Mexico - Second Fertilizer (Lazaro Cardenas) Project

Document of The World Bank FOR OFFICIAL USE ONLYr *'t Report No. 2273-ME STAFF APPRAISAL REPORT MEXICO SECOND FERTILIZER PROJECT (LAZARO CARDENAS) March 29, 1979 Industrial Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS WEIGHTS AND MEASURES Mex$ 1.0 = US$0.04 1 Meter = 39.37 inches Mex$22.5 = US$1.00 1 Metric Ton (ton or MT) = 1,000 kilograms 1 Kilogram (kg) = 2.205 pounds (lbs) 1 Kilometer (km) = 0.62 miles I Hectare (ha) = 2.17 acres I Cubic Meter = 1 m = 35.3 cubic feet (cu. ft.) I Normal Cubic Meter of Gas (Nm ) = 37.3 Standard Cubic Feet of Gas (SCF) 1 MSCF = 1,000 SCF PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AN Ammonium Nitrate AS Ammonium Sulphate BANCRURAL Banco Nacional de Credito Rural CFE Comision Federal de Electricidad CONASUPO Compania Nacional de Subsistencias Populares DAP Diammonium Phosphate FFM Fertilizantes Fosfatados Mexicanos S.A. GDP Gross Domestic Product FERTIMEX Fertilizantes Mexicanos S.A. IFDC International Fertilizer Development Center IMP Instituto Mexicano del Petroleo K20 Potassium content in Fertilizer kw Kilowatt kwh Kilowatt hour MW Megawatt N Nitrogen NAFINSA Nacional Financiera S.A. NPK Compound Fertilizer P 0 Phosphatic content in Fertilizer PEMEX Petroleos Mexicanos PROFERSA Productos Basicos para Fertilizantes, S.A. ROFOMEX Roca Fosforica de Mexico SCF Standard Cubic Feet SICARTSA Siderurgica Lazaro Cardenas, S.A. SSP Single Superphosphate TPD Tons per Day TPY Tons per Year TSP Triple Superphosphate FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY MEXICO SECOND FERTILIZER PROJECT (LAZARO CARDENAS) TABLE OF CONTENTS Page No. I. INTRODUCTION ............................................ 1 II. THE FERTILIZER INDUSTRY .................................. 2 A. History and Structure of the Industry ............. . 2 B. Raw Materials .................................... . 3 1. Sulfur ........................................ 3 2. Hydrocarbons .................................. 3 3. Phosphate Rock ................................ 4 C. Local Engineering and Construction Capabilities .... 4 D. Production Capacity and Performance .... ............ 6 E. Future Plans ....................................... 7 F. Prior Bank Involvement ............................. 8 III. THE BORROWER AND PROJECT SPONSOR ........................ 9 A. Organization and Structure .... ............. 9 1. Corporate Charter and Organization .... ........ 9 2. Planning and Construction ..................... 10 3. Financial ..................................... 10 B. Manufacturing Facilities ..... ...................... 11 C. Financial Situation ................................ 11 D. Acquisition of Fertilizantes Fosfatados Mexicanos (FFM) .................................. 14 IV. THE MARKET AND MARKETING SYSTEM ...... .................... 15 A. Agriculture in Mexico .............................. 15 B. Fertilizer Use in Agriculture ...................... 17 C. Hlistorical Fertilizer Demand and Supply Balance 19 D. Projected Demand and Production of Fertilizers ..... 20 E. Fertilizer Marketing and Distribution .... .......... 22 1. Project Marketing Area ........................ 22 2. Distribution System ........................... 22 3. Product Handling and Commissions .... .......... 24 4. Warehousing and Inventories .... ............... 24 5. Transport ..................................... 26 F. Fertilizer Prices and Pricing Policy ........ ....... 26 V. THE PROJECT .............................................. 29 A. Project Scope ...................................... 29 B. Raw Materials, Utilities and Infrastructure ... ..... 30 C. Technology and Engineering ......................... 31 D. Project Management and Schedule .................... 32 E. Environmental Aspects ............................... 32 F. Employment and Training ............................ 34 This report was prepared by Messrs. Loos, Evans, Soncini and Bhan of the Industrial Projects Department. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Page No. VI. PROJECT COST, FINANCING PLAN AND PROCUREMENT ............ 35 A. Capital Cost ................ O-* ................................... 35 B. Financing Plan ..................................... 36 C. Procurement ..... ....... ...... ................................ 37 D. Allocation and Disbursement of Bank Loan ........... 38 VII. FINANCIAL ANALYSIS ......... . . . . . . . . . . . .. ..................... ... . 39 A. General .......................................................... 39 B. Operating Cost of the Project .................. * ... 39 C. Financial Projections for the Project ............. . 40 D. Financial Projections for the Company Consolidated with the Project ................................. 41 E. Financial Rate of Return and Sensitivity Analysis .. 43 F. Financial Covenants and Reporting Requirements .... 43 G. Major Risks ....................................... 44 VIII. ECONOMIC ANALYSIS ......... . . .. . . . . . .................. ................... 45 A. Economic Costs and Benefits ........................ 45 B. Economic Rate of Return ..................... ..... 46 C. Other Benefits and Foreign Exchange Savings ........ 47 IX. AGREEMENTS .............................................. 48 ANNEXES 3-1 FERTIMEX - Manufacturing Capacities and Production 3-2 Financial Statements of FERTIMEX 4-1 Cultivated Crops by Regions 4-2 Apparent Nutrient Consumption 1950-78 4-3 Crops and Fertilizer Usage Based on Average Fertilizer Recommendations for 1975 4-4 Warehouses and Distribution Channels 4-5 Terms of Reference for Fertilizer Distribution Study 4-6 Fertilizer Prices at Rail Depot 6-1 Capital Cost Estimate 6-2 Permanent Working Capital 6-3 Estimated Disbursement Schedule for Bank Loan 7-1 Assumptions Used in Financial Projections 7-2 Estimated Production Cost Summary and Output Value for 1985  - iii - 7-3 Financial Projections for the Project 7-4 Financial. Projections for the Company Consolidated with the Project 7-5 Cash Flows for Financial Rate of Return Calculati'ons 8-1 Assumptions Used in Econom:ic Analysis 8-2 Economic Cost and Benefit Streams CHARTS C-1 Organization Chart of FERTIMEX C-2 Organization Chart of the P'lanning and Developing Department C-3 Organization Chart of the Finance Department C-4 Comparative Fertilizer Demand Projections of FERI'IMEX and IFDC C-5 Lazaro Cardenas Project - Block Diagram MAP IBRD 13550 Mexico Marketing Regions and Location of Fertilizer Plants IBRD 13548 - Plant Layout IBRD 13549 - Project Area DOCUMENTS AVAILABLE IN THE PROJECT FILE Reference Title A Feasibility Study, prepared by FERTIMEX, 1977 Volume I Background Volume II Market Study Volume III Technical Aspects Volume IV Financial and Economic Study Volume V General Statistics concerning Production and Consumption B Market Evaluation of GUANOMEX' Lazaro Cardenas Project, prepared by J. M. Hill, IFDC, January 1978 C Various Documents concerning the Financial Status of FERTIMEX, prepared by FERTI:MEX D FFM Documents concerning merger with FERTIMEX, prepared by FERTIMEX, 1978 E Contract with Instituto Mexicano del Pe.troleo F Contracts with Process Engineering Contractors  I  I. INTRODUCTION 1.01 The Government of Mexico (the Government) and Fertilizantes Mexicanos S.A. (FERTIMEX, the Company) have requested Bank financing for a phosphaLte compound fertilizer manufacturing project (the Project) to be built at Lazaro Cardenas in the state of Michoacan (NAP IBRD-13550). The proposed Bank loan of US$80 million will cover approximately 27% of the total estimated financing requirements of US$301 million and about 64% of the total foreign excharLge cost of US$125 mill:ion. The remaining financing for the Project will be pro- vided in the form of new equity (US$95 million) to be subscribed by the Government, internally generated cash by FERTIMEX (US$26 million), bilateral funds (US$5 million), and foreign commercial loans (US$95 million). The pro- posed loan would be the second Bank operation in the Mexican fertilizer sector; FERTIMEX is currently implementing a nitrogenous fertilizer proJect (Report No. 734-ME, dated May 5, 1975) with the assistance of a US$50 million Bank loan. 1.02 The Project was prepared and will be implemented by FERTIMEX Ea wholly-owned government corporation and the country's main producer and sole distributor of fertilizers (Project File -- Reference A). The Project will produce approximately 275,000 tons per year (tpy) of diammonium phosphate (DAP); 250,000 tpy of compound fertilizers (NPK); 190,000 tpy of ammonium nitrate (AN); and 10,000 tpy of marketable phosphoric acid, all for consump- tion in the domestic market. The major engineering contracts for the imple- mentation of the Project have already been awarded and registration of equip- ment suppliers and preparation of bidding specifications are presently in progress to achieve commencement of commercial operations by October 1981. 1.03 The Project is designed to ensure that Mexico will have sufficient capacity to meet expected increases in domestic phosphatic and nitrogenous fertilizers through the early 1980s and to partly correct the current imbalance in the Mexican fertilizer industry, which exports intermediate products such as ammonia and phosphoric acid, while at the same time importing substantial quantities of finished fertilizers to meet domestic demand. The Project. involves building of a new finished fertilizers production complex at LaLzaro Cardenas, a new industrial center on the Pacific coast, close to the main fertilizer consuming regions of the country. It is an integral part of the Government efforts to stimulate the agriculture sector by making the country self-sufficient in important agricultural inputs such as fertilizers, and to locate important industrial projects away from major urban centers. The Project, when in operation, will provide direct permanent employment for 630 persons; additionally, during the construction period, job opportunities will be provided in the Mexican equipment manufacturing, construction and design engineering industr:ies, all of which are expected to play major roles irL project implementation. 1.04 The Project was first identified in October 1975 and was planned for construction at Guaymas, Sonora, adjacent to a planned new copper smelting facility of Mexicana de Cobre S.A. However, following deferment of the  - 2 - smelting project and installation of the new Government in December 1976, FERTINEX (formerly known as GUANOMEX) reappraised the Project. This led in mid-1977 to the Government granting top priority to the construction of the Project at the present location (Lazaro Cardenas), with a 20% increased production capacity (para 1.02). The Project, in its present form, was pre-appraised in November/December 1977, and appraised in August 1978 by Messrs. Kurt Loos, Geoffrey Evans and Jose Soncini of the Industrial Projects Department, assisted by Messrs. Delio Gianturco (financial consultant) and John Hill (market consultant). II. THE FERTILIZER INDUSTRY A. History and Structure of the Industry 2.01 Until December 1977, the Mexican fertilizer industry consisted of a number of small private blenders and three main Government-owned companies: (i) Guanos y Fertilizantes S.A. (GUANOMEX); (ii) Fertilizantes Fosfatados Mexicanos (FFM); and (iii) Petroleos Mexicanos (PEMEX). The attached map (IBRD-13550) shows the locations of various plants owned by these companies. 2.02 The country's largest producer of finished fertilizers and the sole fertilizer marketing company, GUANOMEX, was originally created by Presidential Decree in 1943 as a Government-owned enterprise to promote the use of organic fertilizer, exploit the guano 1/ deposits on the Pacific Coast, and distribute guano products. In 1948, a second Decree broadened the scope of GUANOMEX' role into production and distribution of chemical fertilizers and, in the late 1950s, as a complement to GUANOMEX' activities, private investments in the fertilizer sector were promoted. However, in 1965, the Government decided to merge the three major private sector companies 2/ into GUANOMEX, with the objective of streamlining the scattered and uncoordinated production and distribution activities of the industry, in order to better promote and stimulate increased fertilizer use in Mexico. The Government policy to consolidate the responsibilities for the supply of major agricultural inputs also led, in the late 1960s, to the GUANOMEX take-over of the national supply of insecticides, acquisition of a majority holding of Fertica S.A., which owns fertilizer plants in Central America, and a minority participation (20%) in Azufrera Panamericana, the company engaged in exploitation of Mexico's sulfur deposits. In addition, GUANOMEX was assigned the sole responsibility for domestic marketing and distribution of fertilizers. 