Report No. 734-ME FILE COPYAppraisal ofFertilizer ProjectMexicoMay 5, 1975

Industrial Projects Department

Not for Public Use

Document of the International Bank for Reconstruction and DevelopmentInternational Development Association

This report was prepared for official use only by the Bank Group. it may notbe published, quoted or cited without Bank Group authorization. The Bank Group doesnot accept responsibility for the accuracy or completeness ot the report.

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CURRENCY EQUIVALENTS WEIGHTS AND MEASURES

Mex$1.0 = US$0.08 1 Metric Ton (ton or MT) - 1,000 kilogramsMes$12.5 = US$1.00 1 Kilogram (kg) = 2.205 pounds (lbs)

1 Kilometer (km) = 0.62 miles1 Hectare (ha) = 2.47 acres1 Cubic Meter = 1 m3 = 35.3 cubic feet (cu. ft.)1 Normal Cubic Meter of Gas (Nm3) 37.3 Standard

Cubic Feet of Gas (SCF)1 MSCF = 1,000 SCF

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BHC Benzene HexachlorideCONASUPO Compania Nacional de Subsistencias PopularesDAP Diammonium PhosphateDDr Dichloro-diphenyl-trichloroethaneFFM Fosfatados Mexicanos S.A.GOM Government of MexicoGUANOMEX Guanos y Fertilizantes de Mexico S.A.HYV High Yielding VarietyK20 Potassium (potash) content in FertilizerIW KilowattKWh Kilowatt hourMW MegawattN NitrogenNAFINSA Nacional Financiera S.A.NPK Complex FertilizersP205 Phosphatic content in FertilizerSSP Single SuperphosphateTPD Tons per DayTPY Tons per YearTSP Triple Superphosphate

FISCAL YEAR

July 1 - June 30

MV= cO

APPRAISAL OF FERTILIZER PROJECT

Page No.

SUMMAABY AND CONCLUSIONS ..... ................................ -

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

II. THE FERTILIZER INDUSTRY AND GUANOiMEX ....... ..................... 1

A. The Mexican Fertilizer Industry ............................. IB. Description of Guanomex . ... ...........* ..................... 2C. Organization and Management ...................... 3D. Past Production and Financial Position . ................ 3

III. THE MARKET .................................................. 7

A. Agriculture in Mexico and the Need for Fertilizers . ......... 7B. Fertilizer Supply and Consumption .......................... 9C. Fertilizer Distribution ..................................... 13D. Fertilizer Prices ................................. . ...... 13E. The Market for Insecticides .. 13

IV. THE PROJECT ....................................... 1

A. Project Scope ............................ 14B. Technology .. 15C. Utilities ............................. 15D. Employment and Training .......................... 16E. jcology and Safety .................................... . . 16F. Project Execution 16

V. CAPITAT COST ESTLMATES AND FINANCINGI PLAN ...... .......... 17

A. Capital Cost . . ............... 17B. Financing Plan ................. 19C. Procurement . . . ........... . 20D. Allocation and Disbursement of Bank Loan ......... ........... 20

VI. FINANCIAL ANALYSIS .. ........................................... 21

A. Analysis of the Project ............... a....... 21B. Financial Rate of Return and Sensitivity Analysis ,.. .... 24C. Financial Forecasts for Guanomex . . . ........... ............. a 24D. Financial Covenants . . . .................. 25E. Major Risks. .. . ........................ 26

This report was prepared by Messrs. Tarnawiecki, Brown, de la Balze, Pratt,Carpio, Suebsaeng and Becher of the Industrial Projects Department

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Page No.

VII. ECONOMIC ANALYS IS 26

A. World Fertilizer Prices ......... 26B. 'Economic Rate of Return ......... 27C. Direct Foreign Exchange Savings ..... 28D. Other Benefits ...... 28

VIII* AGREEMENTS 28

ANNEXES

1-1 Glossary of Terms used in the Report1-2 Units and Conversion Factors2-1 Description of the Company2-2 Organization Chart of Guanomex2-3 Manufacturing Units of Guanomex2-4 Historical Financial Statements3-1 Crops and the Need for Fertilizers in Mexico3-2 Historical Development of Fertilizer Supply and Consumption3-3 Agro-Chemical Inputs according to an Agricultural Sector

Model for Mexico3-4 Ratio of Urea Nitrogen to Total Nitrogen Fertilizer Consumption

in Selected Countries3-5 Fertilizer Supply and Consumption Projections3-6 Imports of Urea in Selected Countries3-7 Description of Conasupo3-8 The Role of Organo-Phosphorus Insecticides4-1 Description of the Projected Plants4-2 Feedstock for Ammonia Plants in Mexico4-3 Parathion Manufacture5-1 Total Capital Cost Estimates for the Project5-2 Capital Cost Estimates for the Sub-projects5-3 Schedule of Capital Expenditures and Escalation Factors5-4 Estimation of Permanent Working Capital5-5 Disbursement Schedule for IBRD Loan6-1 Assumptions used for Financial Projections6-2 Manufacturing Costs of Different Production Units of Guanomex6-3 Projected Income Statements for the Project Alone6-4 Profit and Cash Flow Break-even Charts6-5 Projected Balance Sheets and Cash Flow Statements for the

Project Alone6-6 Cost and Benefit Streams for Financial Rate of Return Calculations6-7 Projections for Existing Facilities6-8 Consolidated Financial Projections7 Cost and Benefit Streams for Economic Rate of Return Calculations

MAP IBRD 11494 - Location of Plants and Marketing Areas

MEXICO

APPRAISAL OF FERTILIZER PROJECT

SUMMARY AND CONCLUSIONS

i. This report deals with the appraisal of a fertilizer project inMexico comprising two plants with a total capacity of 2,500 tons per day(TPD) of urea and the expansion of an insecticide (parathion) plant from7,500 to 10,000 tons per year (TPY). One of the urea plants (1,000 TPD)and the insecticide plant to be expanded are located at or near Salamanca,in the State of Guanajuato, and the other urea plant (1,500 TPD) at Coatza-coalcos, in the State of Veracruz. The plants will be owned by Guanos yFertilizantes de Mexico (Guanomex), a fully-owned Government corporation,with major responsibility in the manufacture and distribution of fertilizer.The feedstock will be ammonia produced from natural gas by Petroleos Mexicanos(Pemex), the government agency which has exclusive rights to extract, refineand distribute petroleum and natural gas, and operate basic petrochemicalindustries. Total financing required for the project is estimated at US$150million, US$53 million of which is in foreign exchange (including US$7million in interest during construction). A Bank loan of US$50 millionequivalent is proposed, to be made to Nafinsa and Guanomex, and guaranteedby the Government.

ii. Chemical fertilizer consumption grew in Mexico at an average rateof 10.4% annually in the last decade reaching in 1973 a total of 750,000nutrient tons, of which 75% is nitrogen (N), 21% phosphate (P205) and 4%potassium (K20). The present average rate of fertilizer application inMexico (29 nutrient kg/ha)--although nearly twice that for all developingcountries combined-- is below the world's average of 50 kg/ha. Furthermore,the Mexican average masks a wide range of fertilization levels from nearlyoptimum dosages in flat irrigated land in the northwest to none in many rain-fed highland areas (it is estimated that fertilized land--now about 5.7million ha--can be doubled). Nitrogenous fertilizer consumption is expectedto grow at 8.7% annually through 1985 consistent witlh the findings of a modelfor Mexican agriculture developed jointly by the Government and the Bank.

iii. Mexico has a well developed fertilizer industry based on extensiveresources of natural gas and sulfur. At present, production and consumptionof finished fertilizer are roughly balanced, but practically all the phos-phate rock and more than one third of the ammonia required has to be imported.During the 80s, however, Mexico is expected to become substantially self-sufficient in fertilizer raw materials. Recent finds of phosphate depositsin Baja California and an aggressive program to further prospect for anddevelop natural gas resources and to build additional capacity for the pro-duction of ammonia and petrochemicals coupled with adequate infrastructure,experienced manpower, and competent technical and managerial personnelshould provide the basis for Mexico to become independent of imports andpossibly a net exporter of fertilizers.

iv. Production and distribution of fertilizer in Mexico is mainlycarried out by three enterprises, two of which are fully Government-owned(Pemex and Guanomex) and a third which is a joint public and private sectorenterprise: Fosfatados Mexicanos S.A. (FFM). Guanomex now operates 16fertilizer plants with a combined capacity of 437,300 TPY of N. The Companyis efficiently run, has a good record for plant construction and in 1973-74operated available nitrogen capacity at 80%, less than it would most likelyhave achieved had it not been constrained by a shortage of ammonia in theworld market. Guanomex has a sound financial structure. The Government isaware of the importance of pesticides in agricultural production and hasgiven Guanomex an important, but non-exclusive role in their manufactureand distribution.

v. The project envisages the utilization of modern, proven technologyfor the manufacture of urea and parathion, using the assistance of experiencedengineering firms. In agreement with the Bank two of the firms--FosterWheeler Energy Corp. (US) and Atlas Foster Wheeler Mexicana--have alreadybeen contracted for the 1,000 TPD urea plant. Furthermore Guanomex has setup a Project Execution Team to implement the project with similar responsi-bilities as in earlier projects and the Bank considers this arrangement to besatisfactory. The insecticide plant expansion involves little new in processor equipment and, with the advice of the licensor--Stauffer of the US--nodifficulties are expected.

vi. The proposed Bank loan would be made for 14 years, including3-1/2 years of grace. Guanomex would pay 12% per annum interest with thedifference of 3-1/2% over the assumed Bank interest rate of 8-1/2% accruingto the Government. The loan will finance equipment procured through inter-national competitive bidding; long-lead imported equipment which, because ofbeing critical to the completion of the project, will be procured from alimited list of suppliers; items under US$50,000 procured by internationalshopping; and fees for process licensing and engineering services. To main-tain the schedule of the Bajio II urea plant, the Bank has agreed to theadvanced contracting of engineering services and long-lead equipment andGuanomex has been advised that, subject to approval of the loan by theExecutive Directors, up to US$3.6 million will be reimbursed to Guanomex fordown payments on these contracts. The balance of the financing required willbe met by raising Guanomex's equity by Mex$750 (US$60.0) million and long-termborrowing of Mex$502 (US$40.2) million from Mexican and foreign financial insti-tutions.

vii. During the initial years of operations of the two new urea plantsup to 36% of their output may have to be exported. Based on expected ureaprices of US$122 per ton delivered to retailers in Mexico and US$93 per tonf.o.b. for sales abroad in those years when exports have been projected tooccur, the project is forecast to yield a financial rate of return of 14.5%after income taxes (20.3% before taxes). The financial position of Guanomexis projected to remain sound; it will be safeguarded by a number of financialcovenants and further improve as loans are repaid, reserves are built up, newefficient plants are built to replace some of the obsolete units and newpolicies now being developed on fertilizer distribution, transportation andinventories are implemented.

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viii. Long-term international prices per ton of urea and ammonia areprojected to be US$130 CIF Mexican port and US$88 delivered at factory siterespectively. For the part of urea projected to be exported between 1979and 1982, estimated FOB US Gulf prices have been used in the calculation ofthe project benefits. On this basis, the project's economic rate of returnis 24.0%. A drop of 10% in the urea price would depress the return by 6.2percentage points. Lower capacity utilization (at 80%) would result in areturn of 20.3% and a capital cost overrun of 15%, would still leave a satis-factory rate of return of 21.2%.

ix. Guanomex has agreed that a study of fertilizer distribution systems,including the optimization of inventory levels, coupled to a survey of themeasures required to promote the proper use of fertilizer by small farmers,should be carried out under terms of reference agreed upon by the Bank andthe recommendations of such a study be implemented after having been reviewedby the Bank.

x. The project would result in substantial benefits to the Mexicaneconomy and faces no important technical or financial risks. Based onrecommendations summarized at the end of this report, the project is suitablefor a Bank loan of US$50 million equivalent.

I

I. INTRODUCTION

1.01 The Mexican Government development bank, Nacional Financiera S.A.(Nafinsa) and Guanos y Fertilizantes de Mexico S.A. (Guanomex or the Company),a firm fully owned by Nafinsa, have requested a Bank loan of US$50 millionequivalent for a project comprising two urea plants and the expansion of aninsecticide (parathion) plant to be located in the States of Guanajuato andVeracruz (Map: IBRD 11494). The proposed urea plants will have capacitiesof 1,000 and 1,500 tons per day (TPD) or a total of 825,000 tons per year(TPY), equivalent to 379,500 TPY of nitrogen (N). 1/ They will increase thecountry's existing N capacity by 79% to 858,400 TPY of nitrogen. The para-thion plant's capacity will be increased by 33% to 10,000 TPY.

1.02 The fertilizer sector in Mexico was first reviewed by the Bank inJune 1974, at which time the project's scope was outlined. The appraisalof the project was carried out in Mexico in September 1974 by Messrs.Tarnawiecki (Chief), Brown and de la Balze of the Industrial Projects Depart-ment. This would be the first Bank Group operation in the fertilizer sectorin Mexico.

II. THE FERTILIZER INDUSTRY AND GUANOMEX

A. The Mexican Fertilizer Industry

2.01 Mexico has a well established fertilizer industry based mainly ondomestic natural gas and sulfur but so far requiring large ammonia and phos-phate rock imports. The manufacture of nitrogenous fertilizer is for allpractical purposes in the hands of two organizations, both of them in thepublic sector: Petroleos Mexicanos (Pemex) produces virtually all theammonia made locally, and Guanomex produces all other nitrogenous fertili-zers, with the exception of by-product ammonium sulfate (para. 3.07).Pemex is the Government agency which, in Mexico, is in exclusive charge ofpetroleum extraction and refining and the distribution of petroleum productsas well as the manufacture of petrochemicals, including ammonia. 2/ As aconsequence of this organizational set-up, ammonia and urea are manufacturedby two different enterprises; this arrangement, although not in widespreaduse, does not interfere with efficient and economical integration of themanufacturing operations as long as the ammonia and urea plants are locatedclose to each other; this is the case in the proposed project.

1/ A glossary of terms used in the report is contained in Annex 1-1and frequentlv used units and conversion factors are shown in Annex 1-2.

2/ Domestic distribution of all fertilizers, including imported products,is the exclusive responsibility of Guanomex (para. 3.12).

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2.02 Phosphate fertilizers are manufactured by Guanomex and Fertili-zantes Fosfatados Mexicanos (FFM), a company which is also one of the largestphosphoric acid exporters in the world; though majority-owned by Banco deMexico, FFM is generally considered as a private enterprise. Until nowpractically all phosphate rock has been imported (96% of requirements). How-ever, last year, deposits of phospPate nodules were found in the Baja Californiaterritory. Drilling over a 300 km area and evaluation of reserves will not becompleted until late in 1975, but preliminary indications are that these de-posits will probably permit Mexico to satisfy its own phosphate needs and possi-bly leave an exportable surplus.

2.03 Feedstock for the production of ammonia in Mexico is natural gasfrom deposits developed by Pemex, mainly in the States of Tamaulipas andTabasco. Production of ammonia has not increased significantly since 1969(para. 3.08) but Pemex intends to utilize its rapidly growing reserves ofnatural gas (estimated at 11 trillion SCF at the end of 1973) 1/ to furtherdevelop its petrochemical industries, including trebling ammonia productionby 1985 (para. 3.10).

B. Description of Guanomex

2.04 Guanomex, created in July 1943, was originally charged with theresponsibility of promoting the exploitation of Mexico's guano deposits andthe use of fertilizers in general (Annex 2-1). Subsequently, small instal-lations for the manufacture of simple superphosphate (SSP) and bone mealwere added and, in 1951, the first Mexican chemical nitrogenous fertilizerplant came into operation with the manufacture of ammonium sulfate inCuautitlan, in the State of Mexico.

2.05 Rapidly expanding demand favored the establishment of severalfertilizer plants in the private sector. In 1965, the Government decidedthat orderly growth of the industry, savings in transportation costs andthe realization of economies of scale could be obtained by consolidationof most of the fertilizer activities. Between 1965 and 1969, Guanomex,through negotiations, bought out Fertilizantes de Monclova S.A. (ammoniumnitrate), Fertilizantes del Istmo S.A. (ammonium sulfate), Fertilizantesdel Bajio S.A. (urea) and Fertilizantes Delta as well as Montrose MexicanaS.A. and Lerma Industrial S.A. (chlorinated insecticides). The Governmentalso transferred to Guanomex the assets of Industria Petroquimica Nacional,a small private company then in process of liquidation and, in 1970, Guanomexacquired a controlling interest in Fertica S.A., a holding company owningfertilizer plants in Costa Rica, El Salvador and Guatemala.

1/ The Government has budgeted US$248 million for the development ofadditional gas reserves (mainly in the States of Chiapas and Tabasco)in the 3-year period ending in December 1976.

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2.06 At present Guanomex has 36 plants of which 16 are fertilizerplants 1/ with a total capacity of 437,300 TPY of N, 122,000 TPY of P205 and27,000 TPY of K20 2/ as well as two plants for the manufacture of chlorinatedand phosphorated insecticides (7,700 and 7,500 TPY respectively) and smallplants for various chemicals. The average age 3/ of the Company's fertilizerplants is now about 10 years and four plants are more than 15 years old.The location of the manufacturing facilities as well as the Company's salesareas are shown in Map: IBRD 11494.

C. Organization and Management

2.07 The organization chart for the Company is shown in Annex 2-2.Guanomex's Board of Directors consists of nine members appointed by thePresident of Mexico, including the Secretary of National Patrimony, andPresident of Pemex, Mr. Francisco J. Alejo, who is the Chairman, the Secre-taries of Agriculture, Finances, and Industry and Trade, and representativesof Nafinsa. The day-to-day operations are carried out by six decentralizeddepartments under the General Director, Mr. Luciano Barraza Allande. Manu-facturing plants are grouped in 11 units (Annex 2-3) under the general direc-tion of the Production Manager, Mr. Adolfo Sisto Velasco, an experiencedengineer of international reputation. The Company's agricultural extension,fertilizer promotion and sales activities are coordinated under Mr. FranciscoCastillo Creus.

2.08 Construction of new plants is the responsibility of the DevelopmentDepartment presently managed by Mr. Ernesto Badillo, a competent executivewith a background in agricultural economics. Three divisions report to him:Research, Projects and Construction Supervision. With the collaboration offoreign and local engineering firms, Guanomex has gained considerable experi-ence during the implementation of more than a dozen plants, including fourlarge scale fertilizer plants, which have been built in the last six years.

D. Past Production and Financial Position

2.09 The production performance of Guanomex has been satisfactory.Manufacturing units are well run and quality of the engineering and techni-cal plant staff is high. In the last two years average capacity utilization(in terms of nutrient tons) was 80% for nitrogenous and 93% for phosphaticfertilizers. Operating data for the more important plants are summarizedbelow and detailed data for all plants are given in Annex 2-3.

1/ Not including four mixing plants.

2/ Manufactured from imported potassium salts.

3/ Weighted average based on nutrient contents.

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Guanomex - Capacity Utilization

Capacity Year of Capacity UtilizationProduct/Plant Product N P205 Start-up /1 1970 1973 1974

___----- (000 TPY) --- -/1

Urea- Camargo 85.0 25.8 - 1968 77 97 81- Minatitlan 305.0 140.3 - 1963 18 78 76

Ammonium Sulfate- Bajio 60.0 12.3 - 1969 45 95 81- Coatzacoalcos 100.0 20.5 - 1966 17 50 44- Guadalajara 120.0 24.6 - 1968 97 84 78

DAP and NPK- Coatzacoalcos 80.0 /3 14.4 36.8 1970 5 /2 84 101- Minatitlan 140.0 25.2 23.8 1962 72 95 99- Monclova 50.0 9.0 8.5 1963 100 106 119

SSP- Cuautitlan 120.0 - 21.6 1963 92 105 105- Guadalajara 120.0 - 21.6 1968 21 63 60

Parathion- Salmanca 7.5 - - 1973 - 55 /2 62

/1 Years ended June 30./2 Year of start-up/3 DAP

The above table indicates that with the exception of one SSP and oneammonium sulfate plant and the recently completed insecticides plant allother production units have been operating at a rather high capacity utili-zation. The urea plants suffered over the last two years from scarcity ofammonia supplies which, however, will be alleviated by the output of newPemex ammonia plants (para. 3.10), of which one, in Minatitlan, startedoperations in January 1975.

2.10 The financial administration of Guanomex is centralized, and the11 manufacturing units are cost centers only. The Company's recent incomestatements are shown in Annex 2-4 and, for the last four years, are summarizedbelow:

Guanomex - Summary Income Statements (1971-1974)(Mex$ Million)

Year Ended June 30 1971 1972 1973 1974

Net Sales 1,449.8 1,772.3 1,847.1 2,353.3Cost of Goods Sold 1,133.7 1,352.4 1,411.0 1,859.3Gross Profit 316.1 419.9 436.1 494.0

Administration and Sales Expenses 190.9 227.4 254.7 334.3Operating Profit 125.2 192.5 181.4 159.7

Interest Paid 110.1 96.1 98.8 153.7Plus: Other Income /1 25.8 24.1 40.5 78.2Profit before Tax 40.9 120.5 123.2 84.2

Income Tax 3.8 35.4 35.8 33.3Profit after Tax 37.1 85.1 87.4 50.9

Workers' Participation in Profit 1.2 7.5 8.7 4.4Retained Net Profit 35.9 77.6 78.7 46.5

Cost of Goods Sold/Sales (%) 78.2 76.3 76.4 79.0Operating Profit/Sales (%) 8.6 10.9 9.8 6.8

/1 Mainly interest received for accounts receivable.

2.11 The Government controls the price of fertilizer and that of theCompany's principal raw material, ammonia, through a pricing policy whichis directed towards avoiding great fluctuations in fertilizer prices andwhich largely determines the Company's profitability. The other majorinput, phosphate rock, is dependent on international prices. The effectof world market price fluctuations for raw materials on the Company's prof-itability will decline as Pemex's ammonia capacity is expanded and domesticphosphate rock production on a large scale commences and thus replacesimports. Domestic fertilizer prices were increased between 1971 and the endof 1974 (i.e. from US$108 to 122 per ton of urea placed at main distributionpoints), but they are still substantially below those presently prevailingin the international market, which for urea are now between US$300 and 350per ton. It is expected that this gap between domestic and internationalpr4ces will narrow as the latter recede from their current exceptionallyhigh level.

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2.12 The Government has appropriated Mex$500 million to compensate theCompany for losses incurred through the importation of ammonia at the presenthigh prices and its sale for direct application as fertilizer at the lowerdomestic price as well as for those losses resulting from higher cost of someimported raw materials which are not reflected in the finished product price.During FY1974, the Company had received Mex$82.8 million for this purpose.

2.13 Guanomex's recent balance sheets are also shown in Annex 2-4 andare summarized for the last four years below:

Guanomex - Summary Balance Sheets (1971-1974)(Mex$ Million)

As of June 30 1971 1972 1973 1974

Cash and Near Cash 120.3 94.2 77.4 57.8Receivables 702.3 697.4 816.0 1,003.8Inventory 415.3 468.8 648.8 912.9Other Current Assets 67.4 57.4 65.9 113.0

Total Current Assets 1,305.3 1,317.8 1,608.1 2,087.5

Investments 403.6 374.7 385.5 375.5Fixed Assets (Net) 869.4 962.3 923.6 904.1Other Assets (Net) 107.9 140.3 137.4 154.5

Total Assets 2,686.2 2,795.1 3,054.6 3,521.6

Payables 185.6 250.9 274.3 459.6Short-term Debt 719.9 720.7 951.6 1,003.5Other Current Liabilities 122.8 152.7 152.0 346.6 /1

Total Current Liabilities 1,028.3 1,124.3 1,377.9 1,809.7

Long-term Debt 586.3 528.0 486.1 544.9

Equity-Share Capital 925.0 955.0 1,000.0 1,000.0-Reserves 146.6 187.8 190.6 167.0

Total Equity 1,071.6 1,142.8 1,190.6 1,167.0

Total Liabilities and Equity 2,686.2 2,795.1 3,054.6 3,521.6

Current Ratio 1.3 1.2 1.2 1.2Debt/Equity Ratio 35/65 32/68 29/71 32/68Net Profit/Equity Ratio (%) 3.4 6.8 6.6 4.0 /2

/1 Including Mex$82.8 million received from the Government's compensatoryfund (para. 2.12) but not yet entered as income received.

/2 If the compensatory Mex$82.8 million is included as income in FY 1974,the profit/equity ratio would be 8%.

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2.14 The Company's low current ratio in the last three years resultsfrom Guanomex acting, in a way, as a financing agent for fertilizer sales.Even "cash" sales are frequently not paid for 60 days or more. Receivablesare interest-free for sixty days and earn an interest of about 1-1/4% monthlyafterwards. Furthermore, Guanomex also extends direct credits to dealerscovering the payment terms that they in turn accept from the buyers. Begin-ning in FY 1973, the Company accumulated sizable inventories of finishedgoods 1/ (over 70% of total inventories) in line with a Government policy toavoid lack of fertilizer at a time of worldwide shortages. In addition,Guanomex is undertaking a study of the optimum level of its inventoriestaking into account freight, storage and capital costs as well as the maximumadmissible risk of crop losses due to lack of fertilizers in different areas.

2.15 Guanomex has established good vertical reporting proceduresand horizontal communications, particularly among the Production, Financial,Sales and Development Departments, are being improved. The Finance Departmentis mainly geared to the accounting aspects of financial control. Guanomexwill strengthen this department and provide it with the capacity for bettercontrol of current assets and prepare adequate financial projections asrequired by the Bank. Guanomex has also agreed to provide the Bank withquarterly financial statements and annual audited reports submitted by inde-pendent auditors acceptable to the Bank.

III. THE MARKET

A. A riculture in Mexico and the Need for Fertilizers

3.01 Of the total area of Mexico, less than 12% (about 22 million ha.)is arable land (i.e. excluding permanent pastures, forests and arid land).A relatively large proportion is left fallow each year so that actuallycultivated land was estimated in 1974 at 16 million ha., of which approximately24% is irrigated. Double-cropping in some areas, especially in the Northwest,increases cropped area by about 0.6 million ha.

3.02 The main food crops are corn, wheat, sorghum, beans and soya andthe main industrial crops are cotton, sugarcane and coffee (Annex 3-1).The following table compares the agricultural yields for several crops inMexico with those of a number of other selected countries:

1/ Including fertilizer held by dealers on consignment.

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1972 Yields for Several Crops in Selected Countries(kg/Ha.)

Wheat Corn Sorghum Beans Cotton Sugarcane Coffee

Mexico 2,721 1,148 2,118 524 822 62 584Argentina 1,612 1,862 1,600 932 240 51 -Peru 1,006 1,788 3,250 800 610 155 657Ave. S. America 1,458 1,464 1,647 654 250 51 550US 2,196 3,675 3,808 1,458 490 92 -Canada 1,680 4,985 - 1,595 - - -Average Europe 2,952 6,084 3,880 281 620 77 -

" Asia 1,255 1,766 489 408 240 49 518If Africa 1,065 1,382 806 429 270 59 437" World 1,628 2,785 1,170 489 371 53 514

It can be seen that Mexican yields for wheat 1/, sorghum and cotton areconsiderably higher than the world averages although the yield for corn islower than in all other major producing areas. It is expected that yieldsfor beans, sugarcane and coffee, although also higher than the world averages,can be improved. Agricultural production in Mexico during the last 10 yearshas not kept pace with population. The availability of new land is limitedand water is a scarce resource in large areas. Under these conditions,future growth of agricultural output will be based, to a large degree, onbetter utilization of existing resources and improved farming practices,including intensified and proper use of fertilizers and pesticides, irriga-tion, multiple cropping and development of new--and perhaps more versatile--varieties of the most important crops.

3.03 At present, the average fertilizer application rate in Mexico--although 1.9 times higher than for all developing countries taken together--is below the world average (Annex 3-1, Table 2). Averages, however, maskthe wide variety of agricultural practices in Mexico ranging from very modernfarming on flat irrigated land in Northwestern states, in which fertilizerdosages approach (and may occasionally surpass) optimum economic rates, tono fertilization in many rain-fed highland areas. Guanomex estimates thatthe area now being fertilized--estimated at 5.7 million ha.--can be doubled.

1/ With the help of the Rockefeller Foundation, high yielding varieties(HYVs) of wheat were developed in Mexico from Norin 10, a Japanesedwarf variety introduced in the US after the Second World War. In 1964they were exported to the Indian sub-continent where they have contri-buted largely to the increase in yields attained in the last decade.

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B. Fertilizer Supply and Consumption

1. Past

3.04 The historical growth of fertilizer consumption and production inMexico is analyzed in Annex 3-2 and summarized below:

Mexico - Consumption and Production of Fertilizer(000 tons of Nutrients)

Calendar Apparent Consumption Production Surplus (Deficit) /LYear N P K Total N P /2 Total N P Total

1953 22 15 1 38 14 10 24 (8) (5) (13)1963 197 68 14 279 163 53 216 (34) (15) (49)1969 398 125 20 543 390 115 505 (8) (10) (18)1970 405 118 22 545 407 115 522 2 (3) (1)1971 435 148 23 606 427 131 558 (8) (17) (25)1972 485 148 31 664 448 161 609 (37) 13 (24)1973 560 158 33 751 543 205 748 (17) 47 301974 /3 611 186 40 837 559 231 790 (52) 45 (7)

Ave. Growth Rate(%/Year)1953/73 17.4 12.5 18.6 16.0 20.1 16.3 18.81963/73 11.0 8.8 9.2 10.4 12.8 14.5 13.2

/1 Excluding K20 which is all imported./2 Not including phosphoric acid exported by FFM/3 Preliminary estimates by Guanomex.

3.05 After a very rapid growth in the decade from 1953 to 1963, fertilizerconsumption has continued growing at a fairly steady annual rate of 10.4%from 1963 through 1973. Domestic production substantially balanced consump-tion with a small, though growing surplus of phosphatic fertilizer and adeficit in nitrogen fertilizer. All potassium fertilizer is imported. Theaverage N:P 0 :K0 ratio was 17:4.8:1 in 1973, slightly lower in N than in1969, when it was 20:6.2:1. This nutrient ratio compares to a world averageof 1.9:1.2:1 in 1972, and stems from the preponderant use of fertilizer onsoils rich in phosphate and potassium, mainly in the Northwest (Annex 3-2,Table 9). As fertilizer application in other areas increases and nutrientsin new cultivated land are depleted, the relative demand for phosphate andpotassic fertilizers should increase.

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3.06 The three principal nitrogenous fertilizers consumed in Mexicoare ammonia (32%), urea (24%) and ammonium sulfate (26%). While the pro-portion of direct ammonia application has remained at more than 30% oftotal N since 1953, the consumption share of urea has more than trebled andthat of ammonium sulfate, which in 1953 accounted for two-thirds of consump-tion, has declined substantially.

3.07 The main nitrogenous fertilizers produced in Mexico are liquidammonia (see following para.), urea, whose output gtew from 19,000 tons in1963 to 167,000 tons in 1973, and ammonium sulfate, which, although relativelyless important than 10 years ago, still accounts for 19% of all N productionin Mexico. In addition to the ammonium sulfate produced by Guanomex, thisfertilizer is also a by-product in the manufacture of caprolactam (by Univex),steel (Altos Hornos de Mexico), and coke (Compania Mexicana de Coke).

3.08 In the last three years (1971-1973), about 27% of Mexico's totalammonia consumption--for direct application as fertilizer as well as anintermediate material for other fertilizers and industrial uses--wasimported as shown in the following table:

Sources and Uses of Ammonia in Mexico(000 tons of N)

…------ Sources -- …-- -----------------Uses ------------------

Calendar Produc- Total Processed for Other Indus-Year tion Imports Supply Fertilizer Fertilizer use trial Uses

1953 14 1 15 1 14 -1963 125 49 174 60 110 41970 410 61 471 175 289 71971 398 95 493 166 319 81972 435 169 604 158 437 91973 455 203 658 177 472 9

To substitute for the current Mexican import requirements of ammonia andutilize its significant resources of natural gas economically, Pemex hasembarked on an expansion program which is described further below.

2. Future

3.09 Guanomex has made projections for the consumption of nitrogenthrough 1985 based on regression curves fitted to actual 1950-1973 consump-tion and the implicit projected average growth rate of 8.7% annually isconsistent with results derived from a model for the Mexican agriculturalsector that was developed jointly by the Government of Mexico and the Bank'sDevelopment Research Center (Annex 3-3). Guanomex projects consumption ofurea and complex fertilizers to grow more rapidly than in the past becauseof their suitability for most crops and soils, ease of handling and lower

transportat.ion costs. Furthermore, Guanomex and the Bank agree that growthin the direct application of ammonia as fertilizer will slow down sinceapplication rates in many areas of the northwest are already high. Ureaconsumption, however, even after such accelerated increase, would provideonly 45% of the total N consumption in 1985, which is a lower proportion thanin many other countries (Annex 3-4). Urea is presently applied to and most ofthe projected growth in consumption wll take place in irrigated land and dryfarming areas which have adequate rainfall and where modern farming techni-ques are widespread, such as Sonora, Sinaloa, Baja California, Chihuahua,Jalisco and Guanajuato. The projections for individual products through 1985are contained in Annex 3-5.

3.10 Production projections for N fertilizers through 1984 are based onknown projects for which definite construction schedules and financing plansexist, i.e. the two urea plants included in the present project, three ammoniumsulfate and nitrate plants, and four ammonia plants which Pemex plans to com-plete by 1980 (Annex 3-5, Table 3), as well as a 200,000 TPY DAP and complexfertilizer plant, whose site will be finally decided after a long-term sourceof supply of phosphate rock is secured and the corresponding feasibility studyis prepared. The production and consumption projections contained in Annex 3-5are summarized below:

Nitrogenous Fertilizer Production and Consumption Projections(000 tons of N)

Years Total Nending Urea Other Solid Fert./1 Ammonia SurplusJune 30 Prod. Cons. Prod. Cons. Prod./2 Cons./3 Prod. Cons. (Deficit)

1975 173 175 228 278 82 191 483 644 (161)1976 175 201 232 297 129 203 536 701 (165)1977 177 231 237 316 414 216 828 763 651978 247 266 284 335 387 230 918 831 871979 465 312 294 348 274 245 1,033 905 1281980 507 355 296 370 250 261 1,053 986 671982 526 467 325 403 367 301 1,218 1,171 471985 526 654 363 468 355 374 1,245 1,496 (251)

/1 Ammonium sulfate and nitrate, and complex fertilizers/2 Other than ammonia required to manufacture other fertilizers

and for other industrial uses/3 For direct application as fertilizer.

3.11 It can be seen in the table above that in the first four full yearsof operation of the project (1979-82), urea production from the existing andproposed nlants would be higher than the consumption projections used. Sincethe need for other solid fertilizers, on the other hand, exceeds their pro-jected production, it is probable that some of the urea could be diverted to

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manufacture mixed fertilizers. Nevertheless, in the financial projections ithas been conservatively assumed that about 120,000 tons annually of N as ureawill be exported, between 1979 and 1982, mainly to the Central American CommonMarket and South America. Imports of urea in the Western Hemisphere are shownin Annex 3-6. Guanomex has already had experience in exporting urea in thelast 10 years 1/.

C. Fertilizer Distribution

3.12 Guanomex is the only agency for the wholesale distribution offertilizer for domestic consumption (including ammonia for direct applica-tion); exports are handled by both Guanomex and FFM. Guanomex has avoided,as a matter of policy, being tied to only one distribution channel. In 1973,it sold more than half (57%) of its fertilizer through some 200 dealers, 95%of which were private enterprises and 5% cooperative organizations and threewere small public sector agencies. The balance of the Company's sales (43%)were handled through agricultural banks which have become increasingly moreimportant (having been responsible for 15% of sales in 1970 and 21% in 1973),5% was exported, 8% sold directly to sugar mills, and the residual 9% went to"direct" clients, i.e. mainly agricultural "uniones" or non-profit privatecredit and input distributing associations of farmers.

3.13 In spite of this extensive network of sales outlets, adequateavailability of fertilizer throughout the country is apparently not assured--especially not for small farmers in the isolated highland areas. Guanomexhas agreed to carry out, in coordination with an independent agency, a ferti-lizer marketing and distribution study which is to be completed not later thanone year after approval of the Bank loan. The study will include considerationof availability of credit and the need for agricultural extension servicesand other agricultural inputs particularly as they are required by the poorersegment of farmers 2/, as well as the optimum rates of fertilizer applicationfor various crops in each State, taking into account not only the specificrequirements of each crop but also soil characteristics and rainfall and otherclimate conditions. The study will be carried out under terms of referenceagreed upon with the Bank and the study's recommendations will be implementedafter consultation with the Bank.

3.14 One of the channels that can be used for the sale of small amountsof fertilizer in small villages is the Compania Nacional de SubsistenciasPopulares (CONASUPO), a public sector agency in charge of distributing commonstaples in the poorer urban and rural areas, and the warehousing and sellingorganizations affiliated with it (Annex 3-7). While in 1974/75 Guanomexexpects to sell only some 85,000 tons of fertilizer (or about 3.4% of thetotal) through Conasupo's network, it intends to subsequently increaseConasupo's participation in the distribution of fertilizer.

1/ Exports increased from 6,800 tons in 1964 to 58,000 tons in 1972 anddropped to 35,800 tons in 1973 as a result of a narrowing of the surplusof production over consumption.

2/ 50% of all the farmers produce less than Mex$1,000 (US$80) per capita andaccount for only 4% of output and 3% of sales (Annex 3-7). Another 34%,earning between Mex$1,000 and Mex$5,000 (US$400), produce 17% of agri-cultural output but sell only 9%.

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D. Fertilizer Prices

3.15 As mentioned previously, all fertilizer prices are controlled bythe Government both at the factory gate and at farm level. Since 1965efforts have been made to equalize freight costs, but only in 1973 werefertilizer prices made uniform for most destinations. Historical prices forammonia and bagged urea delivered at any train station in the country areshown below. In the case of urea, these prices include a weighted averagefreight and loading charge of Mex$105 per ton:

Mexico - Fertilizer Prices to Farmers(per ton of product)

Ammonia UreaCalendarYear Mex$ US$ Mex$ US$

1970 965 77.2 1,420 113.61971 992 79.4 1,350 108.01972 892 71.4 1,350 108.01973 1,273 101.8 1,350 108.01974 May 1,644 131.5 1,450 116.01974 Oct. 1,644 131.5 1,520 121.6

As a result of Government policy, present fertilizer prices in Mexico aremuch lower than those prevailing in international trade (para. 2.11). Inthe last three months of 1974 export prices for urea have ranged betweenUS$300 and 350 (Mex$3,940/4,375) per ton fob Western Europe and between US$358and 370 (Mex$4,475/4,625) per ton fob US Gulf ports. In the case of urea,Guanomex is able to sell considerably below the international price becauseof the low price at which it buys ammonia (para. 6.03) from Pemex. As men-tioned in para. 2.12, the Government protects Guanomex in the re-sale ofhigh-cost imported ammonia through a compensatory fund.

E. The Market for Insecticides

3.16 The Government expanded Guanomex's operations in 1968 through anauthorization to manufacture insecticides (para. 2.05) and in 1973, Guanomexinstalled an organo-phosphoric (parathion) insecticide plant. At present,approximately one half of Mexican consumption of insecticides is covered bythe Company's production which, in the last two years, averaged about 3,000tons of 100% DDT, 775 tons of BHC, 2,000 tons of toxaphene and 4,300 tons ofparathion. The proposed 33% expansion of the parathion plant is aimed atsubstituting cuts in DDT consumption because of ecological considerations(Annex 3-8) and therefore no difficulties are foreseen in marketing theexpanded output of parathion.

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IV. THE PROJECT

A. Project Scope

4.01 The project which is described in more detail in Annex 4-1comprises three sub-projects:

- A 1,000 TPD (330,000 TPY) urea plant (the "Bajio II" plant),which will be an expansion of the existing Bajio Unit, locatednear Salamanca, State of Guanajuato;

- A 1,500 TPD (495,000 TPY) urea plant (the "Istmno" plant), whichwill constitute a new unit, to be located at Coatzacoalcos,State of Veracruz;

- A 10 TPD (2,500 TPY) expansion of an existing parathion plant(the "Salamanca" plant expansion) which will form part of theexisting Salamanca Unit, located at the city of the same name.

4.02 The existing Bajio Unit produces urea and ammonium sulfate (Annex2-3). Pemex has a 250 TPD ammonia plant near the Guanomex facilities andis building a 900 TPD plant side by side to be completed by the end of 1977(i.e. three months ahead of the Bajio II urea plant) to jointly provide thefeedstock for the two urea plants. This is expected to be a reliable sourceof ammonia since only 25% of the ammonia capacity would be required to supplythe two urea plants at full capacity. 1/ Both ammonia plants are based onnatural gas drawn from extensive fields (Annex 4-2) centered at Tierra Blanca,State of Veracruz, and Villahermosa and Cactus, State of Tabasco, at adistance of about 600 and 1,000 km respectively. The needed land for theBajio urea expansion has already been acquired and most of the infrastructureexists. Salamanca, 3 km away, is an important railway and highway junctionand has a population of about 100,000. The size for the Bajio II plant hasbeen geared to the expected capacity of the inland market served by it.

4.03 For the Istmo urea sub-project, several sites were studied, andone next to a well-dredged basin in the Pajaritos inlet, close to Coatza-coalcos on the Gulf of Mexico (Map: IBRD 11494) and adjacent to existingfacilities of Pemex and FFM, was chosen. The site is also served by rail-road and paved road. The project will have some additional facilities (andtherefore higher costs) such as a jetty for shipping urea, office buildingsand a large polyethylene bag manufacturing unit (60 million bags/year capacity)that will also supply the Bajio sub-project and the existing Guanomex plants.Polyethylene chips will be purchased from Pemex.

1/ The balance of ammonia will be used for the production of ammoniumsulfate in the Bajio Unit, direct application to crops or transportedto other Guanomex plants.

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4.04 The ammonia for the Istmo plant will be supplied by Pemex from oneof two plants, of 1,500 TPD capacity each, based on natural gas drawr. fromfields located about 150 km away (Annex 4-2), being built at Cosaleacaque,near the city of Minatitlan, about 25 km away, at a major petrochemicalinstallation of Pemex. In addition, Pemex has in operation, at Cosal2acaque,two other plants with a capacity of 180 and 1,000 TPD, which supply ammoniato the existing Guanomex plants in the Minatitlan Unit (Annex 2-3). 1/ Pemexwill also build at its own expense the ammonia and carbon dioxide pipelinesfrom its factory to the Istmo urea site. One of the Pemex ammonia plants wascompleted in January 1975 and the other is about six to twelve months aheadof Guanomex. There is therefore no difficulty foreseen in obtaining adequateand timely supplies of ammonia for the urea project. Because Pemex and Guano-mex are both state-owned, there have been no long-term ammonia supply contractsbetween the two companies and judging from the close cooperation between thetwo firms and their coordinated investment programs none appear necessary.Furthermore, the Government has given general assurances that ammonia andother inputs will be made available to Guanomex as required for the efficientoperation of the project as well as of the existing plants.

4.05 The Salamanca Unit comprises a 60 TPD Krebs electrolytic plant toproduce caustic soda and chlorine, a 30 TPD DDT plant using the MontroseChemical Corp. process, small BHC and toxaphene plants and a 25 TPD parathionplant. As mentioned in para. 3.16 the proposed expansion of this plant,besides improving the present production process, will allow to phase outDDT production over the next 5 to 10 years in line with a planned decrease inthe consumption of this type of pesticides in Mexico.

B. Technology

4.06 Processes for urea synthesis are widely available. Guanomex haschosen the Stamicarbon process (Holland) for the two proposed plants. Aprilling tower will be used for the finishing operation in the Bajio sub-project but whether the same system or a pan granulator developed by TVA(US) will be selected for the Istmo sub-project has not yet been decided.Parathion manufacture is described in Annex 4-3. The process for the manu-facture of parathion is supplied by Stauffer (US).

C. Utilities

4.07 Utilities required for each of the three sub-projects are describedin Annex 4-1. Electricity will be purchased from the Government-ownedComision Federal de Electricidad (CFE). In addition to drinking water frompublic systems, water will be obtained from wells for all the needs of theBajio and Salamanca plants as well as for processes in the Istmo plant, andfrom the river for cooling purposes in the latter plant. There have been noconstraints in the availability of utilities and none are expected in the

1/ The surplus ammonia not needed for the Guanomex plants will be usedfor direct application as fertilizer, shipped to other plants orexported.

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future. Nevertheless, general assurances have been obtained from the Govern-ment that electric power for the project as well as for Guanomex's existingfacilities will be made available as required by Guanomex to operate efficiently.

D. Employment and Training

4.08 Guanomex's total employment will increase by 11% to a total ofabout 4,800 as a result of the operation of the proposed project. Guanomexis already a large company with 11 operating units and most skilled and highlevel positions will be staffed from internal sources and existing trainingprograms. Therefore, additional training requirements are small; some staffwill be trained by Guanomex, along with the process licensor and the engin-eering firms, in the specific technology and operating systems utilized inthe three proposed plants. The cost of this training is included in theproject's costs.

E. Ecology and Safety

4.09 The urea plants will be designed and operated with emission levelsof effluents following standards acceptable to the Bank. Gaseous and liquideffluents present virtually no problem in a well designed and operated ureaplant, particularly because of the benefits derived from the recovery ofvaluable raw materials and chemicals used. Dust dispersion has become a majorconcern in many US plants and some of them have recently switched to granula-tion rather than prilling to minimize this problem. With regard to the Istmoplant Guanomex will investigate the viability of this approach during theearly design stage and for the Bajio plant will seek measures to diminishpollution--and losses-- from the prilling operation. The safety record ofGuanomex is comparable to those in modern fertilizer factories in developedcountries.

4.10 The dangers in the manufacture and use of parathion are primarilyrelated to safety during handling rather than environmental impact becauseparathion, although highly toxic, is rapidly degradable. Guanomex hasalready implemented stringent safety regulations in the existing parathionplant (the one being expanded) regarding such factors as employee educationand good housekeeping practices in minimizing spills, and distributors andfarmers are informed about the proper techniques for the pesticide's use.No accident has occurred since the factory began production at the end of1972. However, taking into account the hazards in the manufacture, trans-portation, warehousing and use of this product (Annex 3-8), the Bank hasobtained assurances from Guanomex that monitoring of safety measures will becontinuously implemented.

F. Project Execution

4.11 The urea plants will be built under a contract with an experiencedinternational engineering company, selected by following Bank guidelines, inassociation with a qualified local engineering firm. The contract will pro-vide for a guarantee on timely completion and plant performance levels.

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Civil works, construction and erection will be carried out by local firms.The parathion expansion will be executed by a local engineering firm basedon the process design and the guidance of the licensor, Stauffer (US) in thesame manner as was done for the original plant. Guanomex has an experiencedproject team that will oversee the execution of the project and since ithas used the same approach to project implementation in its existing unitsand its record of completing projects successfully is good the Bank doesnot think that an outside technical advisor is needed.

4.12 Guanomex, in agreement with the Bank, initiated steps to selectthe urea engineering firms shortly after the mission visited Mexico and,following procedures for evaluation and selection agreed between Guanomexand the Bank, has contracted the services of Foster Wheeler Energy Co. (US)and Atlas Foster Wheeler Mexicana for the Bajio sub-project. The selectionof engineering firms for the Istmo sub-project is expected to be made inMay 1975. A preliminary project execution schedule has been submitted byGuanomex and the Government has given assurances that the required importlicenses required by the project will be promptly made available to Guanomexas needed.

V. CAPITAL COST ESTIMATES AND FINANCING PLAN

A. Capital Cost

5.01 Total financing required for the project is estimated at US$150.2million equivalent, of which US$53.5 million is in foreign exchange (Annex 5-1).A summary of the estimate is given in the following table:

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Summary of Financing Requ1ired for the Project

----In Mex$ Million------ ----In US$ Million------Foreign Local Foreign LocalExchange Currency Total Exchange Currency Total ¾

Land Acquisition and Site Dev. - 51 51 - 4.1 4.1 5.1Equipment, Supplies and Spares 309 292 601 24.7 23.4 48.1 59.9Freight, Insurance and Duties 17 34 51 1.4 2.7 4.1 5.1L:icenses and Engineering 75 51 126 6.0 4.1 10.1 12.2Erection and Supervision 11 64 75 0.9 5.1 6.0 7.9CiLvil Works 9 84 93 0.7 6.7 7.4 9.3Pre-operating Expenses 1 4 5 0.1 0.3 0.4 0.5

Base Cost Estimate (BCE) 422 580 1,002 33.8 46.4 80.2 100.0Physical Contingencies

(11% of BCE) 45 64 109 3.6 5.1 8.7Price Escalation (30% of BCEplus physical Contingencies) 116 215 331 9.3 17.2 26.5Installed Cost 583 859 1,442 46.7 68.7 115.4

Incremental Working Capital - 227 227 - 18.1 18.1Project Cost 583 1,086 1,669 46.7 86.8 133.5

Interest during Construction 85 123 208 6.8 9.9 16.7Total Financing Required 668 1,209 1,877 53.5 96.7 150.2

5.02 The breakdown of the capital costs for each of the three sub-projectsis shown in detail in Annex 5-2 and summarized below:

Summary of Capital Costs of Sub-Projects-/(US$ Million)

Foreign LocalBajio II Plant Exchange Currency TotalBase Cost Estimate 12.6 14.8 27.4Contingencies 4.5 6.4 10.9Working Capital - 6.9 6.9

Total Sub-Project Cost 17.1 28.1 45.2

Istmo PlantB3ase Cost Estimate 18.6 29.8 48.4Contingencies 7.4 15.0 22.4'Wlorking Capital - 10.3 10.3

Total Sub-Project Cost 26.0 55.1 81.1

Salamanca Plant ExpansionBase Cost Estimate 2.6 1.8 4.4Contingencies 1.0 0.9 1.9Working Capital - 0.9 0.9

Total Sub-Project Cost 3.6 3.6 7.2

Total Project Cost 46.7 86.8 133.5

1/ Excluding interest during construction.

5.03 The above capital cost estimates were arrived at through consul-tation with Guanomex and Foster Wheeler, using recent quotations for mainpieces cf equipment and current unit costs for civil works, and hence arebased on prices prevailing during the last quarter of 1974. The estimatesare consistent with other fertilizer projects currently being financed bythe Bank Group. Physical contingencies have been taken at 11% of the basecost estimate (BCE) which is an ample margin for standard urea plants.Contingencies for price escalation have been calculated on the basis ofprojected price increases of 12% for 1975, 10% for 1976 and 8% thereafterfor foreign exchange and internationally bid local equipment costs, and 16%,14% and 12% respectively for civil works and other local currency costs.The expected schedule of capital expenditures and the escalation factorsare shown in Annex 5-3. The required working capital is estimated inAnnex 5-4. Interest during construction was calculated at rates of 12% onthe IBRD loan and 13.5% on other loans (para. 5.05 below).

B. Financing Plan

5.04 The proposed financing plan for the project is as follows:

In Mex$ Million ---- ---- In US$ Million ----Foreign Local Foreign LocalExchange Currency Total Exchange Currency Total

EquityShare Capital - 750 750 - 60.0 60.0

Long-Term DebtIBRD 625 - 625 50.0 - 50.0Foreign & Local Banks 43 459 502 3.5 36.7 40.2

Total: 668 1,209 1,877 53.5 96.7 150.2

Guanomex shall increase its share capital (US$60.0 million equivalent) inaccordance with such a schedule as required by Guanomex to carry out theproject and comply with the financial covenants (para. 6.12). The proposedBank loan (US$50 million) would cover a little less (93%) than the foreignexchange or 33% of the total financing required by the Proiect.

5.05 The proposed loan would be extended to Guanomex and Nafinsaat an interest rate of 8-1/% for a term of 14 years starting in July 1975and including 3-1/2 years of grace. The Government would guarantee theloan and Nafinsa would charge Guanomex a fee of 3-1/2% thus bringing thetotal rate paid by Guanomex on the loan proceeds to 12% annually.

5.06 The Government has agreed to provide, or have provided, to Guanomexany funds, in a form satisfactory to the Bank that might be required to coverany cost overrun on the project in accordance with the agreed implementation

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schedule (para. 4.12) and reach a satisfactory working capital level. Forpurposes of this covenant the project will be considered completed when eachof the sub-projects will have been tested and proven to be satisfactory inaccordance with established engineering procedures and practices, have beenoperated for at least 30 days at production rates of not less than 80% ofrated capacities and the Company will have a current ratio of at least 1.3:1.0.

C. Procurement

5.07 International competitive bidding (ICB) according to Bank guidelineswill be used for equipment and spares estimated to cost about US$27.6 million(excluding physical contingencies but including price escalation). Proprietaryequipment essential to the process and items in limited supply, which arecritical to the timely completion of the project, and estimated to cost US$4.4million equivalent, may be procured after bidding from short lists of qualifiedsuppliers, both the lists of this equipment and their potential suppliers re-quiring the prior approval of the Bank. Small items, costing less thanUS$50,000 equivalent each and US$1 million in total may be purchased directlyfrom foreign suppliers on the basis of suitability, availability and priceconsiderations following the Company's procurement procedures. The list ofthese small-cost items will also be subject to prior Bank approval. A pref-erence of 15% or the applicable customs duties, whichever is lower, will beallowed to Mexican manufacturers for the purpose of evaluating internationalcompetitive bids. The engineering firms contracted or to be contracted(paras. 4.11/4.12) will handle procurement under the direct control ofGuanomex and assist the Company in bid evaluations. Procedures to expeditedeliveries will be worked out between Guanomex and the engineering firms,including the assignment, if required, of Guanomex procurement officers towork closely with the engineering firms and some of the suppliers.

D. Allocation and Disbursement of Bank Loan

5.08 The proceeds of the Bank loan would cover: a) the estimated CIFcost of equipment imported after ICB (US$18.4 million); b) the estimatedcost (US$1.0 million) of small-cost items costing less than US$50,000 procuredfrom abroad through normal commercial channels; c) the estimated cost ofimported proprietory or long-lead items (US$4.4 million); d) the ex-factorycost of equipment expected to be won by local suppliers through ICB procedures(estimated at US$9.2 million net of sales taxes); e) licenses, engineering andother technical services; and f) interest during construction on the Bankloan, as summarized below. In order to maintain the schedule of the Bajio IIplant, advanced contracting of an engineering firm and orders for equipmenthave been placed in January for critical long-delivery items of equipmentfrom a geographically widely distributed list of qualified suppliers. Guanomexhas been advised of the Bank's willingness to reimburse retroactively fromJanuary 1, 1975, up to US$3.6 million equivalent for goods and services asdescribed in items (c) and (e) above to meet down payments for these goodsand services, subject to the approval of the loan by the Executive Directors.

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Allocation of Bank Loan(US$ Million)

Equipment, Supplies, Spares, Ocean Freight and Insurance /1 33.0

Licenses, Engineering, Erection and Supervision /1 7.5Interest during Construction on IBRD Loan /1 5.6Unallocated 3.9

Total 50.0

/1 Including price contingencies.

5.09 The estimated quarterly disbursement schedule of the Bank loanis shown in Annex 5-5. Any surplus funds remaining undisbursed after comple-

tion of the project will be cancelled.

VI. FINANCIAL ANALYSIS

A. Analysis of the Project

6.01 Although the project implementation schedule as envisaged now fore-

sees that commercial operations of the Bajio II urea plant will begin beforeJanuary 1978 and the other plants, three months later, the proforma finan-

cial statements have conservatively assumed that commercial operations of

the three sub-projects will start only on April 1, 1978, and the project'sassumed life time is 12 years from that date. Production is forecast to

commence at 70% of rated capacity and increase to 75% in 1979, 85% in 1980and 90% thereafter. Assumptions for the financial analysis are given inAnnex 6-1. Operating costs and product prices have been assumed to remain

in constant terms at their level of the last quarter of 1974, except forsmall changes in the prices of ammonia and parathion discussed below.

6.02 The production of the Bajio II and Salamanca plants are all expected

to be sold in the domestic market at prices in constant December 1974 terms ofrespectively Mex$1,520 (US$121.6) per ton of bagged urea and Mex$17,370(US$1,390) per ton of parathion delivered at railroad stations throughout the

country. Over the first four years of operations the Istmo plant will exporton average about 60% of its forecast urea production, gradually divertingsales to the local market as domestic consumption increases (Annex 6-1). FOB

ulrea export prices are based on projections made by the Bank's CommodityDivision 1/. Parathion currently sells in the domestic market for Mex$16,000

per ton, considerably below the price for imported parathion of Mex$28,000 per

1/ Bank Report No. 467 (June 19, 1974) and updating memorandum ofNovember 6, 1974.

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ton. Guanomex intends to improve the profitability of parathion productionby increasing the price to Mex$17,370 in constant December 1974 terms beforeFY 78 and this has been anticipated in the financial projections. Finally,the projections for the Istmo plant include nominal revenues from the supplyof 37 million bags to the Company's other plants at an assumed transfer priceof Mex$2.73 per bag, which is the price now paid to outside suppliers.

6.03 Past production costs for urea and parathion and estimated futurecosts in the proposed new plants are shown in Annex 6-2. Total factory costs 1/(excluding depreciation) in the new plants are expected to be about Mex$540(US$43.20) per ton of bulk urea; this compares to about Mex$609 (US$48.90)per ton in the existing Minatitlan II plant in FY 73. Total cost for bulkurea (including depreciation) in the Istmo plant is estimated at Mex$966(US$77.28) per ton delivered to distributors, slightly higher than in theBajio II plant (Mex$918 or US$73.44 per ton) due to extra depreciationcharges for infrastructure and bag-making equipment, and also higher averagefreight costs. The cost of ammonia used in the projections--Mex$600 (US$48)per ton--anticipates an increase in real terms in the current price ofMex$520 (US$41.6) charged by Pemex but is still not only considerably belowthe current exceptionally high ammonia prices of about Mex$4,500 (US$360)prevailing in the international market but also those expected for the late1970s (para. 7.02).

6.04 The project will be part of different production units of Guanomexand will not be operated as an independent profit center. However, Guanomexhas agreed to maintain and submit to the Bank quarterly production reports,including operating costs, in sufficient detail to monitor the performanceof each of the three plants included in the project.

6.05 For the projected financial statements, December 1974 prices havebeen escalated year by year through 1978 using the expected general inflationrates (Annex 5-3). The proforma income statement for the project is shownin Annex 6-3 and summarized below for the first four years of operation.Other income represents interest charged by Guanomex on accounts receivableoutstanding for more than 60 days. Income tax has been conservatively takenas 42% although it can be partially waived for projects like this deemed tobe in the national interest. 2/ Workers' participation in profits is a legalrequirement and has been estimated at 11% of net income after tax.

1/ In constant December 1974 Mex$.

2/ In the last five years, income taxes paid by Guanomex averaged 25.7%of net income before taxes.

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Summary Pro-Forma Income Statement for the Project(Mex$ M4illion) /1

Years ending June 30, 1978 /2 1979 1980 1981

Net Sales 169.1 1,157.6 1,407.9 1,623.3Cost of Goods Sold 113.4 741.6 828.4 866.1

Gross Profit 55.7 416.0 579.5 757.2Non-Manufacturing Costs 32.1 196.3 223.9 242.1

Operating Profit 23.6 219.7 355.6 515.1

Less: Interest /3 35.7 136.3 124.1 109.3Plus: Other Income 6.7 18.6 28.2 37.3

Profit before Tax (5.4) 102.0 259.7 443.1

Tax - 40.5 109.1 186.1

Profit after Tax (5.4) 61.5 150.6 257.0Workers' Profit Participation - 6.8 16.6 28.3

Retained Profit (5.4) 54.7 134.0 228.7

Cost of Goods Sold/Sales (%) 67.1 64.1 58.8 53.4Operating Profit/Sales (%) 14.0 19.0 25.3 31.7

/1 December 1974 prices have been escalated year by year through 1978 in thepro-forma financial statements.

/2 Three months of operations only/3 Mainly interest received on outstanding accounts receivable.

6.06 The income projections show the project's attractive profitabilitythat results from the expected operating efficiency of the new plants andthe favorable ratio between the ammonia and urea prices (para. 6.03). Con-sequently, the level of capacity utilization at which the two urea plantsbreak even is low, namely 46% on a profit basis and 40% on a cash basis in1979. A break-even chart is shown in Annex 6-4. Since profitability of theproject as well as of the Company depends so decisively on ammonia and solidfertilizer prices controlled by the Government, the Bank has obtained from theGovernment assurances that it will take all action required to enable Guanomex,operating efficiently, to meet at all times its operating costs, maintain,after completion of the project, a long-term debt service coverage of at least1.4 times and earn a reasonable return on invested capital. The proforma cashflow statement and balance sheet for the project (in current Mex$ until 1978and constant 1978 Mex$ afterwards) is contained in Annex 6-5.

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B. Financial Rate of Return and Sensitivity Analysis

6.07 For the calculation of the project's financial rate of returnnominal capital costs (excluding interest during construction) and operatingcosts and revenues were deflated by the expected annual rate of generalinflation (Annex 5-3) and expressed in December 1974 Mex$. The resultingcapital cost stream in real terms and the financial costs and benefits (takenfrom the proforma income statement for the project) are shown in Annex 6-6.The project's financial rate of return is 14.5% after income tax and 20.3%before income tax.

6.08 Sensitivity tests are also shown in Annex 6-6, and summarizedbelow:

Sensitivity Tests on Financial Rate of Return (After Tax)

Base Case 14.5%Urea Price decreased by 10% 10.7%Urea Price increased by 10% 18.0%Capital Cost increased by 30% 10.0%Capacity Utilization 80% 10.1%Ammonia price increased by 30% 11.9%

Variations in the price of urea and/or ammonia have a considerable effecton the return, and a 30% increase in the ammonia cost (from US$48 per ton toUS$62.4) would lower the return after taxes by 2.6 percentage points. A capitalcost overrun of as much as 30% would leave a rate of return of 10.0%, and evenat only 80% capacity utilization the return would still be satisfactory.

C. Financial Forecasts for Guanomex

6.09 The financial forecasts for Guanomex, excluding the project, areshown in Annex 6-7. Capacity utilization--now averaging 83%--is expected toreach 90% by the time the project is operating commercially. This improve-ment will be brought about by the increased availability of ammonia for theurea plants, the rehabilitation (or substitution) of some facilities and othermeasures currently being undertaken to improve operations. Prices for ureaand parathion have been discussed above. Other product prices and productioncosts have been escalated from their levels in the last quarter of 1974 byusing general inflation rates-until 1978 and kept constant thereafter.

6.10 Annual gross revenues from the re-sale of products not manufacturedby Guanomex (primarily imported ammonia and solid fertilizers) have beenrealistically assumed to remain, in constant December 1974 terms, at their1973/74 level of about Mex$660 million. The assumed margin on these salesis 10% which is assured for the FYs 1975 and 1976 by the compensatory fundof Mex$500 million established by the Government (para. 2.12).

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6.11 The consolidated financial forecasts for the Company's existing andproposed facilities are contained in Annex 6-8 and summarized in the tablebelow:

Summary of Consolidated Financial Statements for Guanomex(Mex$ Million)

Year ending June 30 1975 1976 1977 1978 1981

Net Sales 2,802 3,351 3,718 4,232 5,557Cost of Goods Sold 2,175 2,594 2,870 3,194 3,804Non-manufacturing Costs 417 498 549 641 857Interest on Long-Term Debt 65 50 44 73 119Net Income after Tax and Workers'Profit Sharing 65 121 162 215 468

Depreciation 55 55 55 88 185Cash Available for Long-termDebt Service 185 226 261 375 773

Debt Service (long-term Debt only) 132 143 129 159 294

Current Assets 2,313 2,471 2,563 2,938 3,163Current Liabilities 1,978 2,046 2,059 2,178 2,019Net Fixed Assets 898 1,379 2,008 2,360 1,879Long-term Debt 478 707 1,023 1,221 695Equity 1,312 1,684 2,096 2,525 3,657

RatiosCost of Goods Sold/Sales (%) 77.6 77.4 77.2 75.5 68.5Net Income after Tax and Workers'Profit Sharing/Equity 5.0 7.2 7.7 8.5 12.8

Debt Service Coverage 1.4 1.6 2.0 2.4 2.6Current Ratio 1.2 1.2 1.2 1.3 1.6Debt/Equity Ratio 27/73 30/70 333/67 33/67 16/84

The project will bring substantial improvement in the Company's overallprofitability through more efficient operations, economies of scale in thelarger or enlarged plants and proportionally lower overhead. No provisionhas been made in the projections for major investments besides the project,other than for normal renewals and replacements. Debt service coverage anddebt/equity ratio will be satisfactory, but the current ratio will be lowbecause of the rapid expansion of the Company's operations and its continuedreliance on short-term debt to cover high fertilizer inventory levels andcredits to distributors.

D. Financial Covenants

6.12 To ensure sound financial management, assurances have been obtainedfrom Guanomex that it will: (i) at all times maintain a debt/equity ratio ofnot more than 60/40; (ii) not incur any new debt if by doing so a debt servicecoverage of at least 1.4 cannot be maintained; (iii) after completion of the

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project, maintain a current ratio of not less than 1.3:1; (iv) not undertake anyadditional investments, which may impair its ability to carry out and operatethe project and meet all its obligations; (v) in any given year, not pay dividendsor pre-pay debt other than to the Bank unless after such payment or cash outlay,its current ratio would remain above 1.5:1.0, except that prepayment of debtwill be allowed if such prepayment is part of a refinancing agreement underterms more favorable than the loan being prepaid.

E. Major Risks

6.13 No major risks are expected. The capital cost estimates for theproject include a provision of US$26.5 million equivalent to cover priceescalation and the project completion schedule is considered realistic. Inview of the Company's past experience and the assistance of qualified inter-national engineering firms, risks in the execution and operation of the pro-ject are considered to be minimal. On the basis of the consumption estimatesurea production may temporarily exceed domestic consumption. However, totalprojected production of solid nitrogenous fertilizer does not cover all theexpected consumption of nitrogen; therefore it is probable that part of thepotential surplus urea will be absorbed to manufacture mixed fertilizers.Nevertheless, the possibility that part of Guanomex's output of urea in 1979/82may need to be exported at lower than the assumed price for domestic sales hasbeen conservatively taken into consideration in the financial projections(para. 6.02). Finally, although the assumed volumes of urea to be exportedin those years (averaging 120,000 tons of N annually) are higher than quanti-ties previously exported by Guanomex (para. 3.11) they would amount to onlyabout 15% of total Guanomex's N production between 1979 and 1982.

VII. ECONOMIC ANALYSIS

A. World Fertilizer Prices

7.01 Fertilizer prices in the international market are subject tosurplus/scarcity cycles resulting from fluctuations in demand coupled tothe large investments and long lead time required for the construction ofnew manufacturing capacity. The present worldwide fertilizer shortage andhigh prices have been aggravated by simultaneous shortages of foodgrain andhigher prices for fertilizer feedstocks (mainly petroleum, natural gas andphosphate rock). Current plans to expand productive capacity are expectedto lead to a downturn of fertilizer prices. Projected urea prices 1/ are asfollows:

1/ Bank Report No. 467 (Price Forecasts for Major Primary Commodities,June 19, 1974) and updating memorandum of November 6, 1974.

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Price Projections for Urea(US$/Ton FOB)

In Nominal Terms In Constant 1974 Terms

1975 335 3001976 306 2501977 212 1601978 151 1051979 146 951980 150 911985 255 111

B. Economic Rate of Return

7.02 For the economic analysis of the project, capital and productioncosts, and urea prices, have been converted to real 1974 terms. Duties andinterest during construction were deducted from the capital costs. Exceptfor ammonia, the economic costs of inputs have been taken as being equivalentto their financial costs. 1/ The economic cost for ammonia is estimated atUS$88 per ton in line with recent estimates of the Bank's Commodities Divisionand TVA. 2/ Estimated ocean freight and port handling charges of US$25/tonwere added to the projected FOB 1978 urea price of US$105 to arrive at anequivalent price for urea landed at a Mexican port. For the years 1979-82the projected export price of urea (averaging US$93/ton) has been used tovalue the conservatively estimated volume of exports in those years. Forparathion, gross sales at Mexican prices have been used for economic benefitcalculation even though its international price is about 40% higher; this has,however, only a relatively small effect on the project's economic rate of return.

7.03 The economic cost and benefit streams are shown in Annex 7. Theeconomic rate of return of the project is 24.0%. Sensitivity tests are alsoshown in Annex 7 and summarized below. Separate rates of return for thetwo urea plants were also calculated and found not to differ significantlyfrom the overall return for the project.

Sensitivity Tests for the Economic Rate of Return (%)

Base Case 24.0%Economic Price of Urea up 10% 29.5%Economic Price of Urea down 10% 17.8%Ammonia Cost up 220 19.1%Capital Cost up 15% 21.2%Capacity Utilization at 80% 20.3%

1/ Duties on the few chemicals and maintenance materials required to beimported are about 5% of their CIF value and have been disregarded.

2/ Unpublished December 1974 draft report on fertilizer costs in developedand developing countries.

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The economic rate of return is very sensitive to variations in the economicprice of urea, a 10% decrease in the price resulting in an economic rate ofreturn of 17.8%. A 20% increase in the economic cost of ammonia has a smallerimpact. A 15% capital cost overrun would still result in a satisfactory rateof return. At 80% capacity utilization, the return would be 20.3%. Thus,except for a combination of a substantial cost overrun and extraordinary long-term depressed urea prices--an unlikely event--the economic rate of return issatisfactory.

