WORLD BANK TECHNICAL PAPER NUMBER 97 WTP-97 x INDUSTRY AND ENERGY SERIES Improving the Supply of Fertilizers to Developing Countries A Summary of the World Bank's Experience Asia Technical Department Europe, Middle East, and North Africa Technical Department FILE COPY _ _ :. - 7AP .... _ ~~I, . ...... . . . ;_ ~ _ e . , RECENT WORLD BANK TECHNICAL PAPERS No. 55. Technica, Ltd., Techniques for Assessing Industrial Hazards: A Manual No. 56. Silverman, Kettering, and Schmidt, Action-Planning Workshops for Development Management: Guidelines No. 57. Obeng and Wright, The Co-composting of Domestic Solid and Human Wastes No. 58. Levitsky and Prasad, Credit Guarantee Schemes for Small and Medium Enterprises No. 59. Sheldrick, World Nitrogen Survey No. 60. Okun and Ernst, Community Piped Water Supply Systems in Developing Countries: A Planning Manual No. 61. Gorse and Steeds, Desertification in the Sahelian and Sudanian Zones of West Africa No. 62. 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The Forest Industries Sector: An Operational Strategy for Developing Countries No. 84. The New Face of the World Petrochemical Sector: Implications for Developing Countries No. 85. Proposals for Monitoring the Performance of Electric Utilities No. 86. Integrated National Energy Planning and Management: Methodology and Application to Sri Lanka No. 92. World Petroleum Markets: A Framework for Reliable Projections WORLD BANK TECHNICAL PAPER NUMBER 97 INDUSTRY AND ENERGY SERIES Improving the Supply of Fertilizers to Developing Countries A Summary of the World Bank's Experience Asia Technical Department Europe, Middle East, and North Africa Technical Department The World Bank Washington, D.C. Copyright © 1989 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. 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Improving the supply of fertilizers to developing countries! Asia Technical Department, Europe, Middle East, and North Africa Technical Department. p. cm. -- (World Bank technical paper, ISSN 0253-7494 no. 97) ISBN 0-8213-1220-0 1. Fertilizer industry--Develop ing countries. I. International Bank for Reconstruction and Develaopment. Europe, Middle East, and North Africa Technical Dept. II. Title. III. Series. HD9483. D42I58 1989 338.4'766862 091724--dc2O 89-9133 CIP ABSTRACT This paper is based on two decades of World Bank Group experience improving the efficiency and security of supplying fertilizers to developing countries. It shows that the a'qailability of fertilizers is vital to food production and dispels any complacency that may have arisen because of recent temporary surpluses of fertilizer. Because of current concern about changes in global weather patterns and other threats to food production systems, it is essential that modern, intense agriculture be expanded. Fertilizer is the least substitutable input to modern agriculture as land and water resources become constrained. Although care must be taken not to overuse chemical fertilizers, they will be needed in ever greater quantities for the foreseeable future. Fertilizer is a unique commodity. It is both industrial and agricultural, closely linked to energy supplies and subject to strong government intervention, especially in developing countries. As a result, policies that control its production and distribution are often distorted when short-term considerations interfere with long-term balances. Detailed supply/demand balances are among the products of World Bank work, and they indicate that recent surpluses are rapidly changing to deficits. Nitrogen products could be in short supply in the early 1990s and phosphates in the mid-1990s, but potash is likely to remain in surplus for the foreseeable future. Prices will rise as shortages occur. The debate over appropriate national fertilizer policies is highly politicized and usually fragmented among interest groups. Only when the supply system is seen as an integrated and transparent whole, from raw - vi - materials through processing and delivery to the farmers, can serious discussions take place. Subsidies, pricing, the role of state production and distribution companies, and the terms of internal and external trade are the main policy issues that World Bank experience has shown to be important. The paper summarizes that experience and shows that a continued Bank role in the sector is important, both in lending operations and in improving technical understanding of a complex business. - vii - Contents ACKNOWLEDGMENTS.............................................. ix PRINCIPAL ABBREVIATIONS AND ACRONYMS......................... x SUMMARY ...................................................... xi I. INTRODUCTION ................................................. 1 II. FERTILIZER IN THE FOOD CHAIN ................................. 4 III. GLOBAL TRENDS AND PROSPECTS .................................. 9 Background of the Fertilizer Industry ........................ 9 Supply/Demand Balances 1986/87-1992/93 ....................... 12 Fertilizer Trade ............................................. 16 Fertilizer Prices ............................................ 19 Agriculture Toward 2000: The FAO Study ...................... 21 Long-term Fertilizer Demand .................................. 23 Fertilizer Investment Needs .................................. 24 Other Investment Needs ....................................... 29 Investment Needs of Developing Countries ..................... 30 The Effect of Future Energy Prices on the World Fertilizer Industry ....................................... 30 The Impact of Genetic Engineering on Fertilizer Use .......... 32 Environmental Considerations ................................. 34 IV. MAJOR NATIONAL POLICY ISSUES ................................. 37 Purpose and Background ....................................... 37 Fertilizer Subsidies ......................................... 38 Pricing ...................................................... 42 Other Issues ................................................. 44 Conclusion ................................................... 48 V. WORLD BANK ASSISTANCE FOR FERTILIZER DEVELOPMENT ............. 50 History ...................................................... 50 Fertilizer Sector Loans ...................................... 54 Restructuring Programs ....................................... 55 Technology Development and Transfer .......................... 56 Conclusions .................................................. 56 VI. THE FUTURE ROLE OF THE WORLD BANK ............................ 58 Conclusions .................................................. 63 - viii - ANNEXES 1. The World Bank/FAO/UNIDO Fertilizer Working Group ................ 65 2. World and Regional Supply/Demand Balances for Nitrogen, Phosphate and Potash .......................................... 73 3. International Trade in Fertilizers, 1986/87 ...................... 90 4. Export Prices for Some Major Fertilizer Materials ................ 92 5. Data from the FAQ Study: Agriculture towards 2000 ............... 93 6. Long-term Fertilizer Demand ...................................... 94 7. Nitrogen Production and Nitrogen Price Forecast .................. 98 8. Ammonia Realization Price Versus Feedstock Cost .................. 99 9. Fertilizer Projects Financed by the Bank Group, FY 1968-1988 ..... 100 10. Justification of Farm Subsidies: Arguments Pro and Con .......... 101 - ix - ACKNOWLEDGMENTS This paper is a result of nearly three years of internal discussion and review of various predecessor drafts among industrial and agricultural specialists in the World Bank Group. Peter Glenshaw and William Sheldrick, who have considerable experience in the fertilizer business, have been the principal authors, but they have relied on many colleagues for ideas, fresh concepts, inspiration and encouragement for what has been a long and challenging task. V.S. Raghavan, Reza Amin, Donald Brown, S. Venkataraman, Andrew Rogerson, Luciano Borin, Y.T. Shetty and Roy Pepper made major contributions. - x - PRINCIPAL ABBREVIATIONS AND ACRONYMS atm. Pressure in atmospheres BBL Barrel BCM Billion cubic meters BTU British thermal units CIF Cost, insurance and freight DAP Diammonium phosphate EEC European Economic Community FAO Food and Agriculture Organization of the United Nations FOB Free on board IRR Internal rate of return K20 Potassium oxide: measure of active plant nutrient in potash fertilizers LNG Liquified natural gas MM Million N Nitrogen: measure of active plant nutrient in nitrogen fertilizers P205 Phosphorus pentoxide: measure of active plant nutrient in phosphate fertilizer SSP Single Superphosphate TFI The Fertilizer Institute of the US tpd Tons per day (metric tons whether stated or not) tpy Tons per year (metric tons whether stated or not) TSP Triple Superphosphate UNIDO The United Nations Industrial Development Organization Fertilizer Statistical Data Statistical data are based on the FAO regional economic classification and also on the fertilizer year July 1 to June 30. For countries that report their fertilizer statistics on a calendar-year basis, data are shown under the fertilizer year, the first part of which corresponds to the calendar year, i.e., 1987 data are under 1987/88. - xi - SUMMARY Introduction The World Bank Group has played a key role in the development of the global fertilizer business. Over the past two decades it has financed fertilizer plants and fertilizer imports. It is conscious now of the need to dispel the complacency about the importance of fertilizers in ensuring food security that arose with the apparent surpluses of food and fertilizer in the 1980s. The devastating droughts in North American and China in the summer of 1988 and in India in 1987, floods in Bangladesh, the resurgence of locust devastation in Africa and continuing agricultural problems in the USSR bring home how fragile are the global food production systems. Fertilizer is the most indispensable and least substitutable input required for modern intense agriculture. Limitations in the availability of agricultural land and water require increasing applications of fertilizer to ensure food production to match high, if moderating, population growth. This paper reviews the World Bank's involvement in the fertilizer sector of developing countries to highlight the lessons that have been learned. Although the paper deals mostly with the supply and use of industrially based chemical fertilizers, it has benefitted from considerable internal debate by industrial and agricultural staff. It points out that Bank assistance at first consisted of helping finance and implement the construction of fertilizer plants, but lately the emphasis has shifted to ensuring better efficiency and reliability in getting this vital material to farmers at the lowest cost. The fertilizer supply chain is a continuum from raw materials through processing and distribution to application on the farmers' fields. It has major problems in many developing countries, such as - xii - excessive subsidies, suboptimal use of fertilizers, large administrative bureaucracies, and unprofitable factories. These problems are politically sensitive, but current World Bank work is helping to correct them, and this work needs to be publicized, emulated, and improved upon. The paper gives an overview of the global fertilizer industry, the need for new investments of US$60 billion equivalent or more by the end of the century, and the trends in trade, and technology. There is a review of the policy lessons being learned, and of past Bank activity. The paper closes with a discussion of some of the issues that need to be tackled in the near future, and recommends practical steps for international cooperation to do this. Fertilizer in the Food Chain Fertilizers replace the nutrients taken out of the soil by the cultivation of food and nonfood crops. The green revolution and the potential for long-term food security would never have occurred without the increased use of fertilizers. Fertilizer requires large investments for process plants and so is both an industrial and agricultural commodity. It is a large consumer of energy, a low-value, high-volume commodity, widely traded, with high transportation costs, subject to volatile international market conditions, has to be used at a precise time set by the weather, and is dependent on other farm inputs to be effective. It is unlikely that biogenetic developments will change this soon, or that organically derived - xiii - mulches will replace chemical fertilizers, which deliver high amounts of nutrients efficiently. The fertilizer sector plays a key role in food security. Because of its many linkages to other sectors, governments play a large role in the sector, especially in developing countries. Modalities of government intervention include state-owned factories, control of prices and availability, payments of subsidies, national energy policies, and control of trade and transport systems. Policy reform can be difficult and sometimes contradictory. For instance, recommendations for improving farm policy usually tolerate slowly decreasing input subsidies, while recommendations at the national budget level usually require a sharper drop in subsidies, adding to the distortion that often exists between factory and farmer prices. Only when the fertilizer sector is regarded as a vertically integrated whole do things fall properly into place. Current Bank fertilizer sector work in India, Indonesia, China, Mexico, Egypt, Turkey, Sub-Saharan Africa and Bangladesh is showing that this approach is useful and should be the basis for most future operations. Global Trends and Prospects The chemical fertilizer industry, founded in the middle of the 19th century, has developed steadily. Nutrient production reached 2 million tons per year (tpy) by 1900 and 14 million tpy by 1950. Sharp increases in food demand by the rapidly growing world population and the introduction of high- yielding varieties of cereals which need high rates of fertilizer application - xiv - caused fertilizer consumption to increase rapidly in the 1960s and 1970s and to reach 115 million tpy of nutrients by 1980. The structure of the industry also changed. The share of both production and use in developed countries fell from 70% to 40%, while centrally planned and developing countries increased their shares of consumption to 40% and 20%, respectively. World recession in the first half of the 1980s reduced the growth of demand for agricultural products and fertilizers. Very low prices for fertilizers and surplus capacity caused many older and less economic factories to be idled or closed. Cutbacks in farm support programs in the industrial countries, the recent drought in North America, and reduced harvests in developing and centrally planned countries have reduced global stocks of food, and the supply and demand for both food and fertilizers in 1989 is more balanced than it was in 1985. This trend is expected to continue, and the outlook for the fertilizer situation is summarized in the following table taken from the 1988 projections of the World Bank/FAO/UNIDO Fertilizer Working Group. The table on the following page shows that nitrogen fertilizer supply and demand are moving into balance and that there could be a global deficit by the early 1990s; phosphate and potash fertilizers are likely to remain in surplus well into the 1990s. There are considerable regional imbalances, especially large surpluses of nitrogen in Eastern Europe, of phosphates in the US, Morocco and Jordan and of potash in Canada and the USSR, and large deficits of nutrients in most developing countries, particularly China and India. As a result of these imbalances, there is considerable trade in fertilizer raw materials, intermediates and finished products. Complex trade - xv - FERTILIZER: GLOBAL SUPPLY AND DEMAND (million tpy) 1986/87 1988/89 1992/93 Nitrogen (N) Supply potential 73.1 77.3 82.8 Demand 72.4 75.3 83.5 Surplus 0.7 2.0 (0.7) Phosphate (P205) Supply potential 37.3 40.0 42.5 Demand 34.7 37.0 40.8 Surplus 2.6 3.0 1.7 Potash (K20) Supply potential 30.3 30.4 31.4 Demand 26.1 27.1 29.4 Surplus 4.2 3.3 2.0 practices--including barter and countertrade--have evolved, and their complexity is likely to increase in the future with development and change of product type, degree of processing, availability and cost of raw materials and energy, and facilities for shipping and receiving large tonnages of bulk or bagged material. World prices of fertilizers have fluctuated wildly over the past two decades, especially after the large rise and fall in 1973-75. In the 1980s, prices generally declined until 1986 due to excess capacity and the willingness of some exporters to reduce prices, often below cost, to earn foreign exchange. Since 1986 there has been a slight upward trend in prices. Predictions of future prices are difficult to make because of the limited number of buyers and sellers, limited entry and exit of producers, imperfect knowledge of the actual deals made, and the large amount of barter and countertrade. In addition, more than 60% of global production is now - xvi - controlled by governments, but this material is not subject to simple free- trade considerations. Oligopolistic producer, trader and buyer organizations dominate the global fertilizer business and carry considerable political clout. Despite these limitations, the global fertilizer market operates in the long term like a free market, and prices respond closely to demand and supply forces. Fertilizer prices are increasing now as supply and demand are becoming more balanced. Forecasts indicate that there could be a surge in nitrogen prices in the 1990s if the expected supply deficit occurs, and phosphate and potash prices will rise slowly but steadily as supply and demand become approach equilibrium. Price developments for the leading fertilizer commodities moving in world trade since 1976 are shown in the table on the following page. Predictions of fertilizer supply and demand beyond the 1992/93 horizon of the Working Group are imprecise despite the use of current econometric modeling techniques which explicitly include those political, economic and environmental factors which influence agricultural production such as the 1985 US Farm Bill, which cut farm output in 1986 and 1987. With some of these possible limitations in mind, fertilizer demand in 2000 has been predicted at 101 million tpy for N, 46 million tpy for P205, and 33 million tpy for K20. Based on these predictions and the estimates of supply capacity in the early 1990s, additional investment for new plants and rehabilitation of old ones can be estimated. About 10 new ammonia/urea complexes costing about - xvii - FERTILIZER PRICES (Current US$/ton FOB in bulk) (end of year) 1976 1982 1986 1987 1988 Urea (bagged) 110 135 100 115 135 Potassium chloride 60 70 60 65 85 Triple superphosphate 105 135 110 150 160 Diammonium phosphate 140 170 145 180 200 US$300 million each will be needed every year starting about 1991, for a total cost of about US$25-30 billion by 2000. Starting about 1993, about 4 million tons of new and replacement phosphate processing capacity will be needed through 2000 at a cost of US$4 billion. No significant new capacity will be needed for potash, but some rehabilitation will be needed. In addition, increases in permanent working capital of US$10 billion will be necessary to cover inventory costs, especially for large amounts of finished product stored somewhere in the supply chain; another US$15 billion will be needed for new and rehabilitated marketing and distribution facilities. Of a total investment of some US$60 billion by the end of the century, about 60% will take place in developing countries, mainly China, India, Indonesia, Brazil, Mexico and the Gulf states. Energy costs will affect investment decisions. Energy is an important part of the cost of making fertilizer, varying between 10% and 15% in the case of phosphates and potash and up to 70% for nitrogen fertilizers in places where hydrocarbons are expensive. Nitrogen plants based on low-cost natural gas have a strong advantage even as oil prices come down, and it is likely that they will continue to dominate the export business. - xviii - New developments in biotechnology and genetics are unlikely to affect fertilizer consumption for the next 20-30 years. Much laboratory work is being done with genetically improved crop species to improve nutrient uptake from the soil and from the air. So far, only nitrogen-fixing Rhizobia in legumes like peas and beans show much promise of increased practical application. Even this use is energy demanding, and the application of nitrogen fixation properties to other crops is not likely to be competitive except at very high fertilizer prices. Environmental concerns exist with both the production and the use of fertilizer, and they are an important part of World Bank fertilizer plant rehabilitation. Fertilizer production can yield harmful effluents. It is sometimes in the self-interest of the producer to treat these effluents if they contain valuable products. Where there is no strong economic incentive to treat the effluents, legislation may be needed to ensure that they are rendered harmless. Excessive use of fertilizer in agriculture is not a major problem in developing countries, but it can be in the industrial world. Runoff of fertilizer to streams and lakes and soil degradation are the main problems of excessive use, and a strong body of regulatory practice is being developed within many countries to deal with them. Dealing With National Policy Issues Dialogue with governments on the many sensitive issues of fertilizer policy becomes most effective when there is a thorough understanding of the cost and price structure all the way from imports and/or raw materials to farm output and food policy. Without an adequate quantitative analytical - xix - framework, discussions of issues such as subsidies, pricing and other topics are often futile. There is much to be done to come to grips with these issues, but some of the lessons being learned from the case-by-case work of the Bank are as follows: Subsidies are typically the major issue. Considerable investigation and debate are needed to discover the sizes and types of subsidies being applied in energy, industry, transport or agriculture, and to distinguish financial and economic subsidies. Vested interests work hard to disguise subsidies which point to excess profits, low efficiency or favored status. Costs over world prices, whether in production, importation or distribution are met either by overpricing the fertilizer and so taxing the farmers, budget transfers which tax the nation, or by underpricing local resources, thus taxing future generations. It is important to ensure that full costs are ascribed to infrastructure and factories and that sunk costs are properly taken into account in pricing calculations. Simply removing subsidies is not a solution if prices do not change, as rationing results and with it, black market operations that generally jeopardize the small farmer. In some African countries, farm input subsidies have been successfully phased out through deals in which governments reduce the subsidy in return for World Bank financing. It was helpful that world prices were low at the same time. Reduction of subsidies will be more difficult now that international prices are increasing again. Still, much can be done in areas such as improving farmer education to increase the efficiency of fertilizer use, providing crop insurance to cover the risk farmers take when using high applications of fertilizer, looking at price support schemes as a better alternative to subsidies, and even examining the usual basic political assumption that food - xx - and fertilizer self-sufficiency must be assured at almost any cost. Several developing countries are beginning to acknowledge the heavy social and economic costs of agricultural subsidies and are taking steps to reduce the subsidy level. Pricing issues also dominate the dialogue, especially as prices are perceived quite differently by the industry producing the fertilizer and the farmers using it. Ex-factory prices are usually administered in developing countries and as such function as rules for allocating budget transfers. Quantities, not prices, are the real planning instruments. Even so, ex- factory prices from existing plants have to be compared with import prices to see if variable costs are at least covered. The right level of import prices on which to make such comparisons is hard to define, given the many noneconomic forces which influence the market. For instance, low prices in a depressed world market are usually short-lived. On the other hand, real structural changes such as new techniques to make low-cost nitrogen from low- cost gas must be realistically assessed. Long-range marginal cost pricing must be treated carefully and must take into account the future supply/demand situation. Other issues include obstacles to free trade, overdependence on imports provided with tied-aid financing, distribution monopolies at all levels, excessive and uneconomic use of local raw materials, reluctance to close inefficient plants, excessive regulation of investments, insufficient quality control, and imbalance in the internal terms of trade between industry and agriculture. - xxi - Industry and agriculture specialists will have to work together closely to achieve an understanding of these issues, but collaboration is difficult in most organizational situations. Deliberate steps will be required to remove barriers if the complex dynamics of the fertilizer sector are to be properly analyzed and dealt with. World Bank Assistance for Fertilizer Development World Bank involvement in fertilizer dates from the early 1950s, but it was not until the 1970s that activity increased to the point where a division was created to handle the work in the former Industry Department. Three policy papers were issued in this period. They stressed the importance of the involvement of the World Bank in the fertilizer sector, both for its help in financing new projects and for its general guidance to developing countries. There were 32 fertilizer operations in the 1970s, 26 to finance new plant construction in line with the desire of developing countries to be self-sufficient in food and fertilizers. In the 1980s, of the 32 operations approved so far, only 8 have been for new plants. This is consistent with the large surplus capacity and the emphasis on restructuring and rehabilitation of existing facilities. It is also worth noting that the World Bank examined another 38 production protects from 1972 to 1985 but found them uneconomic and persuaded the borrowers to forego these unwise investments. A review report of 14 plants financed by the Bank found 7 to be operating without outside assistance, and another 5 ready to do so. The report praised the Bank's crucial role as technical arbiter, monitor and quality controller. A little over US$3 billion of Bank loans and $200 million of IFC funds have gone into - xxii - fertilizer plant projects. These constitute about 15% of the capacity of developing countries and 4% of global capacity. In a new departure for World Bank fertilizer lending, direct fertilizer import loans totaling more than US$600 million have been made recently. Fertilizer imports are also big items financed in adjustment lending operations. Nearly 100 agricultural loan operations since 1980 have had a major fertilizer component, such as the one in Kenya that specifically targeted farm inputs and policy changes to improve their supply. Many Bank operations in mining, petroleum and transportation have had fertilizer as a principle focus. The Fertilizer Sector Loan is emerging as a convenient, comprehensive arrangement through which the World Bank funds imports, transportation, rehabilitation and even new plants in conjunction with major policy changes. They include the promise of follow-up operations as successes are achieved. Coordination among specialists in industry, agriculture, energy, infrastructure, and country operations is essential for the successful planning, appraisal and supervision of these projects. The Mexico Fertilizer Sector Project and the Kenya agricultural input operations typify the type of ongoing cooperation required among Bank staff from different operational units and within different institutions in the developing countries. Other recent World Bank operations have dealt with the physical and financial restructuring of large production and distribution companies, many in the public sector. The issue have covered production, marketing and distribution, and technology development and transfer. Recent Bank work - xxiii - confirms the importance of viewing the fertilizer sector as an integrated whole. Much time and effort can be wasted when particular issues are dealt with out of context. Industrial and agricultural work can proceed independently, but the best results are obtained when the needs of the sector are reviewed as a whole. The Future Role of the World Bank There is a role for the World Bank to continue to exert its proven influence in the global fertilizer business, which is as vital as ever for ensuring future world food security. Together with other international agencies, there is much it can do to investigate the cause of the present inefficiencies in fertilizer supply and use. (a) Lending Operations will probably consist of Fertilizer Sector Loans (either outright built up gradually from components), Fertilizer Import Loans either directly or through structural adjustment lending, and agricultural projects which emphasize inputs. (b) Enhancement of Technical Understanding will consist of the continuation of current work like that of the Fertilizer Working Group on supply/demand forecasting, other modeling activities, and detailed attention to the engineering aspects of production. There is also a need for greater attention to agronomy and soil sciences, and heightened awareness of the environmental implications of fertilizer and production use. - xx iv - Six main areas can be identified where particular attention needs to be paid to improve operations. They are (a) Fertilizer import operations (b) Marketing and distribution (c) Fertilizer in Africa (d) Agronomic expertise (e) Process and environmental technologies (f) Improved intelligence gathering and dissemination. Much remains to be done, but the World Bank and other agencies have a sound base on which to advance. There is a need to broaden the forum in which the studies (which are really applied agricultural research) can take place. A body like the Consultative Group for International Agricultural Research (CGIAR) would be well suited to monitor and coordinate the various programs. This would also help integrate the industry and agricultural aspects of the work. If this paper helps to raise awareness of the many questions still to be explored in the global fertilizer business, it will have served its purpose well. I. INTRODUCTION The World Bank has played an important role in the expansion of fertilizer production in developing countries in the past two decades. It has an equally important task to perform now and in the future, as the focus shifts to supplying this vital commodity at the least cost and greatest reliability to farmers in developing countries. Investment in large industrial facilities to increase production was the main component of World Bank assistance in the past, but now the emphasis is on improving efficiency at all stages of fertilizer supply including production and processing of raw materials, transport and distribution, and correct, balanced and timely fertilizer application for particular soils, crops and climates, all at economically sustainable prices. The purpose of this paper is, first, to show that fertilizers will continue to be vital in the developing world and, second, to propose both broad policies and practical steps for future World Bank assistance. In most developing countries, the fertilizer supply system needs overhaul. Undue state intervention, however well-intended, has led to serious problems such as large budget transfers to cover fertilizer subsidies that exceed, in one case, US$1 billion equivalent per year, promotion of economically inefficient fertilizer materials, unproductive bureaucracies to manage allocation and subsidy programs, and fertilizer production facilities that do not give adequate rates of return. World Bank staff are coming to grips with these issues and are finding innovative ways to deal with the politically sensitive environment that frequently underlies them. That work needs to be better understood and more widely publicized within the Bank and -2- outside it, and, most important, it needs to be intensified. At the same time, the Bank expects to expand its involvement in the global fertilizer sector to ensure that fertilizers are economically and efficiently available to farmers in developing countries. Investment needs will be high: despite current but precarious surpluses of both food and fertilizer, new plants will be needed to replace technically worn out and inefficient ones and to meet the expected growth in fertilizer consumption necessary to increase food production. Replacements and new capacity up to the year 2000 could require investments of US$30 bil- lion or more, so there can be no complacency about the need for new industrial investment, only debate as to its timing and location. Increases in permanent working capital to finance the larger supply of fertilizer will also be substantial and could exceed US$10 billion. Facilities for marketing and distributing the additional fertilizer could cost another US$15 billion. Thus the increase in the financial needs of the global fertilizer sector could total US$60 billion by the end of the century, and more than half of this will be needed in developing countries. The Bank Group will certainly be called on to contribute a share of this sum. This paper summarizes the current thinking of World Bank staff from both industry and agriculture on how best to deal with the problems facing the fertilizer sector, and especially on how to improve the efficiency of the supply and use of chemical fertilizers. It is based on both operational experience and involvement in many international forums in which fertilizer issues are analyzed. The paper gives a brief description of the significant characteristics of fertilizer and its continuing importance and reviews trends in global production, consumption, trade, prices, and technology. It also examines the policy issues that affect efficiency and costs, reviews Bank activity in fertilizer and sets out proposals for future actions in which the Bank can cooperate with others in the important task of improving the fertilizer sector. -4- II. FERTILIZER IN THE FOOD CHAIN Modern chemical fertilizers are critical to the green revolution and tothe ensuring of adequate global food supplies. This is unlikely to change soon, if ever. The major plant nutrients, nitrogen, phosphorus and potassium, are removed from the soil by crop production and must be replaced after every harvest. Replacement is accomplished best, most reliably and at the lowest cost by using inorganic chemical fertilizers. Self-regenerating, organically based, low-tillage agriculture remains the subject of intense research which should be encouraged. However, organic systems alone are an inefficient way of using scarce land, water and climate resources for food production,, except in special situations. For the foreseeable future, the world will rely on chemical fertilizers for its agricultural production. Underlying policies must ensure reliable, affordable fertilizer supplies for the indefinite future and avoid uneconomic overuse which can damage the environment through soil degradation and runoff to streams and lakes. Much attention has also been given to the possibilities of using biogenetics to produce new species of disease- and pest-resistant crops and give higher yields through improved nutrient use. Significant progress is being made in many aspects of this work, and in the future it may have a major impact on food production. However, it is likely to take many years to introduce new crop varieties on a sufficiently large scale to affect fertilizer use. Fertilizer is both an industrial and an agricultural commodity. It has the characteristics of and is influenced by both sectors. Its distinguishing features are that it is: A large consumer of energy, mostly in the form of natural gas (or petroleum) for ammonia-nitrogen fertilizer production A low-value, high-tonnage commodity that incurs high transportation costs before it is used by the final consumer A product of heavy industry with sharply increasing benefits depending on scale, especially for ammonia and urea where modern plants have capacities of up to 1,700 tpd and require investment of up to US$500 million, so that entry of small-scale producers is difficult A product whose users often have little to say in the choice or price, especially in developing countries where these decisions are often made by governments A commodity laden with uncertainty and risk in a very volatile international market A material that has to be used at a very precise time set by the weather and dependent for maximum benefit on the availability of pesticides, seeds, water and power. Policies affecting fertilizer are usually directly related to food- crop productivity and prices. In most developing countries there is intense pressure to keep food prices low, and that often means artificially low fertilizer prices and large subsidies and price controls at all levels. -6- Farmers, particularly those living at poverty levels, are perceived by many governments to be unable to handle widely varying input prices and to need insulation from volatile international markets. Drawing these issues together, it is easy to see why the fertilizer sector is politically sensitive and permeated by government intervention. State-owned industrial plants produce most of the fertilizer in developing countries, and fertilizer distribution is often accomplished by state monopolies. Where private-sector operations exist, they are often closely regulated and/or oligarchic. Public utility and the national mission to achieve food self-sufficiency are the dominant goals which most governments ascribe to their fertilizer sectors. Food security is of course a necessary policy objective, but it is not necessarily best achieved by self-sufficiency in food and fertilizer production. Many forms of government intervention abound. The most common is fertilizer price subsidies applied at various levels in the supply chain. Planning is often driven by agricultural production targets, but these can lead to inconsistent sectoral policies. For example, energy pricing strategies in some developing countries involve pricing natural gas, a fertilizer raw material, above economic cost. Ex-factory fertilizer prices high enough to cover manufacturing costs require subsidies to farmers if they are to use enough fertilizers and yet keep crop prices low. Removing subsidies is neither simple nor easy. For instance, reforms of agricultural input pricing policy usually tolerate slowly decreasing fertilizer subsidies over several years to avoid severe food production shocks. Yet budget imperatives may require a sharper drop in subsidies to the industry. These -7- contradictory needs are not easily reconciled, and they illustrate the kind of dilemma which can make fertilizer policy issues challenging. The World Bank is learning to deal with these issues and increase the efficiency of national fertilizer systems. The most productive reforms include many sectors--industry, transport, agriculture and trade. For example, one of the best ways to improve fertilizer availability, ensure timely delivery and lower its cost is to improve the transport and distribution systems to handle higher volumes of materials. In some African countries, a systematic review of fertilizer issues shows that the most urgent needs are to improve international procurement practices, fertilizer buying skills and access to world market information. A comprehensive analysis of the fertilizer sector, in its vertically integrated sense, is therefore needed and should involve, as relevant: raw material production or import; industrial plant investment and rehabilitation; fertilizer imports, transport and distribution; agricultural credit, extension, research and farming practice; and environmental concerns. This analysis is the conceptual equivalent of an Energy Assessment and deals with opportunities for short- and long-term efficiency gains on both the demand and supply sides. Topics as diverse as quantitative restrictions and trade policy, budget implications of subsidies, the cost of gas exploration and delivery, providing working capital for marketing and distribution, high- yielding crop varieties, and fertilizer process technology have all to be dealt with to establish a sound fertilizer strategy in a country. -8- Recent and current Bank work on such detailed sector analysis is showing how complex things can be, how unclear the links are between the various parts of the sector, and how little is understood about how to increase and sustain efficiencies. Much remains to be done to understand the linkages between fertilizer raw material supply, processing, distribution and application, the interaction of the private and public entities, and local fertilizer production's linkage to global trade through exports and imports. It is on these efforts that much of future World Bank work should be focused. III. GLOBAL TRENDS AND PROSPECTS Background of the Fertilizer Industry The international fertilizer business started in the middle of the 19th century, following Liebig's discovery of mineral plant nutrition. The industry began with the production of single superphosphate and potash fertilizers in Europe. It was not until about 1913 that nitrogen fertilizers were available at a reasonable price. By 1900, annual world consumption of fertilizer nutrients reached about 2 million tons, and 50 years later consumption was about 14 million tons. In 1978, annual world consumption of fertilizer nutrients reached 100 million tons, and at the end of 1987 it had risen to 130 million tons. By 2000, consumption is forecast to reach 180 mil- lion tpy. Rapidly increasing demand for food to meet the dramatic growth in world population accelerated fertilizer demand in the 1960s and 1970s. Fertilizer was vital for successful production of the high-yield varieties of wheat and rice which triggered the green revolution, and its use became indispensable to maintain soil fertility. In many developing countries, grain yields have been increased from 1 to more than 3 tons per hectare, and on average about 50% of the increase in food production has been due to increased fertilizer use. These developments have been extremely important for the developing countries with their still-growing need for food and high potential for improving food production yields. - 10 - The rapid growth of world fertilizer consumption over the last 30 years has been associated with a constantly changing pattern of production and use. In 1950, about 70% of all fertilizer was produced and used by the private sector in industrial countries, mainly Western Europe and North America. About 20% of world fertilizer use and production took place under state control in the centrally planned countries, mainly in Eastern Europe, and the developing countries had only about 10% of the total world fertilizer consumption and produced slightly less. Interregional fertilizer trade was relatively small, less than two million tons of nutrients per year. During the 1950s and 1960s, fertilizer use grew steadily in all regions, particularly under strong public-sector influence in the developing countries which started from a small base. In the 1970s, the growth of demand in developed market economies slowed relative to the centrally planned and developing economies. By the end of the decade, the use of fertilizers in the centrally planned countries was almost equal to that in the industrial countries (about 40%) and that in the developing countries had reached 20%. Generally, the same type of trend can be demonstrated with regard to production, although at a lower rate. Fertilizer production has not always developed in the same place as demand because primary production facilities were based mostly at the source of the raw materials. As a result, fertilizer trade increased from about 2 million tons in 1950 to about 40 million tons in 1986. The main fertilizers traded are diammonium phosphate, triple superphosphate, urea, calcium ammonium nitrate, and potassium chloride. - 11 - International trade in nitrogen and phosphate is 20-25% of production and in potash about 70%. There has also been a considerable increase in trade in fertilizer intermediates such as phosphoric acid and ammonia. In the last few years, the fertilizer industry slowed as the global economic recession in the early 1980s depressed demand for agricultural and fertilizer commodities. Between 1980 and 1983, demand for nitrogen, phosphorus and potash was stagnant, and export prices fell sharply. In 1984 demand for nitrogen increased by 10%, and prices also rose. The recovery was short-lived, however, and the continuation of extremely low farm prices and the debt problems of US farmers and fertilizer-importing developing countries have kept prices low. Excess production capacity and large fertilizer stocks exacerbated the situation and prices fell to very low levels in 1985. Low prices led to the closure of many factories with inherently high costs and caused severe curtailment of investment programs. About 7.5 million tpy of nitrogen and 2.5 million tpy of phosphoric acid plant capacity have been closed in the last 5 years. There was an improvement in fertilizer prices in 1988, due in part to gradually declining fertilizer surpluses and also to reduced harvests in the US and the Asian subcontinent. This change has resulted in increased agricultural prices and provided an incentive for increased fertilizer use in 1989. - 12 - Supply/Demand Balances: 1986/87-1992/93 The supply/demand balances presented in this section are those prepared by the World Bank/FAO/UNIDO Fertilizer Working Group in mid-1988. The Group comprises a number of experienced analysts covering the three main fertilizer nutrients and raw materials. Members of the Working Group represent the International Fertilizer Industry Association (IFIA), several major associations from the nitrogen, phosphate, potash and sulphur industries and the fertilizer industry in developing countries. The World Bank provides the secretariat for the Group. Further background on the status of the Working Group and its work is given in Annex 1. The detailed regional supply/demand balances for the period 1986/87-1993/93 are given in Annex 2 and summarized below. The Group uses the FAO classification of economic regions, which is also given in Annex 1. The consumption figures used in these balances take into account the short- and medium-term political, physical, and economic factors which are likely to affect fertilizer use. For example, fertilizer consumption in 1986 and 1987 was correctly predicted to fall when the projections took into account such issues as the US Farm Bill, the depressed EEC agricultural situation, and the drought in India. Nitrogen. The summary of regional and world nitrogen balances given in Table 1 indicates a world surplus through 1989-90, but a balanced situation by about 1991. The developed countries will generally meet their own needs but will continue to take full advantage of cheap imports when available. - 13 - Developing countries will continue to increase imports. Socialist Europe, especially the USSR, will be the main exporter. Table 1: SUMMARY OF REGIONAL AND WORLD NITROGEN BALANCES la (Millions tons N) 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 World Total 0.72 1.22 1.96 1.11 0.86 0.22 -0.75 Developed ME /b -1.89 -2.00 -1.68 -1.59 -1.55 -1.63 -1.61 North America -0.10 0.13 0.25 0.21 0.14 0.06 -0.01 Western Europe -1.10 -1.39 -1.16 -1.02 -0.86 -0.82 -0.69 Oceania -0.08 -0.06 -0.03 -0.03 -0.05 -0.06 -0.08 Others -0.61 -0.68 -0.74 -0.75 -0.78 -0.81 -0.83 Developing ME -2.62 -1.11 -0.45 -0.75 -0.92 -0.98 -1.19 Africa -0.71 -0.50 -0.38 -0.37 -0.42 -0.45 -0.51 Latin America 0.21 0.07 0.18 0.18 0.25 0.34 0.32 Near East 0.62 0.62 0.85 0.86 0.97 0.93 0.97 Far East -2.74 -1.30 -1.10 -1.42 -1.74 -1.80 -1.97 Centrally Planne Economies 5.23 4.32 4.08 3.46 3.33 2.84 2.06 Eastern Europe 6.57 6.71 6.62 6.44 6.36 6.13 5.87 Socialist Asia -1.34 -2.39 -2.54 -2.98 -3.03 -3.29 -3.81 L Supply Potential less Consumption /b ME = Market Economies Source: World Bank/FAO/UNIDO Fertilizer Working Group. The demand projections imply some improvements in the efficiency of fertilizer use but also show some constraints due to environmental considerations. The projections are based on the prediction that little new ammonia capacity will be built in the next two to three years because of low nitrogen fertilizer prices, the uncertainty about energy prices and the difficulties for many developing countries to finance new projects. This perception could change if prices rise sharply. - 14 - The USSR is expected to dominate the export market and maintain a surplus of about 5 million tpy through 1993. Although nitrogen demand will increase in the USSR, supply is also expected to increase by the upgrading of four large plants and by the addition of four new plants which will increase capacity by about 2 million tons in the next 5 years. Phosphate. World and regional phosphate supply/demand balances are given in Annex 2 and summarized in Table 2. Table 2: SUMMARY OF REGIONAL AND WORLD PHOSPHATE BALANCES /a (Million Tons P205) 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 World Total 2.60 2.93 3.02 2.93 2.61 2.31 1.72 Developed ME /b 6.44 5.99 6.32 6.64 6.55 6.48 6.40 North America 5.21 4.87 5.35 5.78 5.71 5.64 5.56 Western Europe -0.04 -0.06 -0.08 -0.08 -0.10 -0.09 -0.09 Oceania 0.51 0.44 0.40 0.36 0.37 0.37 0.38 Others 0.76 0.74 0.65 0.58 0.57 0.56 0.55 Developing ME -1.15 -0.69 -0.68 -0.79 -1.09 -1.23 -1.54 Africa 2.49 2.96 3.22 3.30 3.32 3.32 3.32 Latin America -1.08 -0.89 -0.88 -0.88 -0.94 -1.00 -0.99 Near East -0.29 -0.48 -0.57 -0.66 -0.75 -0.64 -0.74 Far East -2.27 -2.27 -2.44 -2.55 -2.72 -2.91 -3.13 Centrally Planned Economies -2.68 -2.38 -2.62 -2.92 -2.85 -2.93 -3.15 Eastern Europe -1.79 -1.74 -1.87 -2.06 -1.97 -1.97 -2.11 Socialist Asia -0.89 -0.64 -0.75 -0.86 -0.88 -0.96 -1.04 /a Potential Supply less Consumption /b ME = Market Economy Source: World Bank/FAO/UNIDO Fertilizer Working Group. - 15 - A significant worldwide surplus of phosphate processing capacity is likely to exist through 1993, most of it in the US. Supply potential there exceeds domestic demand by nearly 6 million tpy and export demand by about 2 million tpy. Next to the US, the largest exporters are in North Africa, where surplus available for export will increase from 2 to 3 million tpy and by 1993 will be about half the export potential of the US. All the other regions will be net importers of processed phosphates, the main ones being India, Brazil, the USSR and China. Phosphate rock mining capacity is also expected to be adequate to meet needs through the next five years. Although US capacity will remain constant in the next few years and then slowly decline, there will be major expansions of mining capacity in Morocco, Jordan, China and the USSR. There are also many potential new projects that could be developed for example in Peru, Egypt and Saudi Arabia, but it seems likely that projected demand will be met from existing supplies, at least through 1995. Potash. Supply/demand balances are given in Annex 3 and summarized in Table 3. It is projected that a large world surplus of potash capacity will prevail through at least the next five years, although this balance will decline slowly. Canada will remain the leading exporter, with a surplus potential of about 6.5 million tpy through 1991, and Eastern Europe will be second with a surplus of almost 2 million tpy. Other exports will come from Jordan and Israel. The main importers will be Latin America, the Far East and socialist Asia. - 16 - Table 3: SUMMARY OF REGIONAL AND WORLD POTASH BALANCES /a (Million Tons K20) 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 World Total 4.22 3.24 3.26 2.95 3.18 2.64 2.03 Developed ME /b 5.58 5.15 5.01 4.83 5.33 5.12 4.91 North America 5.57 5.22 5.08 4.86 5.28 5.08 4.89 Western Europe -0.23 -0.28 -0.26 -0.25 -0.21 -0.20 -0.21 Oceania -0.21 -0.23 -0.24 -0.25 -0.26 -0.27 -0.28 Others 0.45 0.44 0.43 0.47 0.52 0.51 -0.51 Developing ME -3.65 -3.57 -3.67 -3.85 -4.09 -4.35 -4.58 Africa -0.30 -0.33 -0.35 -0.37 -0.38 -0.40 -0.41 Latin America -2.01 -1.89 -1.94 -2.00 -2.08 -2.17 -2.26 Near East 0.50 0.50 0.53 0.58 0.57 0.56 0.55 Far East -1.84 -1.85 -1.91 -2.06 -2.20 -2.34 -2.46 Centrally Planned Economies 2.29 1.67 1.92 1.97 1.95 1.87 1.71 Eastern Europe 3.09 2.74 3.09 3.22 3.29 3.31 3.26 Socialist Asia -0.80 -1.07 -1.17 -1.25 -1.39 -1.44 -1.55 /a Supply Potential less Consumption. /b ME = Market Economics Source: World Bank/FAO/UNIDO Fertilizer Working Group 1988. Fertilizer Trade The main items of trade in fertilizers in the form of raw materials, intermediates and finished products are summarized in Table 4 (see Annex 3 for details). The structure of fertilizer trade has changed in recent years with the increasing use of countertrade, particularly with centrally planned countries. About 25% of trade is conducted through various types of barter deals, counterpurchasing or buy-back arrangements which will remain in place until there is a better balance of trade and debt relationship between producers and consumers. - 17 - Table 4: GLOBAL FERTILIZER TRADE (Million tons nutrient) 1960 1986 Phosphate Fertilizers (P205) 1.2 7.6 Nitrogen Fertilizers (N) 2.6 15.3 Potash Fertilizers (K20) 3.4 3.9 Phosphoric Acid (P205 0 3.8 Ammonia (N) 0 9.0 Phosphate Rock (as rock) 20.0 46.2 Source: Annex 3. The US is still the main importing and exporting country for nitrogen materials. It imports large quantities of ammonia, most of which are processed and exported as diammonium phosphate. Other large exporters are the USSR, the Netherlands, Romania and Canada. Major importers are China, Federal Republic of Germany, India and Iran. The types of nitrogen fertilizers traded have changed considerably in the last two decades. For example, ammonium sulphate and ammonium nitrate which comprised about 57% of the export trade in the mid 1960s today only account for 13%. On the other hand, urea, which was about 20% of the total in the mid-1960s now accounts for about 55% of total nitrogen trade. Urea is usually cheaper to produce and transport compared with other nitrogen fertilizers, and it is the preferred fertilizer for cultivation of wet paddy. The trend for new capacity to develop where gas is cheap is slowing down because of difficulties with financing and establishing export-based projects in developing countries where investment costs are high. Improvements in energy consumption in new ammonia plants in developed - 18 - countries and prospects of lower energy prices generally reduce the comparative advantage of locating plants near sources of cheap gas, particularly where high investment in infrastructure is required. A significant part of the world use of phosphates is based on imports of phosphate rock, phosphoric acid and phosphate fertilizers such as triple superphosphate (TSP) or diammonium phosphate (DAP). The industrialized countries were and are still the principal users of phosphate fertilizers. The development of concentrated phosphate fertilizers and intermediates favors the construction of large-scale phosphate processing plants near the rock source, and the major Western rock producers have all entered the processed phosphate trade which is dominated by the US and Morocco. No major changes in phosphate trading patterns are envisaged through the 1990s. The US is expected to maintain its position as the major exporter of phosphates, but its position relative to Morocco, Tunisia and Jordan is expected to decline somewhat. The major increase in imports will be in the Far East, socialist Asia (mainly China), Eastern Europe and Latin America. World potash trade was once dominated by Western European producers operating through a syndicate conforming to EEC regulations. This syndicate had an understanding with Eastern European producers to promote orderly marketing. With the development of large potash resources in Canada there was a rapid increase in exports from Canada, and by the mid-1970s only 60% of potash exports came from Europe (including the USSR). The export shares of Canada and the US grew to 20% each. By 1986, Canada had almost doubled its share of world trade and is likely to increase its dominance in the future. Potash demand in the developed countries has generally reached its long-term - 19 - limit, and most growth of potash use will take place in Southeast Asia and China. Potash consumption in these and other developing countries is now very low, but if the full benefits of the other two major nutrients are to be realized, potash use will have to increase considerably. Agronomic tests clearly indicate that at higher application rates there is significant synergy between nutrients: maximum benefits are achieved only by applying the correct quantities and ratios of nitrogen, phosphate and potash. Fertilizer Prices Trends of international fertilizer export prices since 1965 are shown in Annex 4. Clearly, these prices have fluctuated greatly over the last two decades. Prices of all fertilizer materials rose sharply during the so-called fertilizer crisis of 1974 but fell sharply the following year. Prices increased slowly until about 1980 when they reached a level that ensured a reasonable return on new investments. However, demand stagnated during the first half of the 1980s as additional new capacity came on stream, and there was a steady decline in prices until the end of 1986. Since then, prices have increased slowly. Generally, however, price levels are still below those required to justify new investment. Accurate projections of fertilizer prices are difficult because of the many imperfections in the market, such as: - 20 - (a) The limited numbers of buyers and sellers (b) Limited entry or exit of producers (c) Imperfect knowledge of market conditions and actual deals made (d) Effect of countertrade and barter deals. A recent paper by the World Bank 1/ describes these and other factors affecting fertilizer pricing. The world nitrogen fertilizer industry is dominated by Eastern Europe (mainly the USSR), which during the last few years has been prepared to reduce prices to very low levels to maintain markets simply to earn foreign exchange. In the case of phosphates, the market is dominated by the US and Morocco, and in the case of potash, by Canada and the USSR. China, Brazil and India dominate imports of all three nutrients. Easy entry to the industry is inhibited by the very large investment cost required for new fertilizer plants. Once built, plants are usually operated at high output to maximize contribution to the high capital charges. In addition, more than 60% of the world fertilizer industry is now government controlled and for strategic and social reasons is usually protected from free international competition. Thus capacity is not easily closed when the demand is reduced and prices tumble. Despite these obvious limitations to free trade, over time and from a global point of view the fertilizer market behaves like a free market: prices respond clearly to demand and supply signals. The price of nitrogen fertilizer is likely to increase more quickly than that of the other two nutrients in the next five years because they are closer to 1/ Fertilizer Producer Pricing in Developing Countries, World Bank Industry and Finance Series, No. 11, January 1986. - 21 - balanced supply and demand. As a result of expected new investments, nitrogen fertilizer prices in real terms could level off and even fall slightly before the mid-1990s. Because of current supply surpluses, increases in phosphate and potash prices in real terms will be more gradual. It would be useful to be able to predict prices more accurately than this, but much work remains to be done to understand the interrelationships of the global market, especially the links between the global food, fertilizer and energy markets and the political influences on these markets. The market is dominated by a few large exporters who take great care to protect their markets, using their trading strength to weather hard times, and a few large buyers who work equally hard to drive tough bargains and get the lowest prices commensurate with secure supplies. Smaller producers and buyers such as most African countries are at the mercy of these major market forces and can do little to influence them. They have to be very careful in assessing market trends to be sure to get the best deal for their exports and imports, particularly the degree to which they will set up processing facilities, given their high cost. In the recent past and for the immediate future, most small participants are well advised to forego major investments unless such investments are backed up by firm trading contracts. Even countries with large internal markets and their own sources of raw materials must be very careful in making new production investments. Agriculture Toward 2000: The FAO Study A revised version of this study by the Food and Agriculture Organization of the United Nations (FAO) was published in November 1987. The - 22 - main findings of the study as they relate to the use of fertilizers are reviewed here and summarized in Annex 5. The demand for agricultural products for all food and nonfood uses in the developing countries is projected to grow at 3.1% p.a. between 1985 and 2000, a lower rate than the 3.7% p.a. growth of the previous 15 years. The difference is partly explained by the slowing of the growth of the population: for developing countries it is projected to be 1.9% p.a. compared with 2.2% p.a. over the period 1970-85 and 2.5% p.a. in the 1960s. Crop production increases will take place due to increased arable land, cropping intensity and yields. Agricultural production currently takes place on around 770 million hectares at a cropping intensity of 78%. If the crop production projected to be needed by 2000 is to be achieved, arable land will have to be increased by 83 million hectares, cropping intensity will have to rise to 84%, and harvested land will have to be increased by 115 million hectares. Between 1985 and 2000, about two thirds of the needed increase of arable land will be accounted for by expansion of irrigation. Overall, average fertilizer application rates are projected to more than double by 2000. Irrigated areas will use 60% of all fertilizers, compared to the current 50%. The growth rate of fertilizer use in the developing countries is expected to be 4.7% p.a. through 2000 compared with 5.7% p.a. over the last 5 years. The highest growth rates are projected for Sub-Saharan Africa, although these rates reflect the currently low use of fertilizer. A small number of countries will continue to dominate fertilizer use in each region: Egypt in North Africa, Nigeria in Sub-Saharan Africa, Turkey and Iran in the Near East, Mexico and Brazil in Latin America and India, Indonesia, and China in Asia. Currently, more than half of the fertilizers are used for cereal - 23 - production: wheat and rice account for most use. The study emphasizes that the expansion of fertilizer use requires considerable investments in infrastructure for storage, transport and marketing. By 2000, fertilizer handling facilities in developing countries must double to an annual capacity of around 150 million tons of fertilizer products if farmers are to receive timely and adequate inputs. Long-term Fertilizer Demand Over the last two decades, a great deal of effort has gone into making long-term fertilizer projections, but success has been limited. More recently, demand projections have been made using econometric modelling and a range of different scenarios which try to include increasingly important political factors. Estimates of fertilizer growth rates and use through 2000 based on the Fertilizer Working Group's projections and taking into account projections from the World Bank Integrated Agriculture/Fertilizer Model are presented in Annex 6 and summarized below. The overall growth rates are modest and reflect stagnant, if not falling, growth in the developed countries as agricultural subsidies are removed and environmental constraints increase. There should be strong growth in the developing countries, with the expectation that food and fiber consumption will increase with steadily increasing incomes. Fertilizer Investment Needs Based on current projections for increased nitrogen demand and anticipated needs to replace existing plants, some projections have been made - 24 - Table 5: FERTILIZER DEMAND (Million nutrient tons in 2000/2001 and annual growth rate, 1985/86-2000/2001) Nitrogen (N) Phosphate (P205L Potash (K20) Tons % growth Tons % growth Tons % growth Developed ME 24.3 0.39 12.7 0.52 12.1 0.43 Developing ME 32.7 4.54 14.5 4.41 6.8 3.82 Centrally plan- ned economies 44.2 2.56 18.4 2.14 14.5 2.21 World Total 101.2 2.49 45.7 2.18 33.4 1.77 Source: The World Bank. of new capacity and investment needs for the period 1990/91-2000/01. In estimating demand the increasing needs of nitrogen for the industrial market and also investment needs for the replacement of old plants are taken into account. Nitrogen Supply. A balance between supply and demand is likely for nitrogen by 1990/91, and thereafter new capacity will be required to meet increasing demand. Fertilizer consumption is expected to increase by about 20 million tpy between 1990/91 and 2000/01, and allowance must also be made for increasing industrial nitrogen demand, which accounts for about 10% of all consumption. Most of the existing ammonia capacity in the world was built in the 1960s and 1970s. A significant part of it will need replacing or refurbishing in the 1990s. Information relating to the obsolescence and closure of old plants and the methodology of calculating investment needs is - 25 - given in the World Nitrogen Survey for 1987.2/ It is estimated that the equivalent of about 10 new, large ammonia plants of 1,350 tpd capacity, with downstream fertilizer plants and costing on average about $300 million each, will be needed each year after 1991 to meet future nitrogen demand. Total investment needs to 2000 could exceed US$25 billion. About 60% of new capacity will be in developing countries, mainly in the Far East, and also in Latin America, the Gulf states and Africa. About 30% will be built in the centrally planned economies, and only about 10% will be built in the industrial countries. This allocation is based on the World Bank Integrated Agricultural/Fertilizer Model which shows (Annex 7) the relative shares of the world nitrogen production by 2000. It is projected that the developed countries' share of production will continue to fall from about 35% in 1990 to about 22% in the year 2000. The centrally planned countries' share will remain steady at about 45%, and the developing countries will increase their share from