agents wouldbe fully accredited and authorized to negotiate on behalf of APC. In thesecountries, APC has already started identifying potential local representativesand/or marketers and has received encouraging responses. Based on these con-tacts APC has agreed that by March 1979, it will obtain letters from customersstating their intentions in principle to purchase annually, starting in 1982,at least 600,000 tons of potash or APC's production, whichever is less.

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5.10 APC is also giving further consideration to the desirability ofcomplementing its activities with the Jordan Phosphate Mines and eventuallywith the Jordan Phosphate Fertilizer Industry to jointly exploit marketingand distribution opportunities.

5.11 Product Specification and Packaging: Except for the US and Japan,the demand for potassium chloride is in standard grade, which is the principalgrade to be produced by APC. In the US and Japan, because of the require-ments of bulk blending, granular or coarse grades are normally required.Although as much as 30% of APC's output would be in granular grade, APC isalso considering the desirability of installing the required facilities atAqaba to compact as much as 20% of its production to meet the product needsof bulk blenders in the US and Japan. A decision about these facilities willbe taken in consultation with the Bank by March 31, 1979, after APC's marketingstrategy has been finalized. By that time APC will also decide on the timingby which it should install facilities for transforming potassium chloride intopotassium sulphate which, as noted above, is required by most Arab countries.

5.12 Pricing, Inventory and Shipping Policies: Although the world supplyand demand balance is expected to be reasonably favorable by the time APC'splant comes on stream, APC may have to initially offer some price discounts,perhaps up to 10% of prevailing world prices in order to break into themarket. The Company has taken this possibility into account when estimatingits cash flow needs during the initial years of operations. APC will alsohave to follow the customary commercial practice regarding credit terms. Themajority of sales in APC's potential markets involve minimum credit, i.e. pay-ments are at sight or within 30 days. Extended credits, however, are essentialfeatures in such countries as Thailand (where the cost of credit can normallybe reflected in suppliers' price calculations) and India, which enjoysfinancing from Government agencies of the supplying countries such as CIDAof Canada. APC, as a new supplier, will face strong pressure to be particu-larly flexible regarding conditions of sales and may have to offer creditterms extending beyond 60 days. The need for such concessions may, on theother hand, be substantially reduced in case potash should be in tight supplyin the mid-1980s. Close monitoring by APC in the next few years of the worldmarket trends is, therefore, important to determine APC's credit policy duringits initial operations. APC has agreed to submit by June 30, 1979, a detailedanalysis of its export credit needs and to finalize by September 30, 1979,arrangements, satisfactory to the Bank, necessary to meet them. The Govern-ment is understood to have undertaken to assist APC in obtaining satisfactoryexport credit facilities. Regarding inventory policy, APC plans to makeprovisions to store up to 150,000 tons KCl at Aqaba in order to enable itto offer expeditious and efficient service to its new clients as well as tospot buyers requiring material at short notice. APC is also consideringmaintaining small stock piles at some Southeast Asian ports in order tofacilitate sales in these areas.

5.13 Promotion and Market Seeding: As shown in para 5.14, APC intendsto initiate promotional activities very soon. Such activities would enableAPC's competitors to adjust their own marketing plans by taking account ofthe entry of a new supplier. APC also intends to enter the market with tokensupplies, well in advance of its own production, by securing supplies from

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other producers. This "market seeding" would offer APC's marketing team, aswell as potential consumers, the important benefits of reciprocal familiariza-tion before APC plant operations start.

5.14 Timing of Marketing Effort: In view of the different decisionsconcerning marketing that still need to be taken and then implemented duringproject execution, APC has established a specific timetable for variousactivities generally outlined in this chapter, as shown below:

Timetable for Marketing Activities to be Undertaken by APC

Action Date

(1) Appointment of Sales Executive October 1, 1978(2) Submission of Detailed Marketing Strategy November 30, 1978(3) Decision on the Installation of Compaction

Facilities and Production of Potassium Sulphate March 31, 1979(4) Submission of Letters of Intention from

