Israel - Dead Sea Works - Potash - Project

RETURN TO ~~~~~~~~~~R E S T R I C T E D RETURN TO REPORTS DESK| R e p o r t N o. TO-285a WITHIN rILE COPY ONE WEEK This report was prepared for use within the Bank. It may not be published nor may it be quoted as ropresenting the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE DEAD SEA WORKS, LTD. POTASH PROