Mexico - Fertilizer Project

Report No. 734-ME FILE COPY Appraisal of Fertilizer Project Mexico May 5, 1975 Industrial Projects Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. it may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness ot the report.  CURRENCY EQUIVALENTS WEIGHTS AND MEASURES Mex$1.0 = US$0.08 1 Metric Ton (ton or MT) - 1,000 kilograms Mes$12.5 = US$1.00 1 Kilogram (kg) = 2.205 pounds (lbs) 1 Kilometer (km) = 0.62 miles 1 Hectare (ha) = 2.47 acres 1 Cubic Meter = 1 m3 = 35.3 cubic feet (cu. ft.) 1 Normal Cubic Meter of Gas (Nm3) 37.3 Standard Cubic Feet of Gas (SCF) 1 MSCF = 1,000 SCF PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BHC Benzene Hexachloride CONASUPO Compania Nacional de Subsistencias Populares DAP Diammonium Phosphate DDr Dichloro-diphenyl-trichloroethane FFM Fosfatados Mexicanos S.A. GOM Government of Mexico GUANOMEX Guanos y Fertilizantes de Mexico S.A. HYV High Yielding Variety K20 Potassium (potash) content in Fertilizer IW Kilowatt KWh Kilowatt hour MW Megawatt N Nitrogen NAFINSA Nacional Financiera S.A. NPK Complex Fertilizers P205 Phosphatic content in Fertilizer SSP Single Superphosphate TPD Tons per Day TPY Tons per Year TSP Triple Superphosphate FISCAL YEAR July 1 - June 30  MV= cO APPRAISAL OF FERTILIZER PROJECT Page No. SUMMAABY AND CONCLUSIONS ..... ................................ - I. INTRODUCTION .................. ................................ 1 II. THE FERTILIZER INDUSTRY AND GUANOiMEX ....... ..................... 1 A. The Mexican Fertilizer Industry ............................. I B. Description of Guanomex . ... ...........* ..................... 2 C. Organization and Management ...................... 3 D. Past Production and Financial Position . ................ 3 III. THE MARKET .................................................. 7 A. Agriculture in Mexico and the Need for Fertilizers . ......... 7 B. Fertilizer Supply and Consumption .......................... 9 C. Fertilizer Distribution ..................................... 13 D. Fertilizer Prices ................................. . ...... 13 E. The Market for Insecticides ..13 IV. THE PROJECT ....................................... 1 A. Project Scope ............................ 14 B. Technology ..15 C. Utilities ............................. 15 D. Employment and Training .......................... 16 E. jcology and Safety .................................... . . 16 F. Project Execution 16 V. CAPITAT COST ESTLMATES AND FINANCINGI PLAN ...... .......... 17 A. Capital Cost . . ............... 17 B. Financing Plan ................. 19 C. Procurement . . . ........... . 20 D. Allocation and Disbursement of Bank Loan ......... ........... 20 VI. FINANCIAL ANALYSIS .. ........................................... 21 A. Analysis of the Project ............... a....... 21 B. Financial Rate of Return and Sensitivity Analysis ,.. .... 24 C. Financial Forecasts for Guanomex . . . ........... ............. a 24 D. Financial Covenants . . . .................. 25 E. Major Risks. .. . ........................ 26 This report was prepared by Messrs. Tarnawiecki, Brown, de la Balze, Pratt, Carpio, Suebsaeng and Becher of the Industrial Projects Department  -2- Page No. VII. ECONOMIC ANALYS IS 26 A. World Fertilizer Prices ......... 26 B. 'Economic Rate of Return ......... 27 C. Direct Foreign Exchange Savings .....28 D. Other Benefits ...... 28 VIII* AGREEMENTS 28  ANNEXES 1-1 Glossary of Terms used in the Report 1-2 Units and Conversion Factors 2-1 Description of the Company 2-2 Organization Chart of Guanomex 2-3 Manufacturing Units of Guanomex 2-4 Historical Financial Statements 3-1 Crops and the Need for Fertilizers in Mexico 3-2 Historical Development of Fertilizer Supply and Consumption 3-3 Agro-Chemical Inputs according to an Agricultural Sector Model for Mexico 3-4 Ratio of Urea Nitrogen to Total Nitrogen Fertilizer Consumption in Selected Countries 3-5 Fertilizer Supply and Consumption Projections 3-6 Imports of Urea in Selected Countries 3-7 Description of Conasupo 3-8 The Role of Organo-Phosphorus Insecticides 4-1 Description of the Projected Plants 4-2 Feedstock for Ammonia Plants in Mexico 