2.03 FFM was the country's sole producer of phosphoric acid and triple superphosphate (TSP). Although majority-owned by Banco de Mexico, FFM was run along private enterprise lines; it was nationalized in 1975 and brought under 1/ Organic fertilizer from bird droppings. 2/ Fertilizantes de Monclova S.A. (AN, NPK); Fertilizantes del Istmo S.A.; (AN, Urea, NPK), Fertilizantes de Bajio S.A. (Urea).  - 3 - the control of a state holding company, Productos Basicos para Fertilizantes (PROFERSA). FFM had become one of the world's largest exporters of phosphoric acid and also owned ships and interests in phosphate deposits in Florida. In the domestic market, FFM sold phosphoric acid and TSP to GUANOMEX for further conversion and distribution to farmers. 2.04 PEMEX -- also state-owned -- is the largest single industrial enter- prise in Mexico and is responsible for production and distribution of petroleum and basic petrochemical products. As a producer of basic petrochemicals, PEMEX is also responsible for the production and export of ammonia, while GUANOMEX, which owned a small ammonia facility, was responsible for converting it into solid fertilizers and for domestic ammonia distribution. 2.05 Following the latest restructuring of the fertilizer industry which involved the integration of FFM's operations into FERTIMEX on January 1, 1978, the consolidated enterprise owns all of Mexico's fertilizer production capacity except for ammonia production which remains PEMEX' responsibility and a small amount of ammonium sulfate production which remains in private hands. While PEMEX will retain responsibility for ammonia exports, FERTIMEX will be respons- ible for domestic marketing of ammonia and for exports and domestic marketing and distribution of all other fertilizer products. In addition, the Govern- ment uses FERTIMEX as an executing agency to administer Mexico's fertilizer imports and to provide -- together with other Government institutions -- promotion and extension of fertilizer usage, as well as research and testing of soils. B. Raw Materials 1. Sulfur 2.06 Mexico is well endowed with most of the raw materials required for fertilizer production, including sulfur, natural gas and recently discovered deposits of phosphate rock. Only potash has not been found in economically mineable quantities. Mexico's substantial reserves of sulfur are located mostly around the Gulf of Mexico and the Isthmus of Tehuantepec, with the largest mines of the two major producing companies, Asufrera Panamericana S.A. and Compania Exploradora del Istmo, being located at Jaltipan and Texistipec, respectively. In 1976, Mexico produced about 2.2 million tons of sulfur, virtually all of it in the form of brimstone, making it the world's fifth largest sulfur producer. In the same year, it exported somewhat over 1 million tons, or about 10% of total world exports. 2. Hydrocarbons 2.07 Mexico has substantial hydrocarbon reserves. According to govern- ment estimates, released in July 1978, Mexico's proven oil reserves are equiv- alent to 20 billion barrels of oil, probable reserves are 37 billion barrels and potential reserves are 200 billion barrels. At present consumption rates, proven oil reserves, which include substantial amounts of associated and non-associated gas, are expected to meet Mexico's needs well beyond the turn of the century. The main gas fields are in the State of Tabasco, in the northeast near the US border, and in the State of Veracruz (MAP IBRD 13550). In 1977, gas production totalled about 750 billion of standard cubic feet  (SCF) of which approximately 60% was associated. At present, the main production area is in Tabasco with about 70% of the total production, followed by the northeast and the State of Veracruz with about 20% and 10%, respectively. The gas is distributed and sold via two main pipeline networks. The Northern pipeline extends some 2,000 km from Matamoros, near the Gulf Coast, to Celulosa de Chihuahua and the Southern pipeline leads from Ciudad-Pemex in Tabasco to Guadalajara in Jalisco, a distance of some 1,300 km. In 1977, sales through the Northern and Southern networks amounted to 125 billion SCF and 355 billion SCF, respectively. The balance of the total production of 750 billion SCF was consumed internally by PEMEX partly for the production of 945,000 tons of ammonia in that year. 2.08 Until 1976, PEMEX sold practically its entire ammonia production locally to FERTIMEX to be used, along with imported ammonia, as an input in its own finished fertilizer facilities or to be marketed for direct applica- tions in the agricultural sector and for industrial purposes. (The diagram on the following page gives a more detailed supply flow and company interrela- tionship of the Mexican fertilizer industry from raw materials to intermediate and end products.) In 1977, PEMEX exported for the first time 30,000 tons of ammonia and signed further export contracts for the following years. PEMEX plans to greatly expand its production capacity, from about 1.4 million tons of ammonia in 1977 to about 3.2 million tons in 1981. Part of the increased ammonia production will be absorbed by the growing domestic demand. A major portion of the incremental output, however, is designed for export, utilizing surplus natural gas as feedstock. Some of the ammonia earmarked for export would be converted to urea by FERTIMEX, to achieve a higher value added and diversify markets. 3. Phosphate Rock 2.09 Until now, Mexico has imported its phosphate rock requirements except for small quantities produced by two local companies, Minerales In- dustriales and Fosforitas Mexicana. However, the sharp rise in import prices in 1974 prompted renewed exploration efforts which led to the discovery at San Hilario (some 60 km north of the city of La Paz in Baja California) of one of the world's largest phosphate rock deposits, with total reserves of 3,000 mil- lion tons estimated to average 12% P205 lying at a maximum depth of 40m (Map IBRD-13550). To develop these deposits, Roca Fosforica de Mexico (ROFOMEX) was established in July 1975 under the control of PROFERSA, a state holding company responsible for the local development of non-hydrocarbon raw materials for fertilizer (para 2.03). Initially ROFOMEX plans to extract some 1.6 mil- lion tons of rock annually from a deposit near San Juan de la Costa, grading an average P205 content of 18.8%, for the production of 600,000 tons of 29- 30% concentrates; production is expected to start early in 1980. Ultimately, ROFOMEX plans to increase output to 3 million tons per year of concentrate, sufficient to supply all of Mexico's domestic requirements and to begin exports. C. Local Engineering and Construction Capabilities 2.10 Mexico has well developed local engineering and construction capa- bilities and facilities for domestic equipment manufacturing, including for  MEXICO - LAZARO CARDENAS FERTILIZER PROJECT BLOCK DIAGRAM MEXICAN FERTILIZER INDUSTRY QUANTITIES SHOWN APPLY TO 1976 RAW MATERIALS INTERMEDIATE PRODUCTS END PRODUCT ' SI)LFUh ~~~~M/T % EXPLORADORA DEL ISTMO 129 2 55 4 AZUFRERA PANAMFRICANA 77 5 33 3 r SULFURIC ACID M/T A PEMLX 26 3 1_1 3 GUANOMEX 534 0 346 6GA MX3 78 TOTAL 233 3 100 0 FFM799 0 sla_ UNIVEX 169 20v S _ _ ASARCO MEXICANA 148 16 O _2 INDUSTRIA QUIMICA 10 12 _( PENOLES 179.5 115 TuTA; bi3 100.0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~81 16 RIMPDTS 4.0 03 TOTAL 1543.3 100.0 SULFUR M,T SULFUR | 273.0 _ b b ( S INGLE SUPER PhOSPhATE T M T SULFUR MINERALS RDASTING | 116 0 3 , t GUANOMEX | 290 1 10UN7 0 PHOSPHATE ROAK M/T MI ERALESINDUSTRIALES M/T-F~~~~~~~~~~~~PHSPORC dS M/ 5 DUANOMES ~~~~ ~~147 10 FOSFDRITAS MEXICANAS 1 6 1.2 GUANOMEX 39 124 iMPORTS 1 32 9.8 | __ r F F M 276 87 8 ._ | IMPORTS 71039 77 TOTAL 31b 100 tTOTAL |1 340 | 100.0 TRIPLE SUPR HOSPTE _M,T p b > t FPFM _ 216 |103 PHOSPHORIC ACI M/ 6 IMPORTAS 86/T 100O l COMPLEX FERTILIZER N4PK T E E N I |GUANOMEX| 180 100 NATURAL GAS | U ) 865 AMMONIUM NITRATE KIT PEMEX 00 GUANOMEX 160 10 GUANOMEX 140 100 | k TOTAL | 943 [ 1000 ) *