about 20% to 33%. Phosphate Fertilizer Supply. There is probably sufficient processing capacity for phosphates to meet world needs through the mid-1990s. Most of the oversupply is in the US, and it is still not clear how much rationalization of capacity will take place there. Most new phosphate demand through 2000 will take place in the developing and centrally planned countries, and it is in these regions that 2/ World Nitrogen Survey, World Bank Technical Paper No. 59, Industry and Finance Series. - 26 - most investments in new capacity will take place. The largest demand for phosphates will be in the Far East, socialist Asia (mainly China), Eastern Europe and Latin America. The largest developments of new phosphate mines and production of phosphate fertilizers will take place in China during the 1990s. China has the raw materials to become independent in the production of phosphate fertilizers, and in its eighth and ninth five-year plans it hopes to increase production by about 4 million tpy of P205. The phosphate industries of Morocco, Jordan and the USSR should also expand steadily through the 1990s. There could also be some new developments in Australia, Togo and Egypt. Little new development is expected in the US and, although it will retain its position as the major producer and exporter of fertilizer, its relative position will decline significantly. Between 1993 and 2000, about 4 million tpy of new phosphate processing capacity will be required, much of it in China. The total investments needed for processing will be about US$4 billion, and additional investments could be needed to expand mining capacity if there is a supply constraint in that area. Potash Supply. Based on the forecasts of low growth of potash demand, particularly in the developed countries, there appears to be sufficient potash capacity to meet needs well into the mid-1990s. The supply forecasts do not take into account several million tons of additional capacity currently in the planning stages. If only a part of that comes on stream, there will be more than sufficient capacity to meet increasing demand well into the next century. There seems little likelihood of a shortage of potash during the next decade, and care will have to be taken to avoid further - 27 - overcapacity. In an attempt to control future production, the Saskatchewan provincial government has recently introduced legislation that would enable it to control the production of potash in the province, which now produces about 11 million tpy, about 30% of world capacity. If this Potash Resources Act is passed, it could play an important role in determining the availability and price of potash. With the exception of a Chinese project at Qinghai and possibly one in Northern Thailand, it seems unlikely that there will be any new potash production projects in developing countries in the foreseeable future. Total potash investment in developing countries through 2000 is likely to be less than $1 billion. Phosphate Rock Supply. In line with demand for phosphate fertilizers, phosphate rock demand is expected to increase by 2-2.5% per year. No major expansion of capacity is expected in the US where there may be a decline in production throughout the 1990s. Most of the increasing demand for phosphate rock will occur in Asia, and it is there that phosphate rock capacity will also increase. China has plans to increase phosphate rock capacity from about 12 million tpy to 30 million tpy by 2000. Jordan has already started development of a new mine at El Shidyia. It has sufficient reserves to be expanded to 9 million tpy by 2000 if market conditions permit. Morocco also plans to expand capacity to meet the need of new processing capacity at Jorf Lasfar scheduled to open in the early 1990s. There is currently a significant world excess capacity of phosphate rock, but this excess is expected to diminish slowly as mines become depleted and demand increases. No major new capacity will be needed until about 1992, and new - 28 - demand after that can probably be met by expanding facilities of the present suppliers. In the event that current revenues are not adequate to meet future needs in the second half of the 1990s, there are several major new deposits which have been evaluated and could be exploited. These deposits are in Egypt, Peru, Australia and Saudi Arabia. Sulphur Supply. Sulphur is an important raw material and major cost item in the production of phosphate fertilizers. The main suppliers of sulphur are Canada, the US, Poland, the USSR and Mexico. Sulphur has been in relatively tight supply over the last few years, and needs have been met from the large stockpiles in Canada. Reserve stocks of sulphur will be depleted in a few years, and the world will become more dependent on the large supplies which will be recovered from sour gas at Astrakhan in the USSR. Current projections indicate that there will be sufficient sulphur to meet needs through 1995 from existing or planned capacity. The only discretionary reserves that are available for expansion are in Poland, the US and Mexico. In the event that the sulphur situation becomes tight and prices increase, there will be more incentive to recover sulphuric acid from phosphogypsum. China, for example, has plans to meet as much as 25% of its sulphuric acid need from phosphogypsum. Commercialization of phosphogypsum will depend on the price trend for sulphur. Other Investment Needs Besides the investments in processing plants and mine facilities, other facilities are needed to ensure that the fertilizer reaches the farmers - 29 - in an economic and timely fashion. The considerable working capital needs of the sector are generally underestimated. Fertilizer is produced continuously throughout the year to minimize production costs, but the use of fertilizer is seasonal. Half the annual production has to be stored because, in most situations, only one crop per year is produced. The cost of this inventory is roughly the product of the amount stored (half the annual usage) and the average of the production cost and price delivered to the farmer. This is permanent working capital that has to be allowed for as long as the supply is maintained. The incremental investment needs can therefore be roughly estimated by multiplying half the increase in annual demand by the average price in the supply chain. Based on the above estimates of the increase in consumption, global working capital needs for the inventory increase to 2000 could exceed $10 billion. Marketing and distribution facilities like storage, bagging and transportation equipment are also needed at all stages in the supply chain. Much of the transport equipment will be provided by common carriers, but storage and bagging facilities are often dedicated solely to fertilizers. Besides the new facilities and equipment that will be needed to handle the increase in consumption, there is constant maintenance, rebuilding, and replacement required for existing facilities. Investments needed could exceed $15 billion. Other investments are needed to support the fertilizer investments such as gas lines to supply feedstock to new ammonia plants, townships to house plant personnel, schools to train the personnel, agricultural research facilities to determine the best application methods, and industrial technology development. - 30 - Investment Needs of Developing Countries It is possible to estimate the financial needs for the fertilizer sector in developing countries up to 2000 from this discussion. About 60% of new nitrogen capacity is expected to be in developing countries requiring about US$25 billion. Half of the new phosphate processing capacity is likely to be built in China at a cost of about US$2 billion, and other developing countries with phosphates are also likely to make investments. Potash investments in developing countries could amount to US$1 billion. Thus investments in production facilities in developing countries could total US$18 billion or more by 2000. Investments for permanent working capital, marketing and distribution facilities and other requirements could easily amount to the same figure, so that total needs could exceed US$36 billion. This is a considerable amount, and the World Bank Group's assistance could be requested in arranging part of the financing. The Effect of Future Energy Prices on the World Fertilizer Industry Energy is a significant cost component in the manufacture of chemical fertilizers, but its relative importance is different for each nutrient. For example, in the case of phosphate fertilizers where there are opportunities to effect heat recovery from the exothermic processes, the total cost of energy is normally less than 10% of all costs. There is, however, still considerable scope for saving energy in many older plants. In the case of potash, energy costs are about 15% or less of total operating costs for a "dry" sylvinite underground mine in Canada. The main energy requirements are for the operation of mining machinery and for drying in the beneficiation process. - 31 - Anticipated changes in process technology or in energy prices in the foreseeable future are not likely to affect ex-mine costs by more than a few dollars per ton. In the case of nitrogen fertilizers, production costs are much more dependent on energy prices, as hydrocarbons are used both as a source of energy for making electricity and steam and as a raw material for the process. Hydrocarbon prices vary significantly depending on type (gas, coal, or oil) and location. Generally the most efficient fuel and feedstock is natural gas, as unit consumption levels and investment costs are lower than for other hydrocarbons. More than 70% of all ammonia production is based on natural gas, and it seems likely that most new projects will also be based on natural gas. Annex 8 compares the cost of producing ammonia for different fuel types and prices. Natural gas prices vary considerably throughout the world, normally within the range $0.5-5.0 per million BTU, and as a component of ammonia or urea production costs, energy costs can vary from 10% to about 70% of the total. For most of the nitrogen industry, the price of gas has stayed well below the equivalent price of energy from oil. It is estimated that about half the world's ammonia capacity has a gas price of $1.0/MM BTU or less. For the last few years, there has been a strong move towards nitrogen production in countries where gas is very cheap, mainly in the developing and centrally planned countries. Associated gas that has to be flared and natural gas for which there is no alternative use are often available at low prices for - 32 - fertilizer production. Most export nitrogen fertilizer trade is based on such cheap gas, and experience in the last few years indicates that only those companies that have low gas costs can survive the price fluctuations in the international market. As a result, more than 6 million tpy of ammonia capacity in the developed countries were closed in the early 1980s. The decrease in energy prices since then has made some existing plants more competitive, particularly in developed countries where many plants have been refurbished to incorporate energy saving processes. It is expected, however, that the present trend of building export-based plants where the gas is available at low cost will continue. The Impact of Genetic Engineering on Fertilizer Use The question is often raised whether biotechnology and genetic engineering will have an impact on future fertilizer use. Considerable progress is being made in crop genetics, and new, higher-yield varieties resistant to disease and insects are being developed. However, like current varieties, these new varieties still require chemical fertilizers. Developments in this area are not likely to affect fertilizer use significantly in the short or medium term. In some cases where future varieties make it possible to use crops on marginal land, fertilizer use could actually be increased. There are developments still in their early stages that could create new plant varieties that will require less fertilizer. Examples include varieties which have greatly increased efficiency in the utilization of phosphate or potassium in the soil, and plants that can fix atmospheric - 33 - nitrogen. In theory, it is possible to make root-associated organisms that are especially efficient in utilizing soil phosphate reserves and rock phosphate with minimal treatment. It is possible to make such micro-organisms absolutely dependent on special substances excreted by the plant roots, and such traits may be introduced into plants with current genetic techniques. Less speculative, however, is microbial nitrogen fixation such as the Rhizobia that live in legumes like beans and peas. The study of nitrogen fixing organisms is probably one of the most active fields in present genetic research. Current research suggests that soybean nodules and legumes can probably be improved, but the impact on fertilizer use is not likely to be significant. Calculations relating to nodulating cereals indicate that because the biological fixation process is energy-demanding, it would only make economic sense if fertilizer prices were very high and crop prices very low. Normally in the developed countries it would be more profitable for the farmer to use fertilizer to maximize yields rather than use plants which have a nitrogen fixing property but would result in a lower yield. However, it may be that in some developing countries such nitrogen-fixing plants could be of benefit. Another long-term possibility may be the genetic engineering of nitrogen-fixing plants which fix nitrogen in the leaves rather than in the roots. In this case, the leaves would usually have sufficient energy to fix the nitrogen but because the presence of oxygen makes the nitrogen-fixing - 34 - enzymes inactive, such a long-term solution may not be possible unless oxygen- tolerant enzymes can be developed. Much effort has gone into nitrogen-fixing enzymes, but there are still many fundamental problems to be solved before the technique can have a significant impact on fertilizer use. The techniques are still very much at the laboratory stage of experimentation. Even if major breakthroughs occur in the next few years, it will take many years for them to be widely applied in practical farming and significantly reduce the need for chemical fertilizers. It is unlikely that the developments will be so rapid as to make obsolete new investments in conventional fertilizers even though they have an expected economic life of 20-25 years. Environmental Considerations There are two sets of environmental concerns regarding fertilizer: those that are related to its production and transportation and those associated with its use. The industrial processes that produce fertilizer also produce liquid, solid and gaseous effluents which usually have to be treated to reduce their harmful effects on the environment. Producers are motivated to treat these effluents when the economics of nutrient recovery justify such treatment. In other cases, legislation and monitoring are necessary to see that standards are met. The expense of meeting these standards can add significantly to the investment costs of fertilizer plants and hence to the overall cost of producing fertilizers. The use of double absorption on sulphuric acid plants, the removal of fluoride compounds, the safe disposal of phosphogypsum from phosphoric acid plants, and the removal of - 35 - NOx from nitric acid plants are typical examples of additional investments required to deal with effluents. There are also some problems associated with the storage and handling of fertilizer materials. For example, ammonia is the building block of the nitrogen fertilizer business. It is extremely toxic, and when it is stored in large quantities as a liquid, either under pressure or at low temperature, it represents a major safety hazard. Great care has to be taken in the design and location of large-scale ammonia storage facilities to protect the local community. Ammonium nitrate, a major fertilizer in Europe and the US, must be produced, stored and transported under controlled conditions to avoid explosive decomposition. There are several major problems associated with the use of fertilizers which are receiving increasing attention of environmentalists. When fertilizers are applied at high rates and in an unbalanced manner, excess nutrients may be leached out of the soil and contaminate groundwater supplies. In some cases this results in eutrification of ponds and lakes. Another and more serious problem relates to the build-up of nutrients in drinking water. High levels of nitrate in drinking water have been known to cause methemoglobinemia in infants ("blue babies"). More recently, it has been suggested but not yet substantiated that nitrates may also increase the incidence of cancer in humans. The problem is therefore being taken very seriously in certain parts of the world, particularly where nitrogen fertilizer application rates are high and where there is a danger of nitrates leaking into drinking water. Recommendation have been made for EEC countries that nitrate levels in drinking water should be maintained below 25 mg/liter. Recommendations to handle this problem include limiting total nitrogen fertilizer application in both organic and inorganic fertilizers to well below - 36 - 200 kg/hectare. Similar legislation is being discussed in the US. In the EEC, consideration is also being given to limiting the use of some phosphate fertilizer produced from phosphate rock containing high quantities of cadmium. It is believed that there may a danger that cadmium, a toxic, heavy metal, will enter the food chain and eventually harm the human consumer. However, these concerns have not yet been substantiated. There may be a long-term impact in the increasing use of nitrogen fertilizers if, as some believe, they contribute to the emission of nitrous oxide, one of the greenhouse gases responsible for reducing the ozone layer. It seems likely that further investigation of this subject may call for recommendation for a better choice of fertilizers and better placement at the crop roots to reduce these emissions. Fertilizer producers and users have a built-in self-interest to prevent environmental damage. Where existing production and transportation facilities are causing pollution, the cost of retrofitting can be high. Financial and technical assistance may be needed to help owners install waste- prevention systems. This is a feature of the World Bank's work that deals with the rehabilitation of existing plants. Excessive fertilizer use is not yet a major problem in developing countries, but overuse in developing countries will increase. Regulatory systems will need to be developed to deal with the problem before it occurs. - 37 - IV. MAJOR NATIONAL POLICY ISSUES Purpose and Background This chapter discusses the most important policy issues identified in recent World Bank operations and gives examples of how the issues have been dealt with. A case-by-case approach has evolved to handle policy matters. The policy environment differs markedly from country to country and changes over time within each country, sometimes quite rapidly. It has not been possible to formulate clear rules to handle policy discussions with governments, and this is not likely to be happen soon. What seems generally true is that the private sector works more efficiently than the public sector, and that the market is a better allocator than centralized regulation, as is true of most economic activities. The political economy of the fertilizer sector is complex and varied. In one nation, the farmers might be well organized and able to extract many concessions. In another, consumers in the town, accustomed to lower-priced, subsidized food, may be able to exert bargaining strength. The social welfare aspects of providing fertilizer subsidies to farmers cannot be disregarded. Fertilizer subsidies are found in some nations to grow and fall with the timing of national elections. A reduction in fertilizer subsidies could change cropping patterns, deprive many farmers of their livelihood and increase migration to cities. - 38 - Public ownership of fertilizer facilities is not always detrimental. In Turkey, liberalization and privatization of fertilizer distribution and rationalization of the factories was accomplished with relative ease, in part because much of the system was publicly owned. The overriding political and social risks associated with relying on imports often compel governments to keep high-cost local plants in operation. While political realities have to be understood and dealt with, recent fertilizer sector work shows that the national policy environment can be discussed effectively only when World Bank and local staff master the specifics of the cost and price structure from foreign markets and raw materials all the way to food production. This approach, although complex, opens several important avenues of analysis. For example, even a crude comparison of value added at domestic prices and world prices gives broad indicators of the level of effective protection and, hence, the current competitiveness of the local industry. In the following discussion, some examples of recent findings of World Bank sector work illustrate the range of intricate and delicate issues that are involved and point out the sort of policy dialogues that are emerging. Although the subjects are ranked in some order of importance, no attempt is made to explore them exhaustively. Most deserve detailed study. Fertilizer Subsidies The most confusing and time-consuming fertilizer policy issue is subsidies: what they are, why and where they arise, and how best to deal with them. Much time can be wasted by trying to deal with one apparent - 39 - manifestation of fertilizer subsidy apart from the perspective of the whole fertilizer chain. Considerable debate is necessary to identify which sector- -energy, industry, or agriculture--will prove to be the most appropriate instrument for fertilizer subsidy reform. The distinction between "economic" subsidies, in which factory prices are below estimated import parity, and "financial" subsidies, where the state covers regulated transactions which do not meet full financial costs, can be difficult to disentangle, but patient investigation can prove fruitful. Vested interests often try to ensure that budgetary transfers are never directly identified with inefficiency, excess profits on the part of producers and distributors, or specific benefits for specific categories of consumers. A detailed, quantitative disaggregation of subsidies into energy, industry and agricultural components is essential in order to understand subsidy issues so that substantial dialogue to take place within each country and practical, monitorable approaches toward subsidy removal can be developed. When fertilizers are produced, imported and distributed inefficiently, the costs over and above world prices must be met either by relative overpricing (taxing farmers, whose strong-political clout often prohibits this approach), burdening the budget (taxing the community at large), or underpricing the nation's natural resources used as fertilizer inputs (ultimately, taxing future generations). This basic concept may seem elementary, but in practice it is often ignored. For example, several countries have recently tried to reduce fertilizer subsidies without raising the official farmer prices. The unintended result is often scarcity, because less material is brought to market for the lower price received by the - 40 - sellers. Secondary-market leakages occur at higher prices and are often manipulated by the relatively rich farmers. One major item which many developing countries tend to leave out from their cost calculations is the cost of providing infrastructure, especially gas pipelines and transport systems. It is quite common for incremental gas distribution facilities to be proposed to energy authorities on the basis of an alleged demand from the fertilizer industry at a gas price which allows the additional fertilizer capacity to be justified economically but which covers only the variable costs of gas. Transport systems are often inadequate, with overextended rail systems, improper warehousing and poor rural road systems. All can add considerably to the delivered cost of fertilizer and, more important, they can cause untimely delivery. Fertilizer is often supplied to farmers at subsidized prices. Subsidy policies have received great attention within the Bank, and several sectoral adjustment operations, especially in Africa, have resulted in a very simple policy deal. Governments give time-bound commitments to align their domestic farmgate fertilizer prices to international levels, and the Bank pledges financial assistance to bridge the progressively decreasing gap. It is a moot point whether the Bank's offer of transitional financing, which temporarily relaxes acute government budget constraints, actually achieves faster or slower price alignment to cost realities. Nonetheless, dramatic fertilizer price increases have been passed through to farmers by several of our borrowers in the last five years. Subsidies were virtually eliminated as simultaneously world fertilizer prices fell. Such adjustments have occurred among several poor Sub-Saharan African countries, while subsidies in prominent - 41 - Asian and Latin America countries remain and, in some cases, are rising in absolute terms. Generating a wide, cross-sectoral perspective on fertilizer farmgate subsidies should have high priority. A more detailed discussion is provided in Annex 10. The adjustment of distorted input prices to market levels can be painful and politically sensitive, especially as world fertilizer prices now seem to be rising again. The moving average of world prices can be used to make the adjustment more gradual. Market-related, largely deregulated consumer pricing systems need to be installed because the subsidy bill is beginning to rise again in many countries. If the phasing out of fertilizer subsidies is synchronized with determined efforts to improve the efficiency of fertilizer use and improve crop yields, higher fertilizer prices to the farmer (as a result of subsidy reduction) do not always depress the demand for fertilizer, even when crop prices remain unchanged. In some cases, subsidized fertilizer prices are so low that they can be increased substantially without adding much to crop production costs. A doubling of fertilizer prices in Egypt was found to add only 10% to crop production costs. There is much work to be done on the subject of subsidies before it can be fully understood. There are circumstances, for instance, when the no- subsidy rule should be suspended, as where food security is precarious. Comparisons should be made of the effectiveness for achieving farm production targets of input subsidies versus price support schemes. The effect of subsidies and price supports in the industrial countries on global agriculture - 42 - is often overlooked. The high cost to farmers of using concentrated fertilizers at high application rates creates risks which can be lessened by such devices as crop insurance schemes. Farmers would not risk bankruptcy in the case of crop failure caused by circumstances beyond their control. Farmers also need a better understanding of their technical and economic choices regarding type, quantity and timing of fertilizer applications in order to make informed decisions about what they will buy. And finally, the complex question of food and fertilizer self-sufficiency needs to be studied more deeply because it forms the basis of the political argument for providing the subsidies in the first place. These and other aspects of the subsidy question require a depth of analysis well beyond the scope of this paper. Pricing Pricing policy is directly related to the subsidy issue. It is only after a thorough examination of the major factors affecting protection and competitiveness that a discussion of prices becomes meaningful. There is a dual role for fertilizer prices: they are a signal for resource allocation at the industrial and energy subsector levels, and they also regulate food prices by controlling farmgate prices. It is helpful conceptually to investigate price policy scenarios from both of these viewpoints, but the inherent conflict between them is not easy to resolve. Fertilizer and feedstock prices at the plant gate are often directly administered in developing countries and are not allowed to adjust freely to the market. In cases such as Indonesia and Mexico, the public sector is both the largest (or only) seller and intermediate buyer of fertilizers. Factory - 43 - prices are therefore not competitive efficiency signals, but function as accounting and budgetary mechanisms for transfers to and from different entities in the consolidated national budget. Imports are often filtered through the same budget, and profits and losses from trade are usually absorbed within the state system and not passed on to farmers. Quantities, not prices, are the primary planning instrument. In this respect, the management of the fertilizer industry in many nonsocialist countries has many of the features--and inherent problems--of centrally planned economies. However obscured by trade barriers, domestic monopolization, and the pervasive public utility climate surrounding the industry, the truth remains that chemical fertilizers are traded commodities. World market prices, however projected into an uncertain future, are the only relevant standard for evaluating investments. From the standpoint of the make-or-buy decision, it matters little that low international prices result from unfair trade practices or input subsidies elsewhere in the world. It matters only whether this opportunity is likely to persist over the relevant time horizon. This is not always an easy point of view for World Bank staff to defend, but it must be done. Accurate and reliable price projections are extremely difficult to make. The great volatility in the market is caused by the uncertainties of global agriculture, which is dependent on the unpredictable changes in climate and weather and is also subject to political whim. To prepare sound price forecasts, it is necessary to analyze the underlying food and crop markets with greater accuracy to understand fertilizer demand and then match demand with fertilizer supply, which isquite reliably known today. Current work in - 44 - the World Bank's International Commodity Markets Division of the Policy, Planning and Research Department is a good base on which to build enhanced studies. Many would-be borrowers and even private investors advocate use of the full or long-run marginal costs (LRMC) of the most efficient producer with respect to location and process as a proxy for estimating future world market prices. This approach could be used with caution where demand and supply are likely to be in balance over the relevant horizon, such as for a urea plant committed today and coming on stream in 1991/92. But the LRMC is no guide to the optimal timing of investments and is very misleading for commodities expected to be in chronic surplus over the relevant period. For existing plants, regulated factory prices have to be compared with import prices. If variable costs cannot be covered, production should cease or at least, as a compromise, be phased down. Even writing down labor costs to zero rarely justifies continued production because labor costs are only a small part of total costs. Where variable costs can at least be covered when compared to import prices, financial restructuring should be investigated to bring down capital changes especially by reducing debt service costs. Innovative financial restructuring is often an appropriate solution, but basic underlying economic viability must always remain the ultimate test. Other Issues Obstacles to free trade such as overvalued exchange rates, explicit tariffs on imports and nontariff barriers tend to protect the status quo in - 45 - developing countries, which are all largely dependent on imports of one sort or another. Licensing and quota restrictions also create problems, as do hidden tariffs such as excessive port charges and distribution levies. Technical standards for fertilizer products can also be an important factor, ultimately amounting to a hidden but effective import ban. Tied financing also limits many African and some Asian countries overwhelmingly dependent on aid financing for fertilizer imports while aiding fertilizer firms in the donor countries. Even where explicit rules of origin do not apply, bureaucratic procurement procedures and payment lags turn aside otherwise aggressive quotations by suppliers for the usually relatively small shipments involved. Aid-financed fertilizer is not without other drawbacks: there is not always coordination between donors deliveries are sometimes so late that the fertilizer arrives after the application season. The fertilizer types are not always best suited to local agronomic needs. Shipping rules which specify the use of donor flag vessels add to transportation costs, and limited bidding under tied aid results in higher prices than could be obtained in the open market. Distribution monopolies, at the import, wholesale, and even retail stages also produce distortions. For example, in Indonesia, Bangladesh and, until recently, Mexico, the existence of a single public-sector company makes it easy for the Government to insist that several months' supply of stocks be available at all times and in the remotest locations, no matter what the cost. A large budget subsidy has to be given to the distribution network to absorb the inventory costs, usually only for the benefit of a relatively small minority of farmers. For Burkina Faso, the dominant buyer and de facto - 46 - monopoly wholesaler of fertilizer is the Cotton Development Authority, which imports a cotton-specific NPK compound, including valuable micronutrients. Until recently, it was all but impossible to obtain any other fertilizer formulation in the country. Consequently, anyone growing anything else- -eucalyptus nurseries, fruit plantations or food staples--in totally different soils and microclimates had to apply a suboptimal, inappropriate, high-cost product. However, public distribution monopolies are sometimes easier to liberalize than private oligarchies, as is happening in Mexico and Turkey. Use of local raw materials is sometimes excessive and uneconomic. The use of Domestic Resource Cost Analysis is a powerful tool in analyzing the cost of fertilizer self-sufficiency goals with countries which discount the cost of local resources used to save fertilizer imports. This discount is rarely made explicit, much less compared to alternative dollar returns of applying the same local currency investment elsewhere. When it can be demonstrated that it takes many times more rupees or pesos to generate one dollar in this way than to buy the dollar outright with earnings from more efficient sectors, the discussion acquires a clearer focus and becomes more persuasive. Closing inefficient plants in the public sector is often a problem. Even though fertilizer plants require a very low labor input, many loss-making fertilizer plants are kept open because of political concerns over unemployment. Often, the government is burdened with the debts of plants that should close, and there may be some economic sense in keeping them open if the variable economic costs are covered. Exit regulations need to be developed including the legal framework of bankruptcy, which did not exist until very - 47 - recently in some countries. The political will to close inefficient plants can be strengthened by looking for feasible and economic replacement investments which can be supported by sound economic analysis. Some inefficient plants can be phased down with their labor force kept virtually intact, in effect operating them on a maintenance-only, near-mothballed basis and achieving most of the economic savings of closure with far less political pain. For example, the drop in TSP value relative to phosphate rock and sulphur over the past few years resulted in negative value added for TSP plants, but this ratio is again becoming positive as TSP prices increase. In phosphate plants in Indonesia, Bangladesh and Turkey, the recommendation was that the operators be given the responsibility to decide to make or import product depending on international price levels, and in India, temporary closure for several inefficient nitrogen plants was recommended when cash costs exceed landed costs of imported urea. In Mexico, 7 out of 56 plants were closed recently as being nonviable and 22 are being examined for closure. The regulatory environment needs to be carefully examined for its effect on capital costs. The rules that determine location and timing of investments, licensing of capacity, choice of technology and procurement strongly influence the costs of new fertilizer capacity. Two closely comparable installations using similar feedstocks at economic prices may appear quite attractive against world prices in one country (e.g., Indonesia), but marginal in another (e.g., India). There is some evidence in both India and Mexico that significant savings would be possible in capital costs if the licensing, design and procurement of new fertilizer plants were subject to fewer bureaucratic controls, even when domestic content requirements are not lowered but competition in supply is actively promoted. - 48 - Quality control is frequently poor in developing countries. Proper labeling, quality checking at each stage of distribution, and the setting of national standards are needed to inspire the confidence of the farmers in the efficacy and importance of fertilizer. The internal terms of trade between manufacturing and agriculture in the fertilizer sector are an issue which is only vaguely understood. The fact that most countries have a cheap food policy turns the internal terms of trade against agriculture in favor of manufacturing. Little analysis has been done to examine what this means and what impact it has on the whole fertilizer supply chain. The final consumers--the farmers--are all too often left out of the discussion of efficiency and profitability in the decision making that determines key policies like pricing at the various points in the supply chain. The needs and financial position of the farmers deserve greater weight in the decision-making process than they now have, especially the way they cope with short-term fluctuations in the fertilizer market. Conclusion This brief analysis of the issues shows that much remains to be studied before a real understanding of the fertilizer sector can be developed. Industrial and agricultural experts need to work closely with one another to understand the prerogatives of each other's special domain. Such cooperation is difficult in most organizational situations since the two sectors are usually isolated from one another, and the experts are already overwhelmed dealing with the needs of only their own respective sectors. Vital - 49 - cooperative effort can take place only where deliberate steps are taken to break down organizational barriers. - 50 - V. WORLD BANK ASSISTANCE FOR FERTILIZER DEVELOPMENT History The first World Bank operation in fertilizer development was in 1953 in Iceland, for a small ammonium nitrate plant based on electrolysis of water. Three operations were done in the 1960s: Dead Sea Potash in Israel, a potash mine in the Congo, and the Dawood Hercules urea plant in Pakistan. Although the loan operations were handled by the Bank, the technical and financial appraisal of the projects was done by the IFC's Engineering Department. In 1969, fertilizer project preparation, appraisal and supervision were moved to the Bank's newly created Industrial Projects Department, where they remained until the 1987 reorganization. The IFC has continued its involvement in the fertilizer industry in several projects beginning in the 1960s and remains active in the sector at present. World Bank activity picked up considerably in the 1970s, matching the growth of the global industry and especially the desire of developing countries to become self-sufficient in food and fertilizer. Thirty-two fertilizer industrial loan and/or credit operations were made from 1970 to 1979, 26 for major new plants. Of the 32 fertilizer projects financed by the World Bank since 1980, only 8 have been for new plants. The other projects are for either engineering and pilot work on potential new prospects or rationalization and rehabilitation of existing facilities. During the period 1972-85, the Bank examined some 38 proposals for setting up new plants, but none were approved, usually because they were found not to be economically justified: a major - 51 - part of the Bank's fertilizer work involves persuading borrowers to forego unwise or excessively risky investment projects. A study by the Operations Evaluation Department of 14 of the plants built with World Bank financial assistance showed that 7 had achieved sustainability--the ability to operate with little outside assistance and to carry out expansions--and another 5 would do so once some solvable technical problems were removed. The report referred to the Bank's crucial role as arbiter, monitor and quality controller of the technical aspects of the projects and recommended that the Bank enhance this role where possible. Approximately US$3.4 billion in World Bank loans has gone into industrial fertilizer projects, which now account for about 15% of the fertilizer capacity in developing countries and about 4% of global capacity, as shown in the following table. A list of fertilizer projects financed by the Bank is given in Annex 9. In some cases--urea in Indonesia, for example--the Bank was a crucial catalyst and bears considerable responsibility for launching the fertilizer industry there. In Romania, the Bank played a key role in reshaping the product mix and upgrading technology of the fertilizer industry. The IFC has financed seven projects with a total capacity of about 0.5% of global capacity. Its financing amounts to about $200 million and supports private involvement in the sector. The World Bank has also been involved in the agricultural aspect of fertilizers for some time. Agricultural credit, smallholder improvement and rural and cooperative development projects often emphasize the supply of modern inputs such as fertilizer, improved seeds, pesticides and mechanization for small-scale farmers. These operations date back to the 1960s, and lately - 52 - Table 6: FERTILIZER OPERATING CAPACITY, 1988/89 (million tons) Developing World countries Nitrogen Total 117.1 28.1 Bank-financed 4.4 /a 4.4 % Bank-financed 4.2 15.6 Phosphate Total 36.3 10.2 Bank-financed 1.6 1.6 % Bank-financed 4.4 14.8 Potash (Potassium chloride) Total 37.8 0.9 Bank-financed 1.2 .1k 0.8 % Bank-financed 3.1 88.9 Phosphate rock (Rroduct) Total 190.0 77.1 Bank-financed 1.5 1.5 % Bank-financed 0.8 1.9 L Includes one plant in Portugal and one in Romania. /b Includes expansion in IsraeL. Source: Annex 9. they have become even more focused on ensuring the availability of such inputs. The ongoing agricultural sector adjustment operations in Kenya, for instance, emphasize improving imports and distribution of fertilizer and other farm inputs. World Bank activity has shifted significantly in a third direction, the financing of fertilizer imports, both directly and under adjustment - 53- operations. From modest beginnings in late 1980, 6 loans totaling $620 mil- lion have been made for direct fertilizer imports to Pakistan, Malawi, Nigeria, Yugoslavia, Hungary and Mexico. Fertilizers, crude oil and petroleum products are major items on the import bill of many countries, and these are often the items financed by SALs and SECALs. The combined effect of Bank activity in fertilizers for the last several years has emphasized underpinning and expanding demand rather than contributing to oversupply through capacity creation. The World Bank is also involved in fertilizers in other operational activities: mining operations dealing with phosphates, potash and sulphur- bearing materials are directly related to the fertilizer industry, as are hydrocarbon developments for the production of ammonia. There have been a number of transportation operations dealing with the shipping, port handling and wholesale movement and storage of fertilizer materials, notably in Indonesia. Unconventional fertilizers such as those based on composting organic wastes with or without the admixture of chemical fertilizers or locally available phosphate rock have received attention in land-locked African countries which have few other sources of nutrients. Pilot projects in Burkina Faso and Burundi are under way, and others have been studied. These and other studies show that improved composting of organic waste through the addition of innoculants and chemical fertilizers is an effective way to restore the fertility of eroded soils, increase uptake of nutrients by plant roots, reduce requirements for chemical fertilizers, insecticides and herbicides, and improve crop quality. This approach is particularly appropriate in Sub-Saharan Africa where widespread soil degradation exists. A regional program is being developed there to expand the use of organically - 54 - based chemical fertilizers. The environmental aspects of fertilizer production and use have always received attention, and this activity is intensifying and expanding under the current heightened sensitivity to environmental considerations. Activities include pollution abatement when retrofitting older plants, designing pollution prevention into new ones, and taking care to avoid soil degradation and excessive runoff from fertilized fields. Fertilizer Sector Loans Only a small percentage of staff effort is now devoted to preparing projects involving new fertilizer plants. The increasing complexity of fertilizer loan operations is demonstrated by the fact that most staff time now goes to sector work, restructuring operations, and rehabilitation and distribution projects. This reorientation of activity has resulted in the evolution of a new type of operation, the Fertilizer Sector Loan. The whole commodity chain and broad policy issues are addressed together in exchange for Bank financing of investments and recurrent costs. The Mexican Fertilizer Sector Project is typical: a US$260 million loan was made, $200 million to finance 2 years of imports of fertilizers and fertilizer raw materials against an agreed policy reform agenda. The remainder of the loan funds will be spent to rehabilitate and improve production and distribution facilities. Closely monitored action to implement this package will precede further Bank financing for fertilizer plant replacements. Significant sector management and policy issues being tackled include pricing, liberalization of distribution, and closure of inefficient plants. Preparation of the loan involved close work - 55 - among industry, energy, infrastructure and agricultural staff of many divisions. The Kenya agricultural inputs operations referred to earlier has similar characteristics. Like the Mexico project, it deals with the practical problems of assuring fertilizer delivery at reasonable costs and with improved reliability, particularly to smallholders. It also tackles major sector and policy issues. Project leadership was provided by one of the agricultural divisions, and fertilizer expertise was supplied by consultants and FAO. A number of agriculture-based projects--the Burkina Faso Fertilizer Assistance project, for instance--were aimed at reducing input subsidy distortions and raising domestic prices in exchange for financing imports and applied research on fertilizer application. Restructuring Programs Financial and physical restructuring of large production and distri- bution companies is frequently necessary, and the World Bank is assisting such efforts, notably in Mexico, India, Pakistan, Bangladesh, Indonesia, Egypt, Turkey, and Zambia. Many national fertilizer firms are technically bankrupt, or at least heavily indebted. Most are overstaffed, and many plants run at less than optimum capacity. Technical and energy conservation improvements are often needed, and equipment and technology need to be modernized. While the need for restructuring is clear, the financial role of the Bank is limited since it cannot provide all or even most of the funds needed. What the Bank can and does do, however, is induce suppliers of equity and loans to participate by assisting with technical analysis and financial engineering, - 56 - lending intellectual support to establish technical, financial and economic criteria by which to set goals and monitor the performance of the enterprise. Technology Development and Transfer With a few notable exceptions, the developing world has not kept pace with the rapidly changing technological innovations that have characterized the fertilizer industry over the past few decades, especially with energy con- servation and large-scale, high-technology process units, the two most important factors influencing economic viability. The World Bank is helping design and support technical assistance programs to improve access to and transfer of modern technology, to improve regulatory policies, and to upgrade local engineering and capital goods industries. A particularly effective approach is through industrial energy conservation operations that include fertilizer as one of the focal points. This is being done in Indonesia and Bangladesh and is under consideration in India. Conclusions This brief review of recent World Bank fertilizer work shows how important it is to integrate industrial and agricultural activities by explicitly recognizing the linkages between the various parts of the fertilizer business. Much valuable time is saved by pursuing policy and project ideas which stand up against the broader background of the total sector. Agricultural work which passes over local fertilizer manufacturer can be as misleading as industrial operations which are not fully cognizant of the real needs of the farmers. It is not necessary to wait until everything is in - 57 - place and all aspects of the sector are fully analyzed and understood. In practice, it is often useful (and even necessary) to tackle problems one at a time while keeping the larger picture in mind. The overall Fertilizer Sector Loan is likely to be feasible in the short term in the larger countries which have significant fertilizer business and where the Bank has a history of assistance. - 58 - VI. THE FUTURE ROLE OF THE WORLD BANK There is clearly a role for the World Bank and other international organizations in the global fertilizer business. Because of its track record and its international reputation as a major participant, the Bank is likely to remain deeply involved in activities that ensure a reliable supply of fertilizers with ever-increasing efficiency. Based on the Bank's objectivity, its broad understanding of the business in all its aspects, and its proven ability to influence both national and global developments in fertilizer supply, the Bank has as important a role in the future. There is an obvious need for external, disinterested international bodies like the World Bank to monitor the global production, trading, and consumption system. Barriers to efficiency such as the oligopolistic nature of the international business and the heavy hand of state control and government interference need to be taken into account. Two main lines of activity can be foreseen: those that deal with specific loan operations and those which enable the Bank to deepen its technical understanding of the fertilizer business. Most of the work will be concentrated on loan operations, but considerable effort needs to be expended to improve the understanding of the technical and economic linkages between the various parts of the fertilizer sector, both internationally and within individual countries. There is considerable scope for increased cooperation among the international agencies. - 59 - Lending operations are likely to fall into three main categories: (a) Fertilizer sector loans in which the whole sector is kept under review and a series of loans is devised to deal with priority needs. Sector loan operations may also be built up gradually from components by dealing with individual parts of the sector one at a time, and would typically include restructuring of the sector. (b) Fertilizer import loans which are done directly or as part of struc- tural adjustment lending. (c) Agricultural project loans which emphasize the supply of inputs to farmers. In these operations, fertilizer will be only one of many components, but it will probably be the most costly and require the major part of the foreign-exchange needs. Technical research activities will be of two main types: (a) Continuation of current work like participation in the World Bank/ FAO/UNIDO Fertilizer Working Group, modelling and price forecasting, and detailed attention to the engineering aspects of production. (b) New activities such as improving agronomic and soil science skills and heightening awareness of the environmental effects of fertilizer production and use. - 60 - Much remains to be done to improve these activities, and the Bank will have to seek ways to do so on its own and in joint operations with other development agencies. Areas requiring special attention to improve current operations and those expected in the near future are summarized below: (a) Fertilizer import operations need to be improved by: (i) ensuring that open, credible and efficient procurement systems are installed, (ii) moving to bulk transportation and handling as much as possible, (iii) encouraging a competitive private sector to develop, (iv) installing monitoring systems to measure the success of the import operations, and (v) putting imports on a self-sustaining basis by directly linking the increased agricultural yield to payments for subsequent imports. (b) Marketing and distribution aspects of fertilizer sector operations need more attention, particularly: (i) the comparative roles of granulation plants versus blending and bagging units, - 61 - (ii) ways to handle the skewed movement patterns of fertilizer which has a very short application period, (iii) improvement of the links between product development and formu- lation and extension services, (iv) greater involvement of fertilizer production companies rather than agricultural ministry agencies in marketing and distribution, and (v) increased privatization of the systems. (c) Fertilizer in Africa deserves special attention since Sub-Saharan countries consume only about 6 kg of nutrient per hectare compared with 17 kg for Africa as a whole, 32 kg for Asia, and 90 kg per hectare worldwide. These low levels of consumption are symptomatic of the many problems that plague African agriculture. Matters that need particular attention to improve fertilizer supply are: (i) ways to reduce the price African farmers pay for fertilizer (often two to four times world market prices) by improving importing, marketing and distribution, (ii) rehabilitation and expansion of fertilizer manufacturing and handling facilities, - 62 - (iii) increased use of local materials where feasible, and especially the integration of fertilizer with composting and other soil enhancement techniques, (iv) greater regional and interregional cooperation, and (v) greater cooperation among development agencies, particularly FAO, IFDC, and private and public bilateral agencies. (d) Agronomic expertise needs to be built up, particularly in the soil sciences so that: (i) reliable, up-to-date, and credible fertilizer application recommendations can be devised and monitored, (ii) additional soil enhancement materials such as lime, compost, magnesium, sulfur, and micronutrients can be considered, and (iii) soil fertility and integrity are safeguarded. (e) Process and environmental technology skills must be maintained and enhanced, particularly regarding: (i) new ideas for small-scale ammonia and urea plants which can compete with larger-scale ones, (ii) new processes for nitrophosphates, urea, and phosphogypsum, and - 63 - (iii) clean-up of pollution in old plants and prevention of it in new plants. (f) Global fertilizer intelligence must be maintained and improved by: (i) improved data gathering on fertilizer use and agriculture development in the developed countries and the USSR, (ii) tracking the influence of agriculture policy in the US and the Common Agricultural Policy of the EEC, (iii) improving supply-demand-price forecasting by continually updat- ing the models now used and adding probability analysis to them, and (iv) improving cooperation between agencies. Much remains to be done, and international agencies dealing with food and fertilizers will be pressed to keep up with demands on their resources. Strong efforts over the past two decades have provided a firm base on which to build, and what is most needed now is the clear will to intensify efforts to ensure the continued, efficient, worldwide availability of fertilizer. Conclusions Apparent surpluses of food and fertilizer in the 1980s caused complacency about fertilizers and food security. Such complacency must be - 64 - dispelled: the devastating North American and Chinese droughts, and the locust devastation in Africa in 1988 have highlighted the fragility of global food production systems. Fertilizer is coming to be seen as the most indispensable and least substitutable input to modern, intensive agriculture. Limitations on availability of agricultural land and water require that high dosages of fertilizer be used to ensure that food production will match high (if moderating) population growth. While care must be taken to use fertilizer efficiently, and biotechnological research must continue to improve natural take-up of nutrients by crops, chemical fertilizers will be needed in ever- greater quantities for at least the next 20-30 years. This paper has identified key factors that inhibit efficiency in supplying fertilizers. There is a need to continue and expand this work and broaden the forums in which studies and discussion take place. Much of the technical work described here is applied agricultural research. A body such as the Consultative Group for International Agricultural Research (CGIAR) would be well suited to coordinating and monitoring the various programs. Coordination would also foster badly needed integration of the industrial and agricultural aspects of the work. - 65 - ANNEX 1 THE WORLD BANK/FAO/UNIDO FERTILIZER WORKING GROUP Background As a result of the increasing involvement of the Bank Group in financing investments in the fertilizer sector, in 1974 a unit was established in the Industrial Projects Department of the World Bank to prepare and maintain a data base on world fertilizer supply, demand and balances. This function has been supported by the Bank since then. The World Food Conference, which took place in the middle of the "Fertilizer Crisis" of 1974, recommended that the international agencies, as a matter of urgency, establish and regularly maintain an authoritative analysis of the medium- and long-term fertilizer supply and demand situation, and provide, on a global basis, information that would assist investment agencies in avoiding cyclical imbalances between supply and demand. Since the beginning of 1975, the World Bank/FAO/ UNIDO Fertilizer Working Group, in association with representatives from the international fertilizer industry, have been responsible for maintaining this data base, and the World Bank has relied on the Group's work for maintaining its own data base and reviewing future fertilizer policy and investments. The Group includes a number of experienced analysts who cover the three main fertilizer nutrients and raw materials. Industry members of the Group represent the International Fertilizer Association (IFA) and several - 66 - major industrial associations from the nitrogen, phosphate, potash and sulphur industries and the fertilizer industry in developing countries. The Group meets twice yearly. The first meeting is held in early spring following the publication of FAO production, demand and trade figures for the previous year. The capacity and supply capability figures are calculated country by country, and they take into account the phasing-in of new plants and anticipated plant utilization rates. The industrial consumption (nonfertilizer uses) is then subtracted and an allowance is made for processing and distribution losses to give the potential supply of fertilizers at the farm level. Demand figures are the consensus of the Group and take into account a variety of methodologies, including trend projections, market surveys, agricultural programs and, for the large-demand countries, econometric modelling. Before the preparatory meeting, the Bank makes contact with a number of people in major consuming and producing countries in several different regions and asks them for their updated views on the fertilizer situation in their area. These views are taken into account at the preparatory meeting. Through its work in the agricultural and industrial sectors of many developing countries, the Bank is able to bring unique expertise to the Group's work. Its background work for the appraisal and implementation of major fertilizer projects in developing countries throughout the world is particularly useful for assessing future fertilizer demand and capacity needs. The Bank also periodically reviews the world fertilizer situation and carries out surveys of specific sectors. Examples of this are the Bank's surveys on - 67 - potash, sulphur, nitrogen and fertilizer pricing which have been published by the Bank and have received worldwide circulation. The Group has also been able to draw on the work of the Bank's Commodity Studies and Projections Division which reviews long-term fertilizer needs and fertilizer prices. The Working Group operates in an informal manner, and members are encouraged to discuss the available data freely before a consensus is taken. Generally, anyone who represents a major fertilizer interest is welcome to join the Group if he or she is prepared to make a positive contribution to its work. A wide geographical membership is encouraged. Representatives from the People's Republic of China and the USSR have attended the meetings, and other regular representatives of the Group include Associacao National para Difusao de Adubos (ANDA Brazil), The Fertilizer Association of India (FAI), the Arab Federation of Chemical Fertilizer Producers, and representatives of the Asian and South East Nations (ASEAN) fertilizer companies. It is understood that the forecasts made by the Group do not necessarily reflect the detailed views of all members of the Group. Several members represent associations which have no obligation to conform to the views of their members. One of the main advantages of the Working Group is that it is prepared to take all views into account but has no obligation to any, other than that the consensus be reached on an objective basis. The Bank acts as the custodian of the data, and with the help of other members of the Group it prepares the regional and world supply, demand and balance figures. Several years ago this was a time-consuming and tedious - 68 - task, but improvements in data processing and the use of microcomputers have greatly simplified this operation. The work of the Group is published by FAO as part of its annual fertilizer review and outlook. This report is available in several languages and receives worldwide circulation. A list of organizations which are involved in fertilizers is given below. Approximately 70% are members of the Working Group, and the Group maintains regular contact with nonmember organizations. - 69 - Table Al-l: ORGANIZATIONS INVOLVED WITH FERTILIZERS International Agencies FAO: Food and Agriculture Organization of the UN UNIDO: United Nations Industrial Development Organization The World Bank Asian Development Bank IFDC: International Fertilizer Development Center UNCTAD: United Nations Conference on Trade and Development FADINAP: Fertilizer Advisory Development and Information Network for Asia and the Pacific International Trade Associations IFA: International Fertilizer Association The International Potash Institute The World Phosphate Institute The International Sulphur Institute Regional Trade Associations ADIFAL: Latin American Association for the Development of the Fertilizer Industry ANDA: Association for the Use of Fertilizer (Brazil) APEA: Association of European Nitrogen Producers Arab Federation of Fertilizer Producers ASEAN Fertilizer Producers Centre d'Etude de l'Azote' FAI: Fertilizer Association of India TFI: The Fertilizer Institute of the USA7 EFMA: European Fertilizer Manufacturers Association Trading Companies CANPOTEX: Canadian Potash Exporters CANSULEX: Canadian Sulphur Exporters NITREX: European Nitrogen Exporters PHOSROCK: US Phosphate Rock Exporters PHOSCHEM: US Phosphate Fertilizer Exporters US Government Agencies US Bureau of Mines US Department of Agriculture US Department of Commerce AID: Agency for International Development TVA: Tennessee Valley Authority - 70 - CLASSIFICATION OF COUNTRIES OR AREAS BY CLASSES AND REGIONS The economic classes and regions into which the world is divided for the purpose of FAO's analytical studies are given below. Class I: Developed Market Economies North America: Canada, United States Western Europe: Andorra, Austria, Belgium-Luxembourg, Denmark, Faeroe Islands, Finland, France, Federal Republic of Germany (including West Berlin), Gibraltar, Greece, Holy See, Iceland, Ireland, Italy, Liechtenstein, Malta, Monaco, Netherlands, Norway, Portugal (including Azores and Madeira), San Marino, Spain, Sweden, Switzerland, United Kingdom (including Channel Islands and Isle of Man), Yugoslavia. Oceania: Australia, New Zealand Other Developed Market Israel, Japan (including Bonin and Ryukyu Economies: Islands), South Africa Class II: Developing Market Economies Africa: Algeria, Angola, Benin, Botswana, British Indian Ocean Territory, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Congo, Cote d'Ivoire, Djibouti, Equatorial Guinea,Ethiopia, Gabon, Gambia Chana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Reunion, Rwanda, Saint Helena, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, Somalia, Swaziland, Tanzania, Togo, Tunisia, Uganda, Western Sahara, Zaire, Zambia, Zimbabwe - 71 - Latin America: Antigua and Barbuda, Argentina, Aruba, Bahamas, Barbados, Belize, Bolivia, Brazil, British Virgin Islands, Cayman Islands, Chile, Colombia, Costa Rica, Cuba, Dominica, Dominican Republic, Ecuador (including Galapagos Islands) El Salvador, Falkland Islands (Malvinas), French Guiana, Grenada, Guadeloupe, Guatemala, Guyana, Haiti, Honduras, Jamaica, Martinique, Mexico, Montserrat, Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago, Turks and Caicos Islands, Uruguay, US Virgin Islands, Venezuela Near East: Africa: Egypt, Libyan Arab Jamahiriya, Sudan. Asia: Afghanistan, Bahrain, Cyprus, Gaza Strip (Palestine), Islamic Republic of Iran, Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Kingdom of Saudi Arabia, Syrian Arab Republic, Turkey, United Arab Emirates, Yemen Arab Republic, Democratic Yemen Far East: Bangladesh, Bhutan, Brunei Darussalam, Burma, East Timor, Hong Kong, India, Indonesia, Republic of Korea, Laos, Macau, Malaysia, Maldives, Nepal, Pakistan, Philippines, Singapore, Sri Lanka, Thailand Other developing market America: Bermuda, Greenland, Saint Pierre and economies: Miquelon, Oceania: American Samoa, Canton and Enderbury Islands, Christmas Island (Australia) Cocos (Keeling) Islands, Cook Islands, Fiji, French Polynesia, Guam, Johnston Island, Kiribati, Midway Islands, Nauru, New Caledonia, Niue, Norfolk Island, Pacific Islands (Trust Territory), Papua New Guinea, Pitcairn, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, Vanuatu, Wake Island, Wallis and Futuna Islands Class III: Centrally Planned Economies Asia: China, Democratic Kampuchea, Democratic People's Republic of Korea, Mongolia, Viet Nam East Europe and USSR: Albania, Bulgaria, Czechoslovakia, German Democratic Republic (including East Berlin), Hungary, Poland, Romania, USSR - 72 - All Developed Countries: Includes developed market economies of Eastern Europe and USSR of the centrally planned economies. All Developing Countries: Includes developing market economies and Asia. - 73 - ANNEX 2 WORLD AND REGIONAL SUPPLY/DEMAND BALANCES FOR NITROGEN. PHOSPHATE AND POTASH NITROGEN Introduction to the Table The FAO/UNIDO/World Bank Fertilizer Working Group has updated its forecasts of world and regional nitrogen supply, demand and balances. The Group's objective has been to present world and regional balances indicating the future relationship between supply potential and agricultural demand, thus providing guidance on the appropriateness of creating additional nitrogen capacity. The Group does not try to forecast future production, but rather forecasts the supply that could be made available were there demand for it. The Group's methodology for calculating supply potential is given below. Notes on Terminology NH3 Capacity refers to nominal or nameplate ammonia capacity. Where plants are known to be idle for a year or more, this capacity is subtracted from nominal capacity. Shorter periods of nonoperation are accounted for in the utilization rate. In 1986/87, about 1.2 million tons capacity were idle, mainly in the US, but in 1987/88 only about 0.3 million tons were designated idle. - 74 - NH3 SuRply Capability refers to production capability of ammonia for 1986/87-1992/93. It is estimated by applying forecasts of country-specific operating rates based on past performance and other factors to existing capacity and phased-in new capacity. New capacities are phased in as 80%, 90% and 100%, respectively, for the first 3 full years of operation. N Fertilizer SuDP1y Potential is derived from ammonia "Supply Capa- bility" and nonammonia sources of nitrogen. Industrial uses, and processing and distribution losses are subtracted from ammonia "Supply Capability" to derive "Ammonia Available for Fertilizers." Production of nitrogen from nonammonia sources is added to "Ammonia Available for Fertilizers" to estimate "N Fertilizer Supply Potential." The assumed processing and distribution losses are: Region Processing and Distribution Loss Developed Market Economies 7% Developing Market Economies 10% Centrally Planned Economies: Eastern Europe including USSR 12% Socialist Asia 12% N Fertilizer Consumption refers to estimated use for 1986/87 and to forecast demand thereafter. Surplus (Deficit) refers to the difference between "N Fertilizer Supply Potential" and "Consumption." - 75 - Table A2-1: WORLD AND REGIONAL NITROGEN SUPPLY, DEMAND AND BALANCES ('000 tons N) 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 DEVELOPED M.E. ------- ------- ------- ------- ------- ------- ------- North America NH3 Nominal Capacity 16,397 16,345 16,345 16,345 16,345 16,345 16,345 NH3 Supply Capability 14,145 14,762 14,975 15,019 15,036 15,036 15,036 NH3 Industrial Use 3,020 3,050 3,080 3,110 3,140 3,165 3,190 Losses 779 820 833 834 833 831 829 NH3 Available for Fert. 10,346 10,892 11,062 11,075 11,063 11,040 11,017 Non-NH3 Nitrogen 90 90 90 90 90 90 90 N Fert. Supply Potential 10,436 10,982 11,152 11,165 11,153 11,130 11,107 N Fert. Consumption 10,539 10,850 10,900 10,960 11,010 11,070 11,120 Surplus (-Deficit) (103) 132 252 205 143 60 (13) Western Europe NH3 Nominal Capacity 14,939 14,663 14,605 14,605 14,728 14,482 14,909 NH3 Supply Capability 13,042 12,762 12,840 12,856 12,928 12,854 12,881 NH3 Industrial Use 2,355 2,449 2,384 2,365 2,371 2,356 2,357 Losses 748 722 732 734 739 735 737 NH3 Available for Fert. 9,939 9,591 9,724 9,757 9,818 9,763 9,787 Non-NH3 Nitrogen 120 120 120 120 120 120 120 N Fert. Supply Potential 10,059 9,711 9,844 9,877 9,938 9,883 9,907 N Fert. Consumption 11,160 11,100 11,000 10,900 10,800 10,700 10,600 Surplus (-Deficit) (1,101) (1,389) (1,156) (1,023) (862) (817) (693) Oceania NH3 Nominal Capacity 525 606 657 657 657 657 657 NH3 Supply Capability 449 484 536 556 561 563 563 NH3 Industrial Use 124 128 131 134 138 141 144 Losses 23 25 28 30 30 30 29 NH3 Available for Fert. 302 331 377 392 393 392 390 Non-NH3 Nitrogen 5 5 5 5 5 5 5 N Fert. Supply Potential 307 336 382 397 398 397 395 N Fert. Consumption 387 400 410 430 450 460 480 Surplus (-Deficit) (80) (64) (28) (33) (52) (63) (85) Other Developed M.E. NH3 Nominal Capacity 2,480 2,353 2,435 2,435 2,435 2,435 2,435 NH3 Supply Capability 1,854 1,807 1,779 1,805 1,805 1,805 1,805 NH3 Industrial Use 1,438 1,459 1,484 1,505 1,530 1,551 1,566 Losses 29 24 21 21 19 18 17 NH3 Available for Fert. 387 324 274 279 256 236 222 Non-NH3 Nitrogen 105 105 105 105 105 105 105 N Fert. Supply Potential 492 429 379 384 361 341 327 N Fert. Consumption 1,098 1,110 1,120 1,130 1,140 1,150 1,160 Surplus (-Deficit) (606) (681) (741) (746) (779) (809) (833) - 76 - Table A2-1: WORLD AND REGIONAL NITROGEN SUPPLY, DEMAND AND BALANCES (Continued) ('000 tons N) 1986/87 1.987/88 1988/89 1989/90 1990/91 1991/92 1992/93 DEVELOPING M.E. ----- ------- ------- ------- ------- ------- ----- Africa NH3 Nominal Capacity 701 1,291 1,291 1,291 1,291 1,291 1,291 NH3 Supply Capability 211 493 659 704 721 721 721 NH3 Industrial Use 20 21 22 24 25 26 28 Losses 19 47 64 68 70 70 69 NH3 Available for Fert. 172 425 573 612 626 626 624 Non-NH3 Nitrogen 0 0 0 0 0 0 0 N Fert. Supply Potential 172 425 573 612 626 626 624 N Fert. Consumption 882 920 950 980 1,030 1,080 1,130 Surplus (-Deficit) (710) (495) (377) (368) (404) (454) (506) Latin America NH3 Nominal Capacity 5,761 5,761 6,251 6,251 7,010 7,010 7,416 NH3 Supply Capability 4,709 4,709 4,883 5,072 5,355 5,649 5,847 NH3 Industrial Use 231 241 251 262 272 282 293 Losses 448 447 463 481 508 537 555 NH3 Available for Fert. 4,030 4,021 4,169 4,329 4,575 4,830 4,999 Non-NH3 Nitrogen 5 5 5 5 5 5 5 N Fert. Supply Potential 4,035 4,026 4,174 4,334 4,580 4,835 5,004 N Fert. Consumption 3,830 3,950 3,990 4,150 4,330 4,500 4,680 Surplus (-Deficit) 205 76 184 184 250 335 324 Near East NH3 Nominal Capacity 4,993 5,947 5,947 6,219 6,230 6,502 6,774 NH3 Supply Capability 3,871 3,994 4,402 4,526 4,780 4,893 5,111 NH3 Industrial Use 56 57 59 60 62 63 65 Losses 382 394 434 447 472 483 505 NH3 Available for Fert. 3,434 3,543 3,909 4,019 4,246 4,347 4,541 Non-NH3 Nitrogen 0 0 0 0 0 0 0 N Fert. Supply Potential 3,434 3,543 3,909 4,019 4,246 4,347 4,541 N Fert. Consumption 2,812 2,920 3,060 3,160 3,280 3,420 3,570 Surplus (-Deficit) 622 623 849 859 966 927 971 Far East NH3 Nominal Capacity 12,770 13,409 14,578 14,628 15,083 16,308 17,055 NH3 Supply Capability 9,550 10,371 11,050 11,539 11,847 12,455 13,130 NH3 Industrial Use 299 309 320 330 342 353 365 Losses 925 1,006 1,073 1,121 1,151 1,210 1,277 NH3 Available for Fert. 8,326 9,056 9,657 10,088 10,355 10,892 11,489 Non-NH3 Nitrogen 40 40 40 40 40 40 40 N Fert. Supply Potential 8,366 9,096 9,697 10,128 10,395 10,932 11,529 N Fert. Consumption 11,107 10,400 10,800 11,550 12,130 12,730 13,500 Surplus (-Deficit) (2,741) (1,304) (1,103) (1,422) (1,736) (1,798) (1,972) - 77 - Table A2-1: WORLD AND REGIONAL NITROGEN SUPPLY, DEMAND AND BALANCES (Continued) ('000 tons N) 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 CENT.PLANNED EC. ------- ------- ------- ------- ------- ------- ------- Eastern Europe NH3 Nominal Capacity 34,712 34,952 35,348 36,148 36,918 37,373 37,773 NH3 Supply Capability 27,525 28,083 28,379 28,871 29,481 29,925 30,320 NH3 Industrial Use 2,056 2,091 2,126 2,161 2,196 2,231 2,266 Losses 3,056 3,119 3,150 3,205 3,274 3,323 3,366 NH3 Available for Fert. 22,413 22,873 23,103 23,505 24,011 24,371 24,688 Non-NH3 Nitrogen 180 180 180 180 180 180 180 N Fert. Supply Potential 22,593 23,053 23,283 23,685 24,191 24,551 24,868 N Fert. Consumption 16,024 16,340 16,660 17,250 17,830 18,420 19,000 Surplus (-Deficit) 6,569 6,713 6,623 6,435 6,361 6,131 5,868 Socialist Asia NH3 Nominal Capacity 18,468 19,360 19,632 19,632 20,315 20,315 20,315 NH3 Supply Capability 15,593 15,904 16,386 16,379 16,846 17,090 17,142 NH3 Industrial Use 615 625 640 650 665 680 695 Losses 1,797 1,833 1,890 1,887 1,942 1,969 1,974 NH3 Available for Fert. 13,181 13,446 13,856 13,842 14,239 14,441 14,473 Non-NH3 Nitrogen 15 15 15 15 15 15 15 N Fert. Supply Potential 13,196 13,461 13,871 13,857 14,254 14,456 14,488 N Fert. Consumption 14,531 15,850 16,410 16,840 17,280 17,750 18,300 Surplus (-Deficit) (1,335) (2,389) (2,539) (2,983) (3,026) (3,294) (3,812) - 78 - Table A2-1: WORLD AND REGIONAL NITlROGEN SUPPLY, DEMAND AND BAIANCES (Continued) ('000 tons N) 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 ALL DEVELOPED M.E. ------- ------- ------- ------- ------- ------- ------- NH3 Nominal Capacity 34,341 33,967 34,042 34,042 34,165 33,919 34,346 NH3 Supply Capability 29,490 29,815 30,130 30,236 30,330 30,258 30,285 NH3 Industrial Use 6,937 7,086 7,079 7,114 7,179 7,213 7,257 Losses 1,579 1,591 1,614 1,619 1,621 1,613 1,612 NH3 Available for Fert. 20,974 21,138 21,437 21,503 21,530 21,432 21,416 Non-NH3 Nitrogen 320 320 320 320 320 320 320 N Fert. Supply Potential 21,294 21,458 21,757 21,823 21,850 21,752 21,736 N Fert. Consumption 23,184 23,460 23,430 23,420 23,400 23,380 23,360 Surplus (-Deficit) (1,890) (2,002) (1,673) (1,597) (1,550) (1,628) (1,624) ALL DEVELOPING M.E. NH3 Nominal Capacity 24,225 26,408 28,067 28,389 29,614 31,111 32,536 NH3 Supply Capability 18,341 19,567 20,994 21,841 22,703 23,718 24,809 NH3 Industrial Use 606 628 652 676 701 724 751 Losses 1,774 1,894 2,034 2,117 2,200 2,299 2,406 NH3 Available for Fert. 15,962 17,045 18,308 19,049 19,802 20,695 21,652 Non-NH3 Nitrogen 45 45 45 45 45 45 45 N Fert. Supply Potential 16,007 17,090 18,353 19,094 19,847 20,740 21,697 N Fert. Consumption 18,631 18,190 18,800 19,840 20,770 21,730 22,880 Surplus (-Deficit) (2,625) (1,100) (447) (746) (923) (990) (1,183) ALL CENT. PLANNED EC. NH3 Nominal Capacity 53,180 54,312 54,980 55,780 57,233 57,688 58,088 NH3 Supply Capability 43,118 43,987 44,765 45,250 46,327 47,015 47,462 NH3 Industrial Use 2,671 2,716 2,766 2,811 2,861 2,911 2,961 Losses 4,854 4,953 5,040 5,093 5,216 5,292 5,340 NH3 Available for Fert. 35,593 36,318 36,959 37,346 38,250 38,812 39,161 Non-NH3 Nitrogen 195 195 195 195 195 195 195 N Fert. Supply Potential 35,788 36,513 37,154 37,541 38,445 39,007 39,356 N Fert. Consumption 30,555 32,190 33,070 34,090 35,110 36,170 37,300 Surplus (-Deficit) 5,233 4,323 4,084 3,451 3,335 2,837 2,056 WORLD TOTAL NH3 Nominal Capacity 111,746 114,687 117,089 118,211 121,012 122,718 124,970 NH3 Supply Capability 90,949 93,369 95,889 97,327 99,360 100,991 102,556 NH3 Industrial Use 10,214 10,430 10,497 10,601 10,741 10,848 10,969 Losses 8,206 8,437 8,688 8,828 9,037 9,205 9,358 NH3 Available for Fert. 72,529 74,502 76,704 77,898 79,582 80,938 82,229 Non-NH3 Nitrogen 560 560 560 560 560 560 560 N Fert. Supply Potential 73,089 75,062 77,264 78,458 80,142 81,498 82,789 N Fert. Consumption 72,370 73,840 75,300 77,350 79,280 81,280 83,540 Surplus (-Deficit) 719 1,222 1,964 1,108 862 218 (751) - 79 - PHOSPHATE Introduction to the Table The FAO/UNIDO/World Bank Fertilizer Working Group has updated its forecasts of world and regional phosphate supply, demand and balances. The Group's objective has been to present world and regional balances indicating the future relationship between supply potential and agricultural demand, thus providing guidance on the appropriateness of creating additional phosphate capacity. The Group does not try to forecast future production, but rather forecasts the supply that could be made available were there demand for it. The Group's methodology for calculating supply potential is given below. Notes on Terminolog Phosphoric Acid Capacity refers to nominal or nameplate capacity of phosphoric acid plants. Where plants are known to be idle for a year or more, this capacity is subtracted from nominal capacity. Shorter periods of nonoperation are accounted for in the utilization rate. In 1986/87, 1.62 million tons capacity were idle, and in 1987/88 1.94 million tons were idle, mainly in the US. Fertilizer Acid Supply Capability is the acid production available for fertilizer production in 1986/87-1992/93. It is derived from total acid supply capability by subtracting industrial and technical uses of phosphoric - 80 - acid from it, and then adjusting it for processing and conversion losses (6%). The Phosphoric Acid Supply Capability is estimated by applying country- specific operating rates, based on past performance and other factors, to existing capacity and phased-in new capacity. On average, changes in capacity are assumed to take place in the mid-year. New capacities are phased in as 80%, 90%, and 100%, respectively for the first 3 full years of operation. Other P2O5 Production includes all other phosphate fertilizers not derived directly from phosphoric acid such as single superphosphate, basic slag, thermal phosphates, nitrophosphates (80-100% depending on the region), secondary rock in triple superphosphate production (30%) and ground phosphate rock used as fertilizers. Production is based on existing capacity and anticipated changes in capacity. Total Fertilizer Phosphate Supplv Capability is the sum of "Fertilizer Acid Supply Capability" and "Other P205 Production." Supply Potential is assumed to be 95% of total phosphate fertilizer "Supply Capability" for all regions; this adjustment accounts for normal stock changes, transportation and distribution losses and in-transit shipments. Consumption refers to estimated phosphate fertilizer use for 1986/87 and forecast demand thereafter. Surplus (Deficit) refers to the difference between "Available Supply" and "Consumption." - 81 - Table A2-2: WORLD AND REGIONAL PHOSPHATE SUPPLY, DEMAND AND BALANCES ('000 tons P205) 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 DEVELOPED MARKET EC. North America Phos.Acid Capacity 12,141 11,590 11,590 11,590 11,590 11,590 11,590 Phos.Acid Supply Capability 10,476 10,238 10,877 11,448 11,448 11,448 11,448 Non-Fert.Acid Consumption 518 542 546 550 553 558 562 Fert.Acid Supply Capability 9,361 9,114 9,711 10,244 10,241 10,237 10,233 Other Phosphate Supply 630 595 550 520 505 485 460 Total Fert.Phos.Sup.Capab. 9,991 9,709 10,261 10,764 10,746 10,722 10,693 Fert.Phos.Supply Potential 9,491 9,224 9,748 10,226 10,209 10,186 10,158 Fert.Phos. Consumption 4,283 4,350 4,400 4,450 4,500 4,550 4,600 Surplus (-Deficit) 5,208 4,874 5,348 5,776 5,709 5,636 5,558 Western Europe Phos.Acid Capacity 4,771 4,654 4,654 4,584 4,584 4,584 4,584 Phos.Acid Supply Capability 4,137 3,995 3,944 3,912 3,881 3,881 3,881 Non-Fert.Acid Consumption 700 670 640 610 600 590 580 Fert.Acid Supply Capability 3,231 3,126 3,106 3,104 3,084 3,094 3,103 Other Phosphate Supply 2,070 2,070 2,070 2,070 2,070 2,070 2,070 Total Fert.Phos.Sup.Capab. 5,301 5,196 5,176 5,174 5,154 5,164 5,173 Fert.Phos.Supply Potential 5,036 4,936 4,917 4,915 4,896 4,905 4,914 Fert.Phos. Consumption 5,077 5,000 5,000 5,000 5,000 5,000 5,000 Surplus (-Deficit) (41) (64) (83) (85) (104) (95) (86) Oceania Phos.Acid Capacity 296 296 296 296 296 296 296 Phos.Acid Supply Capability 266 266 266 266 266 266 266 Non-Fert.Acid Consumption 12 13 14 15 16 17 18 Fert.Acid Supply Capability 239 238 237 236 235 234 233 Other Phosphate Supply 1,320 1,340 1,365 1,385 1,410 1,430 1,455 Total Fert.Phos.Sup.Capab. 1,559 1,578 1,602 1,621 1,645 1,664 1,688 Fert.Phos.Supply Potential 1,481 1,499 1,522 1,540 1,563 1,581 1,604 Fert.Phos. Consumption 976 1,060 1,120 1,180 1,190 1,210 1,220 Surplus (-Deficit) 505 439 402 360 373 371 384 Other Developed M.E. Phos.Acid Capacity 1,823 1,756 1,756 1,756 1,756 1,756 1,756 Phos.Acid Supply Capability 1,754 1,704 1,674 1,674 1,674 1,674 1,674 Non-Fert.Acid Consumption 188 186 184 182 180 178 176 Fert.Acid Supply Capability 1,472 1,427 1,401 1,402 1,404 1,406 1,408 Other Phosphate Supply 480 480 480 480 480 480 480 Total Fert.Phos.Sup.Capab. 1,952 1,907 1,881 1,882 1,884 1,886 1,888 Fert.Phos.Supply Potential 1,854 1,812 1,787 1,788 1,790 1,792 1,794 Fert.Phos. Consumption 1,094 1,070 1,140 1,210 1,220 1,230 1,240 Surplus (-Deficit) 760 742 647 578 570 562 554 - 82 - Table A2-2: WORLD AND REGIONAL PHOSPHATE SUPPLY, DEMAND AND BALANCES (Continued) ('000 tons P205) 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 DEVELOPING MARKET E.C. Africa Phos.Acid Capacity 4,027 4,587 4,587 4,587 4,587 4,587 4,587 Phos.Acid Supply Capability 3,104 3,636 3,940 4,033 4,063 4,063 4,063 Non-Fert.Acid Consumption 11 12 13 14 15 16 17 Fert.Acid Supply Capability 2,907 3,407 3,691 3,778 3,805 3,804 3,803 Other Phosphate Supply 390 420 455 485 520 550 585 Total Fert.Phos.Sup.Capab. 3,297 3,827 4,146 4,263 4,325 4,354 4,388 Fert.Phos.Supply Potential 3,133 3,635 3,939 4,050 4,109 4,136 4,169 Fert.Phos. Consumption 639 675 720 750 790 820 850 Surplus (-Deficit) 2,494 2,960 3,219 3,300 3,319 3,316 3,319 Latin America Phos.Acid Capacity 1,502 1,750 1,750 1,750 1,750 1,750 1,900 Phos.Acid Supply Capability 1,119 1,313 1,411 1,473 1,473 1,473 1,544 Non-Fert.Acid Consumption 165 170 175 180 185 188 190 Fert.Acid Supply Capability 897 1,074 1,162 1,215 1,211 1,208 1,273 Other Phosphate Supply 910 935 960 985 1,010 1,035 1,060 Total Fert.Phos.Sup.Capab. 1,807 2,009 2,122 2,200 2,221 2,243 2,333 Fert.Phos.Supply Potential 1,716 1,909 2,016 2,090 2,110 2,131 2,216 Fert.Phos. Consumption 2,799 2,800 2,900 2,970 3,050 3,130 3,210 Surplus (-Deficit) (1,083) (891) (884) (880) (940) (999) (994) Near East Phos.Acid Capacity 1,946 1,946 1,946 1,946 1,946 1,946 1,946 Phos.Acid Supply Capability 1,099 1,134 1,134 1,134 1,134 1,354 1,354 Non-Fert.Acid Consumption 16 17 17 18 18 18 19 Fert.Acid Supply Capability 1,018 1,050 1,050 1,049 1,049 1,256 1,255 Other Phosphate Supply 185 195 205 215 225 235 245 Total Fert.Phos.Sup.Capab. 1,203 1,245 1,255 1,264 1,274 1,491 1,500 Fert.Phos.Supply Potential 1,143 1,183 1,192 1,201 1,210 1,416 1,425 Fert.Phos. Consumption 1,437 1,660 1,760 1,860 1,960 2,060 2,160 Surplus (-Deficit) (294) (477) (568) (659) (750) (644) (735) Far East Phos.Acid Capacity 1,482 1,482 1,740 1,740 1,740 1,740 1,740 Phos.Acid Supply Capability 1,156 1,152 1,206 1,274 1,289 1,297 1,297 Non-Fert.Acid Consumption 43 45 47 48 49 50 51 Fert.Acid Supply Capability 1,046 1,041 1,089 1,152 1,166 1,172 1,171 Other Phosphate Supply 745 780 815 850 885 920 955 Total Fert.Phos.Sup.Capab. 1,791 1,821 1,904 2,002 2,051 2,092 2,126 Fert.Phos.Supply Potential 1,702 1,730 1,809 1,902 1,948 1,988 2,020 Fert.Phos. Consumption 3,970 4,000 4,250 4,450 4,670 4,900 5,150 Surplus (-Deficit) (2,268) (2,270) (2,441), (2,548) (2,722) (2,912) (3,130) - 83 - Table A2-2: WORLD AND REGIONAL PHOSPHATE SUPPLY, DEMAND AND BALANCES (Continued) ('000 tons P205) 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 … CENTRALLY PLANNED EC. Eastern Europe Phos.Acid Capacity 7,570 7,670 7,883 8,118 8,253 8,253 8,253 Phos.Acid Supply Capability 5,883 6,138 6,359 6,613 6,845 6,973 7,043 Non-Fert.Acid Consumption 221 234 248 252 256 257 258 Fert.Acid Supply Capability 5,322 5,550 5,744 5,979 6,194 6,313 6,378 Other Phosphate Supply 4,590 4,640 4,690 4,750 4,810 4,880 4,950 Total Fert.Phos.Sup.Capab. 9,912 10,190 10,434 10,729 11,004 11,193 11,328 Fert.Phos.Supply Potential 9,417 9,680 9,913 10,193 10,453 10,633 10,762 Fert.Phos. Consumption 11,209 11,420 11,780 12,250 12,420 12,600 12,870 Surplus (-Deficit) (1,792) (1,740) (1,867) (2,057) (1,967) (1,967) (2,108) Socialist Asia Phos.Acid Capacity 99 99 99 172 318 344 463 Phos.Acid Supply Capability 69 72 73 94 158 216 270 Non-Fert.Acid Consumption 11 13 15 16 17 18 19 Fert.Acid Supply Capability 55 55 55 73 133 186 236 Other Phosphate Supply 2,400 3,270 3,310 3,340 3,365 3,380 3,405 Total Fert.Phos.Sup.Capab. 2,455 3,325 3,365 3,413 3,498 3,566 3,641 Fert.Phos.Supply Potential 2,332 3,159 3,196 3,243 3,323 3,388 3,459 Fert.Phos. Consumption 3,225 3,800 3,950 4,100 4,200 4,350 4,500 Surplus (-Deficit) (893) (641) (754) (857) (877) (962) (1,041) - 84 - Table A2-2: WORLD AND REGIONAL PHOSPHATE SUPPLY, DEMAND AND BALANCES (Continued) ('000 tons P205) 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 TOTAL DEVELOPED M.E. Phos.Acid Capacity 19,031 18,296 18,296 18,226 18,226 18,226 18,226 Phos.Acid Supply Capability 16,633 16,203 16,761 17,300 17,269 17,269 17,269 Non-Fert.Acid Consumption 1,418 1,411 1,384 1,357 1,349 1,343 1,336 Fert.Acid Supply Capability 14,302 13,904 14,454 14,986 14,965 14,970 14,977 Other Phosphate Supply 4,500 4,485 4,465 4,455 4,465 4,465 4,465 Total Fert.Phos.Sup.Capab. 18,802 18,389 18,919 19,441 19,430 19,435 19,442 Fert.Phos.Supply Potential 17,862 17,470 17,973 18,469 18,458 18,464 18,470 Fert.Phos. Consumption 11,430 11,480 11,660 11,840 11,910 11,990 12,060 Surplus (-Deficit) 6,432 5,990 6,313 6,629 6,548 6,474 6,410 TOTAL DEVELOPING M.E. Phos.Acid Capacity 8,957 9,765 10,023 10,023 10,023 10,023 10,173 Phos.Acid Supply Capability 6,478 7,235 7,691 7,914 7,959 8,187 8,258 Non-Fert.Acid Consumption 235 244 252 260 267 272 277 Fert.Acid Supply Capability 5,868 6,572 6,993 7,195 7,230 7,440 7,502 Other Phosphate Supply 2,230 2,330 2,435 2,535 2,640 2,740 2,845 Total Fert.Phos.Sup.Capab. 8,098 8,902 9,428 9,730 9,870 10,180 10,347 Fert.Phos.Supply Potential 7,693 8,456 8,956 9,243 9,377 9,671 9,830 Fert.Phos. Consumption 8,845 9,135 9,630 10,030 10,470 10,910 11,370 Surplus (-Deficit) (1,152) (679) (674) (787) (1,093) (1,239) (1,540) TOTAL CENTRALLY PLANNED EC. Phos.Acid Capacity 7,669 7,769 7,982 8,290 8,571 8,597 8,716 Phos.Acid Supply Capability 5,952 6,210 6,432 6,707 7,003 7,189 7,313 Non-Fert.Acid Consumption 232 247 263 268 273 275 277 Fert.Acid Supply Capability 5,377 5,605 5,799 6,053 6,326 6,499 6,614 Other Phosphate Supply 6,990 7,910 8,000 8,090 8,175 8,260 8,355 Total Fert.Phos.Sup.Capab. 12,367 13,515 13,799 14,143 14,501 14,759 14,969 Fert.Phos.Supply Potential 11,748 12,839 13,109 13,436 13,776 14,021 14,220 Fert.Phos. Consumption 14,434 15,220 15,730 16,350 16,620 16,950 17,370 Surplus (-Deficit) (2,686) (2,381) (2,621) (2,914) (2,844) (2,929) (3,150) WORLD TOTAL Phos.Acid Capacity 35,657 35,830 36,301 36,539 36,820 36,846 37,115 Phos.Acid Supply Capability 29,063 29,648 30,884 31,921 32,231 32,645 32,840 Non-Fert.Acid Consumption 1,885 1,902 1,899 1,885 1,889 1,890 1,890 Fert.Acid Supply Capability 25,547 26,081 27,246 28,234 28,521 28,910 29,093 Other Phosphate Supply 13,720 14,725 14,900 15,080 15,280 15,465 15,665 Total Fert.Phos.Sup.Capab. 39,267 40,806 42,146 43,314 43,801 44,375 44,758 Fert.Phos.Supply Potential 37,304 38,766 40,039 41,148 41,611 42,156 42,520 Fert.Phos. Consumption 34,709 35,835 37,020 38,220 39,000 39,850 40,800 Surplus (-Deficit) 2,595 2,931 3,019 2,928 2,611 2,306 1,720 - 85 - POTASH Introduction to the Table The FAO/UNIDO/World Bank Fertilizer Working Group has updated its forecasts of world and regional potash supply, demand and balances. The Group's objective has been to present world and regional balances indicating the future relationship between supply potential and agricultural demand, thus providing guidance on the appropriateness of creating additional potash capacity. The Group does not try to forecast future production, but rather forecasts the supply that could be made available were there demand for it. The Group's methodology for calculating supply potential is given below. Notes on Terminology Capacity refers to nominal capacity of mines. Supply Capability refers to production capability for 1986/87- 1992/93 estimated by applying forecasts of country-specific operating rates derived from past performance and other factors to existing capacity and phased-in new capacity. Where plants are known to be idle for a year or more this capacity is subtracted from nominal capacity. Shorter periods of nonoperation are accounted for in the utilization rate. It is assumed that all changes in capacity take place in mid-year. Expansions and closures are - 86 - phased in over a two-year period, while the new mines are phased in as follows: New mines, New mines, Fertilizer year known ore body unknown ore body 1 30.0% 20.0% 2 67.5% 50.0% 3 82.5% 67.5% 4 95.0% 82.5% 5 100.0% 95.0% 6 100.0% 100.0% SupDlv Potential is derived from supply capability after adjusting it for industrial uses and distribution losses. The assumed region-specific industrial uses and distribution losses are: Region Industrial use Distribution loss North America 5.0% 2.0% Western Europe 4.0% 2.0% Centrally planned Europe GDR 2.0% 2.0% USSR 0.2% 8.0% Other regions nil 5.0% Consumption is estimated fertilizer potash use for 1986/87 and forecast demand thereafter. Surplus (Deficit) is the difference between "Supply Potential" and "Consumption." - 87 - Table A2-3: WORLD AND REGIONAL POTASH SUPPLY, DEMAND AND BALANCES ('000 tons K20) DEVELOPED M.E. 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 - . North America Capacity 13,757 13,757 13,307 13,252 13,252 12,892 12,892 Supply Capability 11,139 10,832 10,842 10,710 11,265 11,112 10,959 Supply Potential 10,359 10,074 10,083 9,960 10,476 10,334 10,192 Consumption 4,792 4,850 5,000 5,100 5,200 5,250 5,300 Surplus (-Deficit) 5,567 5,224 5,083 4,860 5,276 5,084 4,892 Western Europe Capacity 6,010 6,040 6,040 6,090 6,110 6,110 6,110 Supply Capability 5,642 5,542 5,555 5,573 5,600 5,609 5,609 Supply Potential 5,247 5,154 5,166 5,183 5,208 5,216 5,216 Consumption 5,477 5,430 5,430 5,430 5,420 5,420 5,430 Surplus (-Deficit) (230) (276) (264) (247) (212) (204) (214) Oceania Capacity 0 0 0 0 0 0 0 Supply Capability 0 0 0 0 0 0 0 Supply Potential 0 0 0 0 0 0 0 Consumption 205 230 240 250 260 270 280 Surplus (-Deficit) (205) (230) (240) (250) (260) (270) (280) Other Developed M.E. Capacity 1,260 1,260 1,260 1,380 1,380 1,380 1,380 Supply Capability 1,260 1,260 1,260 1,320 1,380 1,380 1,380 Supply Potential 1,197 1,197 1,197 1,254 1,311 1,311 1,311 Consumption 750 760 770 780 790 800 800 Surplus (-Deficit) 447 437 427 474 521 511 511 TOTAL DEVELOPED M.E. Capacity 21,027 21,057 20,607 20,722 20,742 20,382 20,382 Supply Capability 18,041 17,634 17,657 17,603 18,245 18,101 17,948 Supply Potential 16,803 16,425 16,446 16,397 16,995 16,862 16,719 Consumption 11,224 11,270 11,440 11,560 11,670 11,740 11,810 Surplus (-Deficit) 5,579 5,155 5,006 4,837 5,325 5,122 4,909 - 88 - Table A2-3: WORLD AND REGIONAL POTASH SUPPLY, DEMAND AND BALANCES (Continued) ('000 tons K20) DEVELOPING M.E. 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 Africa Capacity 0 0 0 0 0 0 0 Supply Capability 0 0 0 0 0 0 0 Supply Potential 0 0 0 0 0 0 0 Consumption 295 330 350 370 380 400 410 Surplus (-Deficit) (295) (330) (350) (370) (380) (400) (410) Latin America Capacity 0 100 100 100 100 100 100 Supply Capability 0 15 38 51 62 71 75 Supply Potential 0 14 36 48 59 67 71 Consumption 2,006 1,900 1,980 2,050 2,140 2,240 2,330 Surplus (-Deficit) (2,006) (1,886) (1,944) (2,002) (2,081) (2,173) (2,259) Near East Capacity 720 720 840 840 840 840 840 Supply Capability 684 684 741 798 798 798 798 Supply Potential 650 650 704 758 758 758 758 Consumption 150 160 170 180 190 200 210 Surplus (-Deficit) 500 490 534 578 568 558 548 Far East Capacity 0 0 0 0 0 0 0 Supply Capability 0 0 0 0 0 0 0 Supply Potential 0 0 0 0 0 0 0 Consumption 1,845 1,850 1,910 2,060 2,200 2,340 2,460 Surplus (-Deficit) (1,845) (1,850) (1,910) (2,060) (2,200) (2,340) (2,460) TOTAL DEVELOPING M.E. Capacity 720 820 940 940 940 940 940 Supply Capability 684 699 779 849 860 869 873 Supply Potential 650 664 740 807 817 826 829 Consumption 4,296 4,240 4,410 4,660 4,910 5,180 5,410 Surplus (-Deficit) (3,646) (3,576) (3,670) (3,853) (4,093) (4,354) (4,581) - 89 - Table A2-3: WORLD AND REGIONAL POTASH SUPPLY, DEMAND AND BALANCES (Continued) ('000 tons K20) CENTRALLY PLANNED EC. 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 Eastern Europe Capacity 14,630 16,130 16,130 16,130 16,130 16,130 16,130 Supply Capability 13,837 13,636 14,158 14,428 14,631 14,800 14,867 Supply Potential 12,849 12,665 13,144 13,392 13,578 13,733 13,795 Consumption 9,755 9,930 10,050 10,170 10,290 10,420 10,540 Surplus (-Deficit) 3,094 2,735 3,094 3,222 3,288 3,313 3,255 Socialist Asia Capacity 50 50 120 120 120 120 120 Supply Capability 30 30 30 51 72 72 72 Supply Potential 29 29 29 48 68 68 68 Consumption 832 1,100 1,200 1,300 1,410 1,510 1,620 Surplus (-Deficit) (804) (1,072) (1,172) (1,252) (1,342) (1,442) (1,552) TOTAL CENT. PLANNED EC. Capacity 14,680 16,180 16,250 16,250 16,250 16,250 16,250 Supply Capability 13,867 13,666 14,188 14,479 14,703 14,872 14,939 Supply Potential 12,878 12,693 13,173 13,440 13,647 13,802 13,863 Consumption 10,587 11,030 11,250 11,470 11,700 11,930 12,160 Surplus (-Deficit) 2,291 1,663 1,923 1,970 1,947 1,872 1,703 WORLD TOTAL Capacity 36,427 38,057 37,797 37,912 37,932 37,572 37,572 Supply Capability 32,592 31,999 32,624 32,931 33,808 33,842 33,760 Supply Potential 30,331 29,782 30,358 30,644 31,459 31,489 31,412 Consumption 26,107 26,540 27,100 27,690 28,280 28,850 29,380 Surplus (-Deficit) 4,224 3,242 3,258 2,954 3,179 2,639 2,032 - 90 - ANNEX 3 INTERNATIONAL TRADE IN FERTILIZERS 1986/87 Table A3-1: NITROGEN (N) Country Exports % Country Imports Mill Tons Mill Tons USA 2.46 14.11 USA 3.54 21.07 USSR 2.41 13.82 China 1.76 10.48 Canada 1.54 8.83 France 1.24 7.38 Netherlands 1.51 8.66 India 1.10 6.55 Romania 1.16 6.65 Germany FR 0.91 5.42 Belgium 0.99 5.68 Iran 0.46 2.74 Others 7.37 42.26 Others 7.79 46.37 TOTAL 17.44 100.00 16.80 100.00 Source: FAO Table A3-2: PHOSPHATE (P205) Country Exports % Country Imports % Mill Tons Mill Tons USA 4.40 46.81 China 0.65 8.59 Tunisia 0.57 6.06 France 0.58 7.66 Belgium 0.50 5.32 USSR 0.41 5.42 Morocco 0.34 3.62 Italy 0.40 5.28 Netherlands 0.37 3.94 Germany FR 0.40 5.28 Korea Rep. 0.29 3.09 Iran 0.37 4.89 Jordan 0.26 2.77 India 0.28 3.70 Others 2.67 28.40 Others 4.48 59.18 TOTAL 9.40 100.00 7.57 100.00 Source: FAO Table A3-3: POTASH (K20) Country Exports % Country Imports % Mill Tons Mill Tons Canada 6.81 38.98 USA 3.95 22.89 USSR 2.94 16,83 Brazil 1.28 7.42 Germany DR 2.81 16.08 Poland 1.20 6.95 Germany FR 1.38 7.90 India 0.89 5.16 Israel 1.11 6.35 France 0.85 4.92 Jordan 0.67 3.84 Japan 0.62 3.59 France 0.60 3.43 China 0.73 4.23 Others 1.15 6.58 Others 7.74 44.84 TOTAL 17.47 100.00 17.26 100.00 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --~~~~~. - 91 - Table A3-4: AMMONIA (N) Country Exports Country Imports Mill Tons Mill Tons USSR 2.20 25.85 USA 2.18 25.62 USA 0.93 10.93 Belgium 0.75 8.81 Gulf States 0.88 10.34 Spain 0.60 7.05 Trinidad 0.85 9.99 India 0.58 6.82 Netherlands 0.82 9.64 Turkey 0.55 6.46 Other W. Europe 0.50 5.88 Germany FR 0.21 2.47 Others 2.33 27.38 Others 3.64 42.77 TOTAL 8.51 100.00 8.51 100.00 Source: British Sulphur Table A3-5: PHOSPHATE ROCK Country Exports Country Imports Mill Tons Mill Tons Morocco 13.06 28.96 France 3.75 8.32 USA 9.01 19.98 Poland 3.45 7.65 Jordan 5.54 12.29 Spain 2.80 6.21 USSR 3.52 7.81 Romania 2.56 5.68 Israel 2.67 5.92 India 2.00 4.44 Togo 2.51 5.57 Japan 1.98 4.39 Senegal 1.45 3.22 Canada 1.89 4.19 Others 7.33 16.26 Others 26.66 59.13 TOTAL 45.09 100.00 45.09 100.00 Source: IFA Table A3-6: PHOSPHORIC ACID (P205) Country Exports Country Imports % Mill Tons Mill Tons USA 1.07 25.78 India 0.95 23.00 Morocco 1.41 33.98 USSR 0.87 21.07 Tunisia 0.32 7.71 Turkey 0.39 9.44 Spain 0.25 6.02 Brazil 0.31 7.51 Senegal 0.16 3.86 Indonesia 0.26 6.30 South Africa 0.16 3.86 Germany FR 0.20 4.84 Israel 0.11 2.65 Italy 0.20 4.84 Others 0.67 16.14 Others 0.95 23.00 TOTAL 4.15 100.00 4.13 100.00 Source: Ferticon - 92 - ANNEX 4 EXPORT PRICES FOR SOME MAJOR FERTILIZER MATERIALS (US$ per MT of product) CY~~~~~~~~~~~~~~~~~~~~ Il~~~~~~~~~~~~~~~~~~~~~~~~o o . ;o4 r11 _n _It r n , o _ I; _^ ' l | | Yf: ' . {1 -- D it 2~~~~~~~I O O O___O_O___ o o0 0 0 0 0 o~~~~~~y - 93 - ANNEX 5 DATA FROM THE FAO STUDY: AGRICULTURE TOWARDS 2000 Table A5-1: Net Cereal Balances (MM tons) 1979-81 1983-85 2000 Developing World -66 -69 -112 E.Europe and USSR -44 -42 -30 to -40 -110 -111 -142 to -152 Developed World 113 117 Table A5-2: Annual Growth Rate of Fertilizer Consumption (%) 1961-75 1975-85 1980-85 1984-2000 Developing Countries 12.4 7.1 5.7 4.7 Africa 11.9 5.8 3.1 6.4 Near East 12.5 7.8 6.8 5.4 Asia 12.7 9.3 8.4 4.3 Latin America 12.1 3.2 0.6 4.6 Table A5-3: Fertilizer Consumption (Nutrients) Million Tons kg/ha 1982-84 2000 1982-84 2000 Developing Countries 25.8 56.0 43.0 78.0 Africa 1.0 2.8 9.0 20.0 Near East 4.6 11.1 72.0 156.0 Asia 13.8 28.2 46.0 81.0 Latin America 6.5 13.9 53.0 90.0 - 94 - ANNEX 6 LONG-TERM FERTILIZER DEMAND World Bank/FAO/UNIDO Industry Fertilizer Working Group Demand figures are the result of consensus within the Working Group and take into account a variety of methods including trend projections, market surveys, agricultural programs and, for large-demand countries, econometric modelling. Long-term forecasts are usually made over a 10-year period, and the growth rates agreed on in June 1988 are shown in Table A6-1. Table A6-1: FERTILIZER DEMAND (Annual Growth Rates (%), 1986/87-1997/98) Nitrogen (N) Phosphate (P205) Potash (K20) Developed ME 0.05 0.54 0.62 North America 0.80 1.04 1.26 Western Europe -0.90 -0.51 -0.13 Oceania 2.36 2.27 3.52 Other developed 0.81 1.44 0.71 Developing ME 4.05 3.60 3.82 Africa 4.29 4.15 4.91 Latin America 3.76 2.31 3.01 Near East 3.71 5.90 5.13 Far East 4.22 3.42 4.36 Centrally Planned 2.97 2.53 2.05 Eastern Europe 2.49 1.70 1.21 Socialist Asia 3.48 4.97 8.78 World Total 2.43 2.22 1.79 - 95 - The World Bank Integrated Agriculture/Fertilizer Model In order to examine the longer-term demand for fertilizers in a more systematic way, the International Economic Department of the World Bank has developed an integrated agricultural/fertilizer model that derives fertilizer demand from grain production figures. In the model, the demand for fertil- izers is determined by, inter alia, market clearing prices and production and consumption of grains. The model also includes factors such as other agricul- tural inputs, growing population, income and investment in new capacity. The regional and world growth rates between 1984 and 2000 projected by the model are shown in Table A6-2. Although there are some differences in the time period and the regional classifications between these and the Fertilizer Working Group's growth rates in Table A6-1, they are sufficiently similar to make valid comparisons and to show that the results are in general agreement. Table A6-2: FERTILIZER DEMAND GROWTH RATES, 1984-2000 (%) Nitrogen (N) Phosphate (P205) Potash (K20) Region/Country North America 1.3 1.3 1.4 EEC 1.1 0.7 0.7 Eastern Europe 2.1 2.3 2.0 Asia 4.4 /a 4.3 /a 4.4 China 4.1 4.6 World Total 2.9 2.8 2.1 /a Includes China /b Includes China - 96 - World and Regional Fertilizer Demand Projections through 2000 Based on the projections given above, estimates have been made of fertilizer demand through 2000. Table A6-3: REGIONAL AND WORLD NITROGEN FERTILIZER DEMAND ('000 tons N) 1986/87 1992/93 1997/98 2000/2001 Developed ME 23.184 23.360 23.300 23.300 North America 10,539 11,120 11,500 11,550 Western Europe 11,160 10,600 10,100 10,000 Oceania 387 480 500 520 Other Developed ME 1,098 1,160 1,200 1,230 Developing ME 18,63 22,880 28.850 31.700 Africa 882 1,130 1,400 1,570 Latin America 3,830 4,680 5,750 6,360 New East 2,812 3,570 4,200 4,650 Far East 11,107 13,500 17,500 19,120 Centrally Planned Economies 30.555 37.300 41.900 44.400 Eastern Europe 16,024 19,000 21,000 22,300 Socialist Asia 14,531 18,300 20,900 22,100 World Total 72,370 83.540 94,050 99,400 - 97 - Table A6-4: REGIONAL AND WORLD PHOSPHATE FERTILIZER DEMAND (000 tons P205) 1986/87 1992/93 1997/86 2000/2001 Developed ME 11.43012.060 12.130 12.230 North America 4,283 4,600 4,800 4,900 Western Europe 5,077 5,000 4,800 4,750 Oceania 976 1,220 1,250 1,280 Other Developed ME 1,094 1,240 1,280 1,300 Developing ME 8.84511.370 13.050 13.930 Africa 639 850 1,000 1,110 Latin America 2,799 3,210 3,600 3,820 New East 1,437 2,160 2,700 2,900 Far East 3,970 5,150 5,750 6,100 Centrally Planned Economies 14.43417.370 19.000 20.200 Eastern Europe 11,20912,870 13,500 14,000 Socialist Asia 3,225 4,500 5,500 6,200 World Total 34.70940.800 44.180 46.360 Table A6-5: REGIONAL AND WORLD POTASH FERTILIZER DEMAND ('000 tons K20) 1986/87 1992/93 1997/98 2000/2001 DeveloRed ME 11.214 11.810 12.Q00 12.180 North America 4,792 5,300 5,500 5,660 Western Europe 5,477 5,430 5,400 5,400 Oceania 204 280 300 320 Other Developed ME 740 800 800 800 Developing ME 4.296 5.410 6.490 6,950 Africa 295 410 500 570 Latin America 2,006 2,330 2,780 2,900 New East 150 210 260 280 Far East 1,845 2,460 2,950 3,200 Centrally Planned Economies 10.587 12.160 13.240 13.860 Eastern Europe 9,755 10,540 11,140 11,460 Socialist Asia 832 1,620 2,100 2,500 World Total 26.097 29.380 31.730 33.090 - 98 - ANNEX 7 NITROGEN PRODUCTION BY MAIN ECONOMIC REGIONS 1962 - 2000 70C e~ tINOUSTRIAL COUNTRrES CENTRALLY PLANNEO ECON. 50 cc35- -------_____ 35 30 o~~ATA 190-98. FOECS 18-2000 350 200 .-5o 350k- C15 low 1. GM 970 .1Q75 1 Q80 985 G 190 Q95 2000 - 99 - ANNEX 8 AMMONIA REALIZATION PRICE VERSUS FEEDSTOCK COST UTILIZATION 90%: IRR 15% 500 - 400 - z 0\ 2 0 o I I f 5 0 200_ __ _ _ __ NATURAL GAS S/MMBU 0 1.0 2.0 3.0 4.0 5.0 6.0 I iI NAPHTHA S/TON oI 50 100 150 200 250 FUEL OiL S/TON 0 1 50 100 150 200 250 COALS/TON 0 20 40 60 80 100 120 140 Eauivalent EosreV Prices For lrifferent Fuels Natural Gas Nphtha Fuel Oil (No.6) coal rzude oil Us$AMtU US9 Per Ton MSS Per Ton 11L Per Tonr U89 Per bhl 1.0 44.8 41.9 25.1 7.1 2.0 89.6 83.8 50.2 14.2 3.0 134.4 125.7 75.3 21.4 4.0 179.2 167.6 100.4 28.5 5.0 224.0 209.5 125.5 35.6 6.0 268.8 251.4 1.50.6 42.6 T1e price of crude oil assuwe that 1uel Oil No. 6 is 80F of the cost of cruie oil on a weight bhis andi that there are 7.35 barrels of cnrue oil per ton of crude oil. The Prices of natural gas, naphtha, ful oil and coal are thn equated on an energv hasis. - 100 - ANNEX 9 FERTILIZER PROJECTS FINANCED BY THE BANK GROUP FY 1968-1988 AMOWNT CAL-YEAR IBRD/IDA REGION/COUNTRY PROJECT (USS MILLION) END PRODUCT APPROVED IFC BangLadesh Ashuganj/suppl. 29.0 Ammonia/Urea 1979 IDA Pakistan Imports Credit 50.0 Purch. of Fertilizers 1980 IDA Bangladesh Industry Credit 29.0 Various Debottlenecking 1980 IDA Brazil Sotave 16.0 Mixed FertiLizers 1980 IFC Peru Bayovar Phosphate 7.5 Phosphate Engineering 1980 IBRD India Hazira 400.0 Ammonia/Urea 1980 IDA Bangladesh Fertilizer Transport 25.0 Rail and Storage 1981 IDA Senegal Industries Chem. Du Se 25.0 Phosphate Fertilizers 1981 IFC Senegal SEFICS 19.3 Fertilizers Transport 1981 IBRD Turkey Fertilizer Industry 110.0 Various Debottlenecking 1981 IBRD Togo Dagbati Phosphate 5.7 Phosphate Engineering 1981 IDA Thailand Potash Project 8.9 potash Engineering 1981 IBRD Bangladesh Chittagong Fertilizer 15.0 Ammonia/Urea 1982 IDA Uganda Fertilizer Industry 4.0 Phosphate Engineering 1982 IDA Turkey Fertilizer Industry 44.1 Rehabilition 1982 IBRD Pakistan Fertilizer Industry 38.5 Rehabilition 1982 IBRD Malawi Fertilizer Cr. IFAD 5.0 SmalLholder Fertilizers 1983 IDA Senegal Phosvalor 7.7 Phosphate Engineering 1983 IDA Nigeria Fertilizer Imports 250.0 Fertilizer Import 1983 IBRD Hungary Energy Efficiency 109.0 Debottleneck./Reh. 1983 IBRD Yugoslavia Fertlizer (SAP) 90.0 Fertlizer Sector Loan 1984 IBRD India MP Fertilizer 203.6 Ammonia/Urea 1984 IBRD Tunisia Phosphate Mining 13.4 Technical Assistance 1984 IBRD China Fertilizer Rehab. 97.0 Rehabilitations 1985 IBRD Hungary Chemicals and B Loan 23.0 Debottleneck./Reh. 1985 IBRD Burkina Faso Fertilizer Credit 13.7 Fertilizer 1985 IDA India Aonla Fertilizer 302.2 Ammonia/Urea 1986 IBRD Zambia Fertilizer Restruc. 10.0 Restructuring 1986 IDA China Fertilizer Ration. 97.4 Rehabilitations/s 1987 IBRD Jordan Arab Potash ll 12.0 Potash 1987 IBRD Jordan Shidiya Phosphate Mine 31.0 Phosphate rock 1988 IBRD Mexico Fertlizer Sector Loan 265.0 Fertlizer Sector Loan 1988 IBRD China Phosphate t 62.7 Phosphate rock 1988 IBRD - 101 - ANNEX 10 JUSTIFICATION OF FARM SUBSIDIES: ARGUMENTS PRO AND CON The original justification for the retention of fertilizer subsidies to farmers was that subsidies would encourage introduction of fertilizers and related "new" farming techniques where they were not in widespread use. Such an argument loses most of its impact as the use of conventional chemical fertilizers becomes commonplace. A second argument sees the subsidy as a corrective measure for farmers' tendencies to use less fertilizer than would be justified given its potential benefit. The farmer, it is believed, will accept a lower, safer outcome using less fertilizer rather than gamble scarce income, even though the expected payoff is high. This adjustment for risk is likely to be strongest for the poorest farmers, especially those facing wide swings in expected income, e.g., because of aberrant rainfall or wide fluctuations in crop prices. It is questionable, however, whether this reasoning can justify the kind of broad-based subsidy programs actually applied by many World Bank borrowers: subsidies usually disregard the specific crop and income situation and the varying levels of agroclimate risk. Simplistic rules of thumb are unconvincing, such as the argument that if fertilizers constitute 20% of cropping costs and fertilizer prices are raised by 20%, the result will be only a 4% rise in crop costs. There is considerable room for innovation for quantifying the costs and benefits of subsidy removal, as the fertilizer chain has linkages forward all the way to urban wages or backward to energy exploration. Ideally, one would want an - 102 - explicit model to analyze direct and indirect effects of a fertilizer price change on crop production and fertilizer use, but even a minimum of quantitative analysis using broad ranges for the relevant elasticities can be of great assistance. A third avenue for justifying fertilizer subsidies is the perceived environmental benefits of certain patterns of fertilizer use. This involves factors beyond direct impact on crop yield. Some fertilizers such as untreated rock phosphate are economically beneficial but are taken up only slowly over several years. Other fertilizers improve long-term soil conditions but have less direct effect on the yield for the crop year in which they are applied. Such fertilizer application is a form of land improvement. This has been recognized in several World Bank agricultural projects where rock phosphate applications have been financed by medium-term rather than seasonal loans. Similarly, adequate access to simple means of on-farm transport like flatbed donkey carts has recently emerged as the key factor in applying fertilizer, manure and crop residues and removing stones as an integral part of soil fertility and conservation efforts. Where land tenure is secure, these long-term land improvements, which require many days of heavy labor, are accepted and the case for targeted fertilizer subsidies in the broadest sense deserves attention. Finally, fertilizer subsidies are often defended on grounds of social equity. They are seen as an means to redistribe income in favor of impoverished farmers and to correct for the lack of direct income support such as floor prices for crops. However, it is not necessarily true that subsidizing fertilizers is is an effective means of tackling rural poverty. Distributors of World Bank Publications ARGENTINA FINAND MALAYSIA SRI LANKA AND THE MAIDIvES Calos Hirob, SRL Akmmen X1kO pPv Ulvor6y d MulWa Co ve La 2ke Hoo p Galta Guroo P.O. BD 128 BSkhcp, Limited P.O. BoX 244 Plaid& 165,4th Rom-OX 453/465 SF4010 P.O. Box 1127, n htalBmu 104, Sir Chtmam A. Gaodloa 1333 Sumen Atm Hd 10 ' Lumpm Ma,atha C4oto,bo 2 AUSTRALLA. PAPUA NEW GUINEA, FRANCE MBXICO FII SOLOMONISLANDS, Waid Bak PubEitrEam, IWNPOEC SWEDEN VANUATU, AND WESTERN SAMOA 64 o,ned'ldnx Aparado Pda 2W160 Pm IFkh DA.Boksa&jomndo 75116Pa 14060TI1p.o,Sn ooDF. 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Razavi, The New Era of Petroleum Trading: Spot Oil, Spot-Related Contracts, and Fu tures Markets The World Bank Headquarters European Office Tokyo Office 1818 H Street, N.W. 66 avenue d'Iena Kokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1 Marunouchi 3-chome Telephone: (202) 477-1234 Telephone: (1) 40.69.30.00 Chiyoda-ku, Tokyo 100, Japan Facsimile: (202) 477-6391 Facsimile: (1) 47.20.19.66 Telephone: (3) 214-5001 Telex: WUI 64145 WORLDBANK Telex: 842-620628 Facsimile: (3) 214-3657 RCA 248423 WORLDBK Telex: 781-26838 Cable Address: INTBAFRAD WASHINGTONDC ISSN 0253-7494 Cover Design by Bill Fraser ISBN 0-8213-1220-0