4-3 Parathion Manufacture 5-1 Total Capital Cost Estimates for the Project 5-2 Capital Cost Estimates for the Sub-projects 5-3 Schedule of Capital Expenditures and Escalation Factors 5-4 Estimation of Permanent Working Capital 5-5 Disbursement Schedule for IBRD Loan 6-1 Assumptions used for Financial Projections 6-2 Manufacturing Costs of Different Production Units of Guanomex 6-3 Projected Income Statements for the Project Alone 6-4 Profit and Cash Flow Break-even Charts 6-5 Projected Balance Sheets and Cash Flow Statements for the Project Alone 6-6 Cost and Benefit Streams for Financial Rate of Return Calculations 6-7 Projections for Existing Facilities 6-8 Consolidated Financial Projections 7 Cost and Benefit Streams for Economic Rate of Return Calculations MAP IBRD 11494 - Location of Plants and Marketing Areas   MEXICO APPRAISAL OF FERTILIZER PROJECT SUMMARY AND CONCLUSIONS i. This report deals with the appraisal of a fertilizer project in Mexico comprising two plants with a total capacity of 2,500 tons per day (TPD) of urea and the expansion of an insecticide (parathion) plant from 7,500 to 10,000 tons per year (TPY). One of the urea plants (1,000 TPD) and the insecticide plant to be expanded are located at or near Salamanca, in the State of Guanajuato, and the other urea plant (1,500 TPD) at Coatza- coalcos, in the State of Veracruz. The plants will be owned by Guanos y Fertilizantes de Mexico (Guanomex), a fully-owned Government corporation, with major responsibility in the manufacture and distribution of fertilizer. The feedstock will be ammonia produced from natural gas by Petroleos Mexicanos (Pemex), the government agency which has exclusive rights to extract, refine and distribute petroleum and natural gas, and operate basic petrochemical industries. Total financing required for the project is estimated at US$150 million, US$53 million of which is in foreign exchange (including US$7 million in interest during construction). A Bank loan of US$50 million equivalent is proposed, to be made to Nafinsa and Guanomex, and guaranteed by the Government. ii. Chemical fertilizer consumption grew in Mexico at an average rate of 10.4% annually in the last decade reaching in 1973 a total of 750,000 nutrient tons, of which 75% is nitrogen (N), 21% phosphate (P205) and 4% potassium (K20). The present average rate of fertilizer application in Mexico (29 nutrient kg/ha)--although nearly twice that for all developing countries combined-- is below the world's average of 50 kg/ha. Furthermore, the Mexican average masks a wide range of fertilization levels from nearly optimum dosages in flat irrigated land in the northwest to none in many rain- fed highland areas (it is estimated that fertilized land--now about 5.7 million ha--can be doubled). Nitrogenous fertilizer consumption is expected to grow at 8.7% annually through 1985 consistent witlh the findings of a model for Mexican agriculture developed jointly by the Government and the Bank. iii. Mexico has a well developed fertilizer industry based on extensive resources of natural gas and sulfur. At present, production and consumption of finished fertilizer are roughly balanced, but practically all the phos- phate rock and more than one third of the ammonia required has to be imported. During the 80s, however, Mexico is expected to become substantially self- sufficient in fertilizer raw materials. Recent finds of phosphate deposits in Baja California and an aggressive program to further prospect for and develop natural gas resources and to build additional capacity for the pro- duction of ammonia and petrochemicals coupled with adequate infrastructure, experienced manpower, and competent technical and managerial personnel should provide the basis for Mexico to become independent of imports and possibly a net exporter of fertilizers.  