C. Direct Foreign Exchange Savings

7.05 The project will make it possible for Mexico to save on the importa-tion of urea (and in initial years export urea) improving her balance ofpayments. Gross foreign exchange savings after the initial five years ofoperation, will be about US$96 million annually in constant December 1974 terms.

D. Other Benefits

7.06 The project will help to make Mexico independent of importedfertilizer eliminating the risk of loss of agricultural production in timesof scarcity in the world fertilizer market and insulating farmers from violentfertilizer price fluctuations. During construction, the project will providedirect employment to about 1,000 people and contribute to the improvement andconsolidation of the technical competence of the staff of Guanomex and Mexicanengineering firms. Finally, about US$64 million of equipment and services isexpected to be provided from Mexican sources.

VIII. AGREEMENTS

8.01 Prior to or during negotiations, agreements were obtained on thefollowing main issues:

A. From the Government, that it will:

i) Make available, to Guanomex or cause to make available by Pemexor other agencies of the public sector, the ammonia and otherinputs required for the efficient operation of its plants(paras. 4.04 and 4.07);

ii) Provide all the import licenses required for the execution ofthe project according to schedule and its efficient operationafter completion (para. 4.12);

iii) Guarantee the loan and charge Guanomex a fee payable to Nafinsa of3-1/2% on the Bank loan, so that the effective interest ratepaid by the Company is 12% per annum (para. 5.05);

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iv) Provide the financing of cost overruns of the project in a mannersatisfactory to the Bank (para. 5.06);

v) Take all action required to enable Guanomex, operating efficiently,to meet all its expenses, service debt out of its earnings andearn a reasonable return on invested capital (para. 6.06);

B. From Nafinsa, that it will:

Charge Guanomex a fee of 3-1/2% per annum on the amounts out-standing of the Bank loan (para. 5.05);

C. From Guanomex, that it will:

i) Provide the Bank with the Company's quarterly financialreports and annual audited balance sheets as well as periodiccash flow projections (para. 2.15);

ii) Within one year of the date of the proposed loan, have studiesmade, according to terms of reference agreed upon with the Bank,on fertilizer markets, transportation, distribution and marketing,optimum levels of inventories and accounts receivable and theircontrol, and the promotion of proper fertilizer use by smallfarmers (para. 3.13);

iii) Establish pollution control measures acceptable to the Bankand monitor them adequately (paras. 4.09 and 4.10);

iv) Maintain and submit to the Bank quarterly production andcost reports for each sub-project (para. 6.04);

v) Agree to the financial covenants listed in para. 6.12 includingmaintaining a debt:equity ratio of no more than 60:40 and,after completion of the project, a debt service coverage of atleast 1.4 and a current ratio of no less than 1.3:1.0.

8.02 Based on the above agreements, the project is suitable for a Bankloan of US$50 million equivalent.

Industrial Projects DepartmentMay 5, 1975

ANNEX 1-1

MEXICO - FERTILIZER PROJECT

GLOSSARY OF TERMS USED IN THE REPORT

1. Aqua Ammonia: Solution of ammonia in water. Solubility ofammonia in water depends greatly on temperature. At 00C (320F), solubilityis about 900 grams per liter and only 7.4 g/lt at 1000C (2120F). Aquaammonia is also used as fertilizer by dissolving anhydrous ammonia inirrigation water.

2. Ammonia or Anhydrous Ammonia: A compound of nitrogen and hydrogen(NH3) obtained by synthesis of nitrogen and hydrogen. It is a gas at normalatmospheric temperature and pressure. It can be liquefied at -330C (-280F)at atmospheric pressure but it can also be liquefied at ordinary temperaturesby application of pressure. For instance at 600F (15.50C) a pressure of 107.6lbs per sq. in. (7.3 kg/cm2) or about 7 atmospheres would be required. Ammoniais applied as a fertilizer because of its high nutrient content (82% N) but itrequires special expensive equipment for storage, transportation and applica-tion and soils having high temperatures may produce prohibitive losses.

3. Ammonium Carbamate: An intermediate product--NH4-C02-NH2--formedby reaction of ammonia and carbon dioxide during the synthesis of urea.

4. Ammonia Feedstocks are the sources of hydrogen used for ammoniaproduction. Except for the minor use of hydrogen produced by electrolysingwater, the principal feedstocks are hydrocarbons such as natural gas, naphtha,heavy fuel oil and coal.

5. Ammonium Nitrate (AN) or chemically NH4NO3 is produced by reactingammonia with nitric acid. Nitric acid (HN03 ), in turn, is made from ammonia(NH3). AN contains 34.5% nitrogen, half in the ammonium form and half in thenitrate form, and is very hygroscopic. It also is a commercial explosive.In many countries, a diluent--e.g. limestone--is added to lower the analysisand negate the explosive properties as well as to minimize the hygroscopicproperties. Mixed with small amounts of fuel oil it is known as ANFO explo-sives used in open pit mining.

6. Ammonium Sulfate (AS): Reaction product of ammonia and sulfuricacid (NH4)2 S04. It should contain not less than 20.5% N.

7. Bagged Fertilizer: Solid fertilizers delivered to the user in bags.Net weight of the bagged fertilizer is commonly 100 lbs, 50 kg and 100 kg.Smaller bags are available in some countries for use on lawns, gardens, etc.Bags are usually made of jute, polyethylene, jute lined with polyethylene,woven polypropylene and multiple-ply paper.

8. Biuret: Carbamylurea--NH2CONH2CONH2H20--is an impurity containedin small amounts in synthetic urea. It is generally kept to a low levelbecause of its damaging effects on maturing seeds and plant leaves.

ANNEX 1-1Page 2

9. Bulk Fertilizer: Solid or liquid fertilizer sold loosely in tankers,ship holds, train wagons, trucks or large containers. Anhydrous ammonia issometimes transported in refrigerated barges or railroad tanks.

10. Chemical Fertilizers: Manufactured chemical compounds suitable asfertilizers should be high enough in nutrient content; stable to avoid hazardsand handling problems; water soluble and available to plant root systems. Itis the common practice to report the nutrient content of materials in terms ofpercentages of N (nitrogen), P205 (phosphorus pentoxide)j and K20 (potassiumoxide)2/. Commercially available materials meeting these requirements to a

Primary Fertilizer Materials

% of N %,of P205 % of K20Nutrient Nutrient Nutrient

Urea 46% Triple Superphosphate 46% Potassium Chloride 61%Ammonium Nitrate 34% Single Superphosphate 18% Potassium Sulfate 54%Ammonium Sulfate 21% Dianmmonium Phosphate 46%Diammonium Phosphate 18%

Because of the high nutrient content of urea, diammonium phosphate and potassiumchloride (KCl), they are some of the most popular fertilizer materials in theworld today.

11. Complex or NPK Fertilizers: All three primary nutrients (N, P205,K20) are frequently applied to the soil at the same time in ratios varyingwith the nutrient requirements of different crops. Complex fertilizers con-tain at least two chemically combined nutrients. To facilitate handling, theseveral required chemicals are usually agglomerated into uniform granules fordistribution. The analysis of each nutrient is given as a ratio to describethe NPK product. Thus 15-15-15 complex fertilizer contains 15% each of N,P205, and K20; and 12-24-12 complex fertilizer contains 12% N, 24% P205 and12% K20.

12. Crop Yield: Output of crop in kg or tons per ha. or lbs/acre.

13. Diammonium Phosphate (DAP) or chemically (NH4) 2HPO , is producedby reacting NH3 with phosphoric acid (H3PO0) followed by granulation and drying.

14. Dosage: Intensity of fertilizer application generally measured inkg/ha or lbs acre (nutrient content).

15. Fertilizer: The vehicle through which plant nutrients--with theexception of carbon, hydrogen, and oxygen--are added to the soil. It is usualto distinguish between natural fertilizers (such as compost) and manufacturedor chemical fertilizers. Very often when the term fertilizer is used alone itrefers to the latter.

/ Normally but incorrectly referred to as phosphoric acid or phosphate.2 Or potash.

ANNEX 1-1Page 3

16. Granular Fertilizer: Fertilizer in a granular form, as distinctfrom powdered fertilizer which has a tendency to 'bridge' in hoppers andgenerally to make bagging and application more difficult.

17. Guano: Excrement deposited by birds (mainly sea birds) and batson areas where it is not washed away by rain. Peruvian guano averages 14% N.

18. HYV: High yielding variety.

19. Lint: Cotton fibre after ginning.

20. Mixed Fertilizer: A fertilizer made by the physical mixing orblending of two or more fertilizers and generally containing more than oneplant nutrient.

21. Plant Nutrients: Essential to plant growth are some 17 elements,six in large and the remainder in small or micro quantities. Carbon, hydrogen,oxygen, nitrogen, phosphorus and potassium comprise the first six; the othersof lesser significance include calcium, magnesium, sulfur, silicon, zinc, iron,aluminum, manganese, boron, sodium, and copper. Chlorine and cobalt are alsothought essential. Carbon, hydrogen and oxygen are readily available fromthe atmosphere and water. Nitrogen, phosphorus and potassium--three mainnutrients--and the other elements are drawn from the soil systems. Unlesssupplemented by regular additions of materials containing the three mainnutrients, soil becomes depleted of fertility by repeated cropping. Use ofnatural organic materials such as animal and vegetable wastes can be utilizedbut the scale and intensity of modern agriculture have far exceeded the avail-ability of natural 'fertilizers'. Consequently, the majority of the world'sprimary plant nutrient needs are now supplied in the form of manufactured or'chemical' fertilizers. To an increasing degree, secondary nutrients such ascalcium, magnesium, sulfur, and micro nutrients such as boron, zinc, copperand manganese are also added to soils along with the primary nutrients inratios prescribed by agronomists according to specific crop and soil needs.

22. Phosphate Rock: Rock containing phosphates mainly of calcium ingenerally comprex forms. Some deposits contain the phosphates as nodulesscattered in sterile gangue. It is used to produce phosphoric acid (H3POO)as well as superphosphates.

23. Prilled Fertilizer: Fertilizer in spheroidal particles generallybetween 1 and 4 mm in diameter.

24. Sin le Sup hos hate: A prod