Potential Potash Buyers March 31, 1979(5) Submission of Analysis and Proposals on Credit

needs of the Borrower for the sale of itsproducts June 30, 1979

(6) Organization of Marketing Structure June 30, 1979(7) Staffing of Marketing Department August 1979(8) Start of Training Programs for Marketing Staff September 1979(9) Selection and Appointment of Local Representatives January 1980(10) Drafting and Initiation of Promotional Activities February 1980(11) Bidding of Tonnages Required for Market Seeding Early 1980(12) Execution of Market Seeding Program Early 1980-June 1982

VI. THE PROJECT

A. Project Location and Scope

6.01 The Project is located on a 150 sq. km concession area belonging toAPC in the southern basin of the Dead Sea, some 130 km from Amman and 200 kmfrom Aqaba Port. The shallow depth of the Dead Sea in that area and the hot,dry weather offer excellent conditions for mineral recovery from sea brineaided by solar evaporation at relatively low operating costs. The Dead Seais an inland lake about 80 km long and up to 18 km wide, and covers an areaof about 900 sq. km between Jordan and Israel. It is fed by the Jordan andMujib rivers and other smaller streams, but has no outlet. The water levelof the Dead Sea is about 400 m below the Red Sea level at the Port of Aqaba.The Dead Sea essentially comprises two basins joined by a narrow stretch ofwater at the Lisan Peninsula, the main northern basin which is relativelydeep (up to 400 m) and the smaller, southern end which is shallow and driesup during part of the year (Map IBRD-3078 R2).

6.02 Low rainfall, high ambient temperatures and pressure, low humidityand prolonged sunshine have gradually concentrated the dissolved mineralcontents of the incoming waters. The Dead Sea has a salinity of about 30%,

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compared to some 4% for typical sea water. This represents some 45,000million tons of dissolved solids, of which 75% are magnesium and sodiumchlorides. Substantial amounts of potassium chloride, calcium chloride andmagnesium bromide are also present. Total reserves of potash (potassiumchloride) are estimated at about 2,000 million tons. The proposed Project hasbeen designed for an annual production of 1.2 million metric tons of potash,with the possibility of attaining an ultimate capacity of 1.7 million tons.In the future, in a second stage not included in this Project, the Companyplans to extract bromine, magnesium and other chemicals contained in Dead Seabrine.

B. Production Process and Technology

6.03 The production process is technically sound; it is similar tothe process utilized by Dead Sea Works and some other projects elsewherein the World. A schematic diagram of the carnallite route for solar potashrecovery is shown on the following page. The principal project componentsto be constructed at the southern end of the Dead Sea, as shown in the sim-plified flow chart on the following page, are: (i) solar evaporation pondsfor the concentration of brine, and a brine transfer system to bring thebrine from the Dead Sea to the evaporation pans and then transfer it betweenpans; (ii) a harvesting system for dredging and transporting the solids preci-pitated in the final pans (principally carnallite, a double salt of potassiumand magnesium, KCI.Mg Cl2. 6H 20 containing about 23% potash) to the refinery;(iii) a refinery to produce fertilizer grade potash from the harvested car-nallite; (iv) a water supply system, and a steam and power generating plantto provide the needs of the plants and township; and (v) an associated town-ship. Project layout is shown in Map IBRD-13362 R and details of the Projectare given in the Project Feasibility Report prepared by APC's consultants inFebruary 1978 (Project File - Reference B).

6.04 Solar Evaporation and Brine Transfer Systems. Brine containingabout 1% potash in the deep section of the Dead Sea, north of the LisanPeninsula, will be pumped and conveyed via a 10 km canal to large shallowevaporation ponds. These ponds will be filled with brine of different con-centrations to a depth of about one meter. The pan area will cover theentire southern end of the Jordanian Dead Sea, which is the most suitablelocation for the construction of ponds. In order to encompass the evapora-tion pans, about 58 km of dikes will be built, mostly over salt and softsilty mud beds that are either permeable or unstable. The area which willform the base of the evaporating pans was mostly under water in the mid-1960s. However, the level of the sea has steadily fallen by about 3 m overthe last 12 years, and the area is now practically dry during most of theyear. Although this sea recession will facilitate the construction of dikes,they still represent the largest single component in the project costs.

6.05 In order to minimize pan area, and dike construction and operatingcosts, the consultants have recommended that the pan system be operated inthree steps and in a continuous manner rather than batchwise. The evaporatingpans will have a total area of 70.8 sq. km, of which 40 sq. km would be in onesalt pan (where most of the sodium chloride will crystallize and precipitate

ARAB POTASH PROdECTSCHEMATIC DIAGRAM OF CONVENTIONAL CARNALLITE

ROUTE FOR SOLAR POTASH RECOVERY

DEAD SEA SALT PANS PRE-CARNALLITE PANS CARNALLITE PANS(DEEP PART)

HARVESTER

TRANSFER PUMP TRANSFER PUMP

/ I t///////////I / W.ENTIA\EI

BRINE PUMP DIKE SALT DEPOSIT CONCENTRATED SALT BOTTOM l

CARNALLITE SLURRY TO PROCESSING PLANT ON SHORE

EFFLUENTTO POTASHDEAD SEA I TO AQABA

EFFLUENTTO POTASH POTASH PORTDEAD SEA HOT POTASH DRYING STORAGE

LEACHING CRYSTALLIZER SCREENING

World Bank-9850

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to the bottom of the pond, accumulating at a rate of 15 cm per year 1/), 14.8sq. km in two precarnallite pans and 16.0 sq. km in three carnallite pans.In order to maintain optimal carnallite crystallizing conditions, protect thebottom of the carnallite pans and provide a surface for the running of theharvesting machines, a thick layer of common salt will be deposited into thebottom of the carnallite pans prior to the starting of carnallite production.This laying of salt will be effected by a temporary brine supply systemthat will bring brine directly from the Dead Sea into the carnallite pans.The pan design is considered reasonable. However, one of the project risksis the possibility that the evaporation rates, principally in the carnallitepans, might be lower than now expected, thereby reducing production below the1.2 million tpy of potash envisaged. This risk, however, is not consideredhigh, since the pan area was determined as a result of extensive evaporationtests carried out during the Pilot Project. APC also plans to continuecollecting further data at the test pan station built for the Pilot Project,to confirm that design criteria are consistent with field data collecteduniformly over a longer time period. In case new data were to lead to theunlikely finding that a larger carnallite pan area would be desirable, APCwill then modify the pan design by adding a fourth carnallite pan or byoperating the three carnallite pans in series. Except for this potentialrisk, the pan design is not expected to pose any major problems.

6.06 As shown in the project layout chart, Map 13362, the Truce Linebetween Jordan and Israel forms the western boundary of the Project site; APCdikes will be built parallel both to the Truce Line and to the Israeli's DSWdikes and the average distance between APC and DSW dikes will be about 500 m.Between the two dikes there will be a 18 km long channel to dissipate sub-stantial amounts of flash flood waters from the several wadis in the southernarea, as well as to provide an outlet for the disposal of effluents and wastebrine from the two projects. The proposed width of 500 m is designed todischarge to the Dead Sea up to 2,900 m /sec of flood water from the mouth oftqe southern wadis during the rainy season, at an average speed of about 1.6m /sec, which is considered the maximum flood volume that can occur with aprobability of one in 1,000 years. The proposed width of the channel hasbeen carefully studied and is considered adequate. The APC dikes forming thechannel between APC and DSW will have flood protection consisting of gravelof relatively large size and, where required, groynes to direct the flow andavoid scouring of dike foundations. A breach section with a lower crest levelwill be included on some of the dikes so that floods can be attenuated in thepans without causing excessive damage, should the estimated one in 1,000 yearflood level be exceeded at any time. APC has asked its civil consultants AGPto devise measures to minimize the risk of flood damage to the dikes duringthe construction period. DSW dikes that will form the western side of thisflood water channel are already adequately protected.

1/ This accumulation of salt at the bottom of the pan will require, after10 years of operation, the raising of the dikes encompassing the saltpan by about 2 meters. The accumulation of salt will also increasethe evaporating area of the salt pan to about 60 sq. km.

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6.07 Dikes will be constructed over soils that are either permeable orunstable, and present two major and different design problems; dikes to bebuilt over salt beds will require special horizontal and vertical seepagecontrol, while those over soft mud at the south end will call for specialconstruction methods to overcome stability problems. On the basis of exten-sive soil tests carried out during the Pilot Project, the civil engineeringconsultants have established that all dikes should have an impermeable claycore that will effectively reduce horizontal seepage through the dikes. Tocontrol vertical seepage in about 20 km of dikes to be built over salt beds,a cutoff barrier will be placed below the dikes down to about 5 m into a con-tinuous foundation of clay layer. During the Pilot Project the consultantsalso built and tested about 500 m of trial dikes, 3 to 5 m high, to determinethe most economic cross-section design and construction methods under differ-ent soil conditions. Optimal dike cross-sections, that ensure dike stabilityat minimum costs, have now been established. The full-scale dikes will beconstructed in stages to allow for the settlement of the unstable foundationsand reduce filling costs. The dikes will be constructed from locally avail-able materials, principally gravels from the nearby wadi fans and clay fromthe Lisan Peninsula. Failure of dikes was a major problem faced by DSW duringits initial operations. However, the proposed Project is not expected to facesimilar problems due to the extensive trial and design work done during thePilot Project. The proposed dike design and construction methods are consid-ered satisfactory.

6.08 The design and construction of the dikes and evaporation pans alsotake into consideration the hydrology of the Dead Sea and its surroundingarea in order to ascertain the extent to which sea levels may fluctuate,thereby affecting the Project. Rising levels can endanger the dikes byovertopping them; falling levels would affect the location of the main intakeand lead to significant extra pumping costs to lift the brine to the pans.Extensive hydrological studies concerning the Dead Sea have been carried outby the consultants based on historical trends, in-situ investigations andtesting as well as laboratory simulated models. Such studies show that themost likely possibility is a slow decline of sea level, averaging 0.6 m peryear. With the level of abstractions and brine pumping increasing over time,the risk of any significant increase in sea level and overtopping the dikesis minimal. Given the probability that the sea level will continue to recede,the main brine intake has been sited in a deep area of the sea, some 10 kmfrom the main salt pan.

6.09 Israel is understood to be considering a scheme for using thenatural head between the Mediterranean and the Dead Sea to generate hydro-power, which creates a major uncertainty concerning the future Dead Sealevel, and would affect both the APC and Israeli Dead Sea Works. However, ifsuch a scheme were indeed implemented, it could even be beneficial to the twocompanies as it would help in stabilizing the level of the Dead Sea or atleast in slowing the present downward trend. Even if the amount of watercoming into the Dead Sea from the power project became large enough to sub-stantially raise the sea to a level that would endanger the dikes, it shouldnot constitute a significant problem for the APC dikes since such a scheme wouldtake several years to be implemented; during this time, APC can take measures

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to overcome any problem. Also as noted earlier, after 10 years of operationsthe APC dikes will have to be raised anyway, thus minimizing the possiblerisk to APC of the Israeli hydroelectric scheme. The possible addition ofMediterranean sea water to the Dead Sea brine is not expected to harm potashproduction.

6.10 Harvesting of Carnallite. The crystalline carnallite mixturecontaining about 23% potash will precipitate in the three carnallite pans,which will operate in parallel. This mixture will be harvested by speciallydesigned continuous bottom-operated, track-driven dredging equipment, anddelivered in slurry form to the adjacent chemical refinery on shore. Thisdredging method is different from the one used in DSW operations whichutilize cable-operated floating dredges that minimize bearing requirements ofthe salt bottom. However, the required cable winching, anchoring and ancil-lary equipment is costly and complicated to operate. The proposed APC har-vesting units would be approximately 3 m wide by 6 m long and can operatein the brine with minimum bearing pressure. A commercially available lasersystem would be used to assist the operator in guiding the harvester in astraight line. The cutter of the harvester will supply the slurry containingabout 20% solids to a pump mounted on the harvester's deck. This pump willtransfer the slurry via a 10-inch floating pipeline to a mobile dewateringunit on the nearest dike; this unit will increase the solid content to 40%before the slurry is pumped to the potash refinery. Although the proposedharvesting units are still in the design stage, they are not on the Project'scritical path. But the proposed units have not yet been commercially used fora similar purpose, although the individual components (i.e. cutting elements,pumps, driving wheels, laser equipment) have been used successfully elsewhere.APC is, therefore, planning to order the construction of one prototype har-vester to conduct extensive field tests in order to confirm that the proposeddesign would indeed perform as expected and to determine its optimal configu-ration. APC has agreed to order such a prototype unit by September 1, 1978,and conduct field tests to determine by July 1, 1979, the optimal configurationof the system. In the unlikely event that the proposed harvesting machine isfound to be impractical, the more cumbersome, but proven, floating cutterdredgewould be adopted instead. Therefore, the risk that an adequate harvestingsystem would not be found is minimal.

6.11 The Potash Refinery. The refinery, designed to produce 1.2 milliontpy of potash based on 330 days of operation per year, will be located closeto the carnallite pans, on firm, well-drained ground. In it, the 40% slurryharvested from the carnallite pans will be decomposed into sodium, magnesiumand potassium chlorides. While most of the magnesium chloride will be sepa-rated and returned to the pan area, sodium and potassium chloride will combinewith each other to make a synthetic sylvinite. The delicate decomposition ofsylvinite into potassium and sodium will be achieved by the hot-leach/crystal-lization process, under which sylvinite is leached with hot water underclosely-controlled conditions to dissolve the potassium chloride, which isthen further concentrated and crystallized in vacuum crystallizers. Afterseparation, drying and screening the potash crystals are treated with anti-caking agents and stored for eventual shipment. This process, described inmore detail in Annex 6-1, yields free-flowing potash crystals of standard

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and granular size and purity, and is now generally preferred by the industry;the process is also the one utilized in the expansion of the DSW. The APCdecision on the choice of the process appears sound. The refinery will con-tain considerable amounts of relatively costly materials and some equipmentduplication, in order to ensure optimum and reliable operations given theremoteness of the plant location and the high ambient temperature that willbe experienced during the summer months. Such design has also increased theestimated cost of the plant. The consultants have, therefore, been asked toreview, during the detailed engineering and procurement process, their equip-ment specifications and to recommend if plant costs could be reduced by usingdifferent specifications, without unduly risking reliable plant operations.

C. The Township

6.12 During the construction phase, the civil works and process plantcontractors will employ over 800 persons, including many expatriates; themajority of the local labor will come from outside the neighboring local-ities. Later, when the plant becomes operational, APC will employ some 630permanent staff, again the majority of whom will come from outside the generalarea of the works. The adjoining small villages of Safi and Mazra as well asthe nearest town, Karak (situated about 50 km from the plant site), will notbe able to meet the Project's total needs of housing and social services.Therefore, to attract people to the remote project site, a township will beconstructed to accommodate the contractors' staff during the constructionstage and later the bulk of APC's permanent staff during regular operations.

6.13 Eight possible sites for the township were investigated. Of these,two were located close to the nearest village of Safi and the Jordan-Israelborder, but had to be abandoned because these plots are prime agriculturalland and because of security considerations; the two available sites closestto the plant proved to be too small; another two near Mazra village wereexposed to flood risks. The last two possible sites, similar in size andtopography, are not far from Mazra, about 20 km from the plant; one is pri-vately owned and the other belongs to APC. The APC site, located some 135 mabove the Dead Sea level, was selected after the Jordanian ArcheologicalInstitute and experts contracted by AID confirmed that no archeologicalremains exist underneath; APC has obtained written clearance from the Insti-tute for building a township at this site. It has also been confirmed thatthis plot would not be required for agriculture or other uses. The siteselected for the township is considered satisfactory.

6.14 The township will house some 2,270 persons, in 380 housing unitsthat will be composed of four main category groups: (i) senior staff (29units); (ii) skilled technical and clerical staff (136 units); (iii) semi-skilled staff (185 units); and (iv) 30 bachelor quarters. In view of theclimatic conditions, all dwellings as well as public buildings will be airconditioned with package type window units. The township will, as shown inAnnex 6-2, also contain essential community facilities, including administra-tive offices, shops, a bank, a post office, one community center, schools(kindergarten and elementary) and a health clinic. The Project will include

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the construction of housing and principal township facilities, except for the

fire station, mosque and church and police station that will be provided by

the Jordanian Government. The proposed scope of the township, despite its

relatively high cost, is consistent with project needs and is consideredreasonable.

D. Utilities and Raw Materials

6.15 The plant location is remote and normal utilities such as waterand electricity are not currently available at the site. The Project scope,

therefore, includes provision for the supply within the project area of the

bulk of the utilities required.

6.16 Water Requirements and Supply. During normal operations, the wat rrequirements of the process plant will be about 5.6 million cubic meters (m')

per year, most of which can be supplied with loderate salinity. The town-

ship will require an additional 0.5 million m per year of potable water.With the assistance of the Institute of Hydrology (Oxford, UK), the consul-tants have carried out extensive studies, including five borehole drillings,

to determine the water potential in the area and the optimal means to tap suchresources. The study confirmed that there is sufficient water available in

the area to satisfy the needs of the proposed Project, in addition to presentuses. In fact, excluding flood flows, the perennial annual volume of water

leaving the escarpment in the project area in the fSrm of base flows in the3wadis or springs is estimated at about 45 million m (of which 25 million mcome from the Wadi Hasa, about 7 km from the plant). This flow is several

times the project requirements. However, part of this flow is currentlyutilized for irrigation. Therefore, to minimize any negative effect onirrigation, the prime source of water for the Project would be groundwateraccumulated in underground alluvial aquifers, after such water has beenutilized for irrigation. This groundwater is generally of potable quality.The largest aquifer is the Ghor Safi, which is fed by water from the Wadi

Hasa. To utilize it, about 7 new boreholes will be drilled during Project

execution. Furthermore, it is proposed that during the months of May toAugust, when agricultural demand for water is considerably reduced, water for

the refinery VIll be taken from the Wadi Hasa directly. In this manner, only

3.7 million m per year would be withdrawn f om the Ghor Safi aquifer, whichhas a storage capacity of about 67 million m . Groundwater abstraction andsurface water diversion could thus be used at different times of the year witha greater overall efficiency of groundwater usage; this is in line with the

national objective of achieving an optimum water resource plan for the area.As to water supply for the towSship, the Ghor Mazra aquifer near the township

his a capacity of 25 million m and a recharge capability of about 1.3 millionm per year. Such a recharge would be sufficiSnt to satisfy the water needs

of the township which amounts to 0.5 million m per year.

6.17 The long term reliability of groundwater supplies could be jeo-pardized by any significant diversion of water for irrigation or other usesoutside the limits of the aquifers, as this may reduce the amount of recharge.It is, therefore, important that the planning of any improvement or extensions

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to irrigated areas dependent on surface water and the development of ground-water resources for the Project be carefully coordinated to ensure the op-timal use of water. Therefore, the Government has agreed to consult with theBank before taking any measures in water resource management that would impairthe operations of the proposed Project. In addition, during project imple-mentation APC has agreed to continue its borehole drilling investigations andmonitoring of groundwater resources to obtain closer and direct estimates ofrecharges and yield potentials, in order to be able to determine the optimaldesign and location of productive wells. Subsequently, during project opera-tions, APC will monitor underground water levels and water quality to deter-mine any possible variations in annual sustained yields.

6.18 Electric Power. At full operation, the Project will have a totalconnected electric power demand of 44 mega watts (MW), but the average loadwould be 23 MW. This average demand will consist of 8 MW from the evapora-tion and brine transfer system, 12 MW from the refinery and 3 MW from thetownship. It is currently envisaged that the Project's power needs would besupplied from two different sources. The Project itself will include a fuel-fired steam turbine power generating unit with a capacity of 14 MW, whichwould be sufficient to cover the minimum operating needs of the Project andbe consistent with the steam requirements of the process plant. The remaining9 MW would be supplied by the Jordan Electricity Authority (JEA) from thenational grid, from the Amman area as northern Jordan will continue to havesurplus power. JEA plans to initially connect the Project to the nationalgrid by completing a new transmission line from Amman to Safi by early 1981.Subsequently, it expects to build, by the mid-1980s, a second line connectingSafi with a proposed new power station in Aqaba. The proposed power supplyarrangement would minimize the financial and economic cost to APC of obtainingits power needs, and would also maxim