iv. Production and distribution of fertilizer in Mexico is mainly carried out by three enterprises, two of which are fully Government-owned (Pemex and Guanomex) and a third which is a joint public and private sector enterprise: Fosfatados Mexicanos S.A. (FFM). Guanomex now operates 16 fertilizer plants with a combined capacity of 437,300 TPY of N. The Company is efficiently run, has a good record for plant construction and in 1973-74 operated available nitrogen capacity at 80%, less than it would most likely have achieved had it not been constrained by a shortage of ammonia in the world market. Guanomex has a sound financial structure. The Government is aware of the importance of pesticides in agricultural production and has given Guanomex an important, but non-exclusive role in their manufacture and distribution. v. The project envisages the utilization of modern, proven technology for the manufacture of urea and parathion, using the assistance of experienced engineering firms. In agreement with the Bank two of the firms--Foster Wheeler Energy Corp. (US) and Atlas Foster Wheeler Mexicana--have already been contracted for the 1,000 TPD urea plant. Furthermore Guanomex has set up a Project Execution Team to implement the project with similar responsi- bilities as in earlier projects and the Bank considers this arrangement to be satisfactory. The insecticide plant expansion involves little new in process or equipment and, with the advice of the licensor--Stauffer of the US--no difficulties are expected. vi. The proposed Bank loan would be made for 14 years, including 3-1/2 years of grace. Guanomex would pay 12% per annum interest with the difference of 3-1/2% over the assumed Bank interest rate of 8-1/2% accruing to the Government. The loan will finance equipment procured through inter- national competitive bidding; long-lead imported equipment which, because of being critical to the completion of the project, will be procured from a limited list of suppliers; items under US$50,000 procured by international shopping; and fees for process licensing and engineering services. To main- tain the schedule of the Bajio II urea plant, the Bank has agreed to the advanced contracting of engineering services and long-lead equipment and Guanomex has been advised that, subject to approval of the loan by the Executive Directors, up to US$3.6 million will be reimbursed to Guanomex for down payments on these contracts. The balance of the financing required will be met by raising Guanomex's equity by Mex$750 (US$60.0) million and long-term borrowing of Mex$502 (US$40.2) million from Mexican and foreign financial insti- tutions. vii. During the initial years of operations of the two new urea plants up to 36% of their output may have to be exported. Based on expected urea prices of US$122 per ton delivered to retailers in Mexico and US$93 per ton f.o.b. for sales abroad in those years when exports have been projected to occur, the project is forecast to yield a financial rate of return of 14.5% after income taxes (20.3% before taxes). The financial position of Guanomex is projected to remain sound; it will be safeguarded by a number of financial covenants and further improve as loans are repaid, reserves are built up, new efficient plants are built to replace some of the obsolete units and new policies now being developed on fertilizer distribution, transportation and inventories are implemented.  - iii - viii. Long-term international prices per ton of urea and ammonia are projected to be US$130 CIF Mexican port and US$88 delivered at factory site respectively. For the part of urea projected to be exported between 1979 and 1982, estimated FOB US Gulf prices have been used in the calculation of the project benefits. On this basis, the project's economic rate of return is 24.0%. A drop of 10% in the urea price would depress the return by 6.2 percentage points. Lower capacity utilization (at 80%) would result in a return of 20.3% and a capital cost overrun of 15%, would still leave a satis- factory rate of return of 21.2%. ix. Guanomex has agreed that a study of fertilizer distribution systems, including the optimization of inventory levels, coupled to a survey of the measures required to promote the proper use of fertilizer by small farmers, should be carried out under terms of reference agreed upon by the Bank and the recommendations of such a study be implemented after having been reviewed by the Bank. x. The project would result in substantial benefits to the Mexican economy and faces no important technical or financial risks. Based on recommendations summarized at the end of this report, the project is suitable for a Bank loan of US$50 million equivalent.  I  I. INTRODUCTION 1.01 The Mexican Government development bank, Nacional Financiera S.A. (Nafinsa) and Guanos y Fertilizantes de Mexico S.A. (Guanomex or the Company), a firm fully owned by Nafinsa, have requested a Bank loan of US$50 million equivalent for a project comprising two urea plants and the expansion of an insecticide (parathion) plant to be located in the States of Guanajuato and Veracruz (Map: IBRD 11494). The proposed urea plants will have capacities of 1,000 and 1,500 tons per day (TPD) or a total of 825,000 tons per year (TPY), equivalent to 379,500 TPY of nitrogen (N). 1/ They will increase the country's existing N capacity by 79% to 858,400 TPY of nitrogen. The para- thion plant's capacity will be increased by 33% to 10,000 TPY. 1.02 The fertilizer sector in Mexico was first reviewed by the Bank in June 1974, at which time the project's scope was outlined. The appraisal of the project was carried out in Mexico in September 1974 by Messrs. Tarnawiecki (Chief), Brown and de la Balze of the Industrial Projects Depart- ment. This would be the first Bank Group operation in the fertilizer sector in Mexico. II. THE FERTILIZER INDUSTRY AND GUANOMEX A. The Mexican Fertilizer Industry 2.01 Mexico has a well established fertilizer industry based mainly on domestic natural gas and sulfur but so far requiring large ammonia and phos- phate rock imports. The manufacture of nitrogenous fertilizer is for all practical purposes in the hands of two organizations, both of them in the public sector: Petroleos Mexicanos (Pemex) produces virtually all the ammonia made locally, and Guanomex produces all other nitrogenous fertili- zers, with the exception of by-product ammonium sulfate (para. 3.07). Pemex is the Government agency which, in Mexico, is in exclusive charge of petroleum extraction and refining and the distribution of petroleum products as well as the manufacture of petrochemicals, including ammonia. 2/ As a consequence of this organizational set-up, ammonia and urea are manufactured by two different enterprises; this arrangement, although not in widespread use, does not interfere with efficient and economical integration of the manufacturing operations as long as the ammonia and urea plants are located close to each other; this is the case in the proposed project. 1/ A glossary of terms used in the report is contained in Annex 1-1 and frequentlv used units and conversion factors are shown in Annex 1-2. 2/ Domestic distribution of all fertilizers, including imported products, is the exclusive responsibility of Guanomex (para. 3.12).  -2- 2.02 Phosphate fertilizers are manufactured by Guanomex and Fertili- zantes Fosfatados Mexicanos (FFM), a company which is also one of the largest phosphoric acid exporters in the world; though majority-owned by Banco de Mexico, FFM is generally considered as a private enterprise. Until now practically all phosphate rock has been imported (96% of requirements). How- ever, last year, deposits of phospPate nodules were found in the Baja California territory. Drilling over a 300 km area and evaluation of reserves will not be completed until late in 1975, but preliminary indications are that these de- posits will probably permit Mexico to satisfy its own phosphate needs and possi- bly leave an exportable surplus. 2.03 Feedstock for the production of ammonia in Mexico is natural gas from deposits developed by Pemex, mainly in the States of Tamaulipas and Tabasco. Production of ammonia has not increased significantly since 1969 (para. 3.08) but Pemex intends to utilize its rapidly growing reserves of natural gas (estimated at 11 trillion SCF at the end of 1973) 1/ to further develop its petrochemical industries, including trebling ammonia production by 1985 (para. 3.10). B. Description of Guanomex 2.04 Guanomex, created in July 1943, was originally charged with the responsibility of promoting the exploitation of Mexico's guano deposits and the use of fertilizers in general (Annex 2-1). Subsequently, small instal- lations for the manufacture of simple superphosphate (SSP) and bone meal were added and, in 1951, the first Mexican chemical nitrogenous fertilizer plant came into operation with the manufacture of ammonium sulfate in Cuautitlan, in the State of Mexico. 2.05 Rapidly expanding demand favored the establishment of several fertilizer plants in the private sector. In 1965, the Government decided that orderly growth of the industry, savings in transportation costs and the realization of economies of scale could be obtained by consolidation of most of the fertilizer activities. Between 1965 and 1969, Guanomex, through negotiations, bought out Fertilizantes de Monclova S.A. (ammonium nitrate), Fertilizantes del Istmo S.A. (ammonium sulfate), Fertilizantes del Bajio S.A. (urea) and Fertilizantes Delta as well as Montrose Mexicana S.A. and Lerma Industrial S.A. (chlorinated insecticides). The Government also transferred to Guanomex the assets of Industria Petroquimica Nacional, a small private company then in process of liquidation and, in 1970, Guanomex acquired a controlling interest in Fertica S.A., a holding company owning fertilizer plants in Costa Rica, El Salvador and Guatemala. 1/ The Government has budgeted US$248 million for the development of additional gas reserves (mainly in the States of Chiapas and Tabasco) in the 3-year period ending in December 1976.  -3- 2.06 At present Guanomex has 36 plants of which 16 are fertilizer plants 1/ with a total capacity of 437,300 TPY of N, 122,000 TPY of P205 and 27,000 TPY of K20 2/ as well as two plants for the manufacture of chlorinated and phosphorated insecticides (7,700 and 7,500 TPY respectively) and small plants for various chemicals. The average age 3/ of the Company's fertilizer plants is now about 10 years and four plants are more than 15 years old. The location of the manufacturing facilities as well as the Company's sales areas are shown in Map: IBRD 11494. C. Organization and Management 2.07 The organization chart for the Company is shown in Annex 2-2. Guanomex's Board of Directors consists of nine members appointed by the President of Mexico, including the Secretary of National Patrimony, and President of Pemex, Mr. Francisco J. Alejo, who is the Chairman, the Secre- taries of Agriculture, Finances, and Industry and Trade, and representatives of Nafinsa. The day-to-day operations are carried out by six decentralized departments under the General Director, Mr. Luciano Barraza Allande. Manu- facturing plants are grouped in 11 units (Annex 2-3) under the general direc- tion of the Production Manager, Mr. Adolfo Sisto Velasco, an experienced engineer of international reputation. The Company's agricultural extension, fertilizer promotion and sales activities are coordinated under Mr. Francisco Castillo Creus. 2.08 Construction of new plants is the responsibility of the Development Department presently managed by Mr. Ernesto Badillo, a competent executive with a background in agricultural economics. Three divisions report to him: Research, Projects and Construction Supervision. With the collaboration of foreign and local engineering firms, Guanomex has gained considerable experi- ence during the implementation of more than a dozen plants, including four large scale fertilizer plants, which have been built in the last six years. D. Past Production and Financial Position 2.09 The production performance of Guanomex has been satisfactory. Manufacturing units are well run and quality of the engineering and techni- cal plant staff is high. In the last two years average capacity utilization (in terms of nutrient tons) was 80% for nitrogenous and 93% for phosphatic fertilizers. Operating data for the more important plants are summarized below and detailed data for all plants are given in Annex 2-3. 1/ Not including four mixing plants. 2/ Manufactured from imported potassium salts. 3/ Weighted average based on nutrient contents.  - 4- Guanomex - Capacity Utilization Capacity Year of Capacity Utilization Product/Plant Product N P205 Start-up /1 1970 1973 1974 ___----- (000 TPY) --- - /1 Urea - Camargo 85.0 25.8 - 1968 77 97 81 - Minatitlan 305.0 140.3 - 1963 18 78 76 Ammonium Sulfate - Bajio 60.0 12.3 - 1969 45 95 81 - Coatzacoalcos 100.0 20.5 - 1966 17 50 44 - Guadalajara 120.0 24.6 - 1968 97 84 78 DAP and NPK - Coatzacoalcos 80.0 /3 14.4 36.8 1970 5 /2 84 101 - Minatitlan 140.0 25.2 23.8 1962 72 95 99 - Monclova 50.0 9.0 8.5 1963 100 106 119 SSP - Cuautitlan 120.0 - 21.6 1963 92 105 105 - Guadalajara 120.0 - 21.6 1968 21 63 60 Parathion - Salmanca 7.5 - - 1973 - 55 /2 62 /1 Years ended June 30. /2 Year of start-up /3 DAP The above table indicates that with the exception of one SSP and one ammonium sulfate plant and the recently completed insecticides plant all other production units have been operating at a rather high capacity utili- zation. The urea plants suffered over the last two years from scarcity of ammonia supplies which, however, will be alleviated by the output of new Pemex ammonia plants (para. 3.10), of which one, in Minatitlan, started operations in January 1975. 2.10 The financial administration of Guanomex is centralized, and the 11 manufacturing units are cost centers only. The Company's recent income statements are shown in Annex 2-4 and, for the last four years, are summarized below:  Guanomex - Summary Income Statements (1971-1974) (Mex$ Million) Year Ended June 30 1971 1972 1973 1974 Net Sales 1,449.8 1,772.3 1,847.1 2,353.3 Cost of Goods Sold 1,133.7 1,352.4 1,411.0 1,859.3 Gross Profit 316.1 419.9 436.1 494.0 Administration and Sales Expenses 190.9 227.4 254.7 334.3 Operating Profit 125.2 192.5 181.4 159.7 Interest Paid 110.1 96.1 98.8 153.7 Plus: Other Income /1 25.8 24.1 40.5 78.2 Profit before Tax 40.9 120.5 123.2 84.2 Income Tax 3.8 35.4 35.8 33.3 Profit after Tax 37.1 85.1 87.4 50.9 Workers' Participation in Profit 1.2 7.5 8.7 4.4 Retained Net Profit 35.9 77.6 78.7 46.5 Cost of Goods Sold/Sales (%) 78.2 76.3 76.4 79.0 Operating Profit/Sales (%) 8.6 10.9 9.8 6.8 /1 Mainly interest received for accounts receivable. 2.11 The Government controls the price of fertilizer and that of the Company's principal raw material, ammonia, through a pricing policy which is directed towards avoiding great fluctuations in fertilizer prices and which largely determines the Company's profitability. The other major input, phosphate rock, is dependent on international prices. The effect of world market price fluctuations for raw materials on the Company's prof- itability will decline as Pemex's ammonia capacity is expanded and domestic phosphate rock production on a large scale commences and thus replaces imports. Domestic fertilizer prices were increased between 1971 and the end of 1974 (i.e. from US$108 to 122 per ton of urea placed at main distribution points), but they are still substantially below those presently prevailing in the international market, which for urea are now between US$300 and 350 per ton. It is expected that this gap between domestic and international pr4ces will narrow as the latter recede from their current exceptionally high level.  -6- 2.12 The Government has appropriated Mex$500 million to compensate the Company for losses incurred through the importation of ammonia at the present high prices and its sale for direct application as fertilizer at the lower domestic price as well as for those losses resulting from higher cost of some imported raw materials which are not reflected in the finished product price. During FY1974, the Company had received Mex$82.8 million for this purpose. 2.13 Guanomex's recent balance sheets are also shown in Annex 2-4 and are summarized for the last four years below: Guanomex - Summary Balance Sheets (1971-1974) (Mex$ Million) As of June 30 1971 1972 1973 1974 Cash and Near Cash 120.3 94.2 77.4 57.8 Receivables 702.3 697.4 816.0 1,003.8 Inventory 415.3 468.8 648.8 912.9 Other Current Assets 67.4 57.4 65.9 113.0 Total Current Assets 1,305.3 1,317.8 1,608.1 2,087.5 Investments 403.6 374.7 385.5 375.5 Fixed Assets (Net) 869.4 962.3 923.6 904.1 Other Assets (Net) 107.9 140.3 137.4 154.5 Total Assets 2,686.2 2,795.1 3,054.6 3,521.6 Payables 185.6 250.9 274.3 459.6 Short-term Debt 719.9 720.7 951.6 1,003.5 Other Current Liabilities 122.8 152.7 152.0 346.6 /1 Total Current Liabilities 1,028.3 1,124.3 1,377.9 1,809.7 Long-term Debt 586.3 528.0 486.1 544.9 Equity -Share Capital 925.0 955.0 1,000.0 1,000.0 -Reserves 146.6 187.8 190.6 167.0 Total Equity 1,071.6 1,142.8 1,190.6 1,167.0 Total Liabilities and Equity 2,686.2 2,795.1 3,054.6 3,521.6 Current Ratio 1.3 1.2 1.2 1.2 Debt/Equity Ratio 35/65 32/68 29/71 32/68 Net Profit/Equity Ratio (%) 3.4 6.8 6.6 4.0 /2 /1 Including Mex$82.8 million received from the Government's compensatory fund (para. 2.12) but not yet entered as income received. /2 If the compensatory Mex$82.8 million is included as income in FY 1974, the profit/equity ratio would be 8%.  - 7 - 2.14 The Company's low current ratio in the last three years results from Guanomex acting, in a way, as a financing agent for fertilizer sales. Even "cash" sales are frequently not paid for 60 days or more. Receivables are interest-free for sixty days and earn an interest of about 1-1/4% monthly afterwards. Furthermore, Guanomex also extends direct credits to dealers covering the payment terms that they in turn accept from the buyers. Begin- ning in FY 1973, the Company accumulated sizable inventories of finished goods 1/ (over 70% of total inventories) in line with a Government policy to avoid lack of fertilizer at a time of worldwide shortages. In addition, Guanomex is undertaking a study of the optimum level of its inventories taking into account freight, storage and capital costs as well as the maximum admissible risk of crop losses due to lack of fertilizers in different areas. 2.15 Guanomex has established good vertical reporting procedures and horizontal communications, particularly among the Production, Financial, Sales and Development Departments, are being improved. The Finance Department is mainly geared to the accounting aspects of financial control. Guanomex will strengthen this department and provide it with the capacity for better control of current assets and prepare adequate financial projections as required by the Bank. Guanomex has also agreed to provide the Bank with quarterly financial statements and annual audited reports submitted by inde- pendent auditors acceptable to the Bank. III. THE MARKET A. A riculture in Mexico and the Need for Fertilizers 3.01 Of the total area of Mexico, less than 12% (about 22 million ha.) is arable land (i.e. excluding permanent pastures, forests and arid land). A relatively large proportion is left fallow each year so that actually cultivated land was estimated in 1974 at 16 million ha., of which approximately 24% is irrigated. Double-cropping in some areas, especially in the Northwest, increases cropped area by about 0.6 million ha. 3.02 The main food crops are corn, wheat, sorghum, beans and soya and the main industrial crops are cotton, sugarcane and coffee (Annex 3-1). The following table compares the agricultural yields for several crops in Mexico with those of a number of other selected countries: 1/ Including fertilizer held by dealers on consignment.  - 8 - 1972 Yields for Several Crops in Selected Countries (kg/Ha.) Wheat Corn Sorghum Beans Cotton Sugarcane Coffee Mexico 2,721 1,148 2,118 524 822 62 584 Argentina 1,612 1,862 1,600 932 240 51 - Peru 1,006 1,788 3,250 800 610 155 657 Ave. S. America 1,458 1,464 1,647 654 250 51 550 US 2,196 3,675 3,808 1,458 490 92 - Canada 1,680 4,985 - 1,595 - - - Average Europe 2,952 6,084 3,880 281 620 77 - " Asia 1,255 1,766 489 408 240 49 518 If Africa 1,065 1,382 806 429 270 59 437 " World 1,628 2,785 1,170 489 371 53 514 It can be seen that Mexican yields for wheat 1/, sorghum and cotton are considerably higher than the world averages although the yield for corn is lower than in all other major producing areas. It is expected that yields for beans, sugarcane and coffee, although also higher than the world averages, can be improved. Agricultural production in Mexico during the last 10 years has not kept pace with population. The availability of new land is limited and water is a scarce resource in large areas. Under these conditions, future growth of agricultural output will be based, to a large degree, on better utilization of existing resources and improved farming practices, including intensified and proper use of fertilizers and pesticides, irriga- tion, multiple cropping and development of new--and perhaps more versatile-- varieties of the most important crops. 3.03 At present, the average fertilizer application rate in Mexico-- although 1.9 times higher than for all developing countries taken together-- is below the world average (Annex 3-1, Table 2). Averages, however, mask the wide variety of agricultural practices in Mexico ranging from very modern farming on flat irrigated land in Northwestern states, in which fertilizer dosages approach (and may occasionally surpass) optimum economic rates, to no fertilization in many rain-fed highland areas. Guanomex estimates that the area now being fertilized--estimated at 5.7 million ha.--can be doubled. 1/ With the help of the Rockefeller Foundation, high yielding varieties (HYVs) of wheat were developed in Mexico from Norin 10, a Japanese dwarf variety introduced in the US after the Second World War. In 1964 they were exported to the Indian sub-continent where they have contri- buted largely to the increase in yields attained in the last decade.  - 9- B. Fertilizer Supply and Consumption 1. Past 3.04 The historical growth of fertilizer consumption and production in Mexico is analyzed in Annex 3-2 and summarized below: Mexico - Consumption and Production of Fertilizer (000 tons of Nutrients) Calendar Apparent Consumption Production Surplus (Deficit) /L Year N P K Total N P /2 Total N P Total 1953 22 15 1 38 14 10 24 (8) (5) (13) 1963 197 68 14 279 163 53 216 (34) (15) (49) 1969 398 125 20 543 390 115 505 (8) (10) (18) 1970 405 118 22 545 407 115 522 2 (3) (1) 1971 435 148 23 606 427 131 558 (8) (17) (25) 1972 485 148 31 664 448 161 609 (37) 13 (24) 1973 560 158 33 751 543 205 748 (17) 47 30 1974 /3 611 186 40 837 559 231 790 (52) 45 (7) Ave. Growth Rate (%/Year) 1953/73 17.4 12.5 18.6 16.0 20.1 16.3 18.8 1963/73 11.0 8.8 9.2 10.4 12.8 14.5 13.2 /1 Excluding K20 which is all imported. /2 Not including phosphoric acid exported by FFM /3 Preliminary estimates by Guanomex. 3.05 After a very rapid growth in the decade from 1953 to 1963, fertilizer consumption has continued growing at a fairly steady annual rate of 10.4% from 1963 through 1973. Domestic production substantially balanced consump- tion with a small, though growing surplus of phosphatic fertilizer and a deficit in nitrogen fertilizer. All potassium fertilizer is imported. The average N:P 0 :K0 ratio was 17:4.8:1 in 1973, slightly lower in N than in 1969, when it was 20:6.2:1. This nutrient ratio compares to a world average of 1.9:1.2:1 in 1972, and stems from the preponderant use of fertilizer on soils rich in phosphate and potassium, mainly in the Northwest (Annex 3-2, Table 9). As fertilizer application in other areas increases and nutrients in new cultivated land are depleted, the relative demand for phosphate and potassic fertilizers should increase.  - 10 - 3.06 The three principal nitrogenous fertilizers consumed in Mexico are ammonia (32%), urea (24%) and ammonium sulfate (26%). While the pro- portion of direct ammonia application has remained at more than 30% of total N since 1953, the consumption share of urea has more than trebled and that of ammonium sulfate, which in 1953 accounted for two-thirds of consump- tion, has declined substantially. 3.07 The main nitrogenous fertilizers produced in Mexico are liquid ammonia (see following para.), urea, whose output gtew from 19,000 tons in 1963 to 167,000 tons in 1973, and ammonium sulfate, which, although relatively less important than 10 years ago, still accounts for 19% of all N production in Mexico. In addition to the ammonium sulfate produced by Guanomex, this fertilizer is also a by-product in the manufacture of caprolactam (by Univex), steel (Altos Hornos de Mexico), and coke (Compania Mexicana de Coke). 3.08 In the last three years (1971-1973), about 27% of Mexico's total ammonia consumption--for direct application as fertilizer as well as an intermediate material for other fertilizers and industrial uses--was imported as shown in the following table: Sources and Uses of Ammonia in Mexico (000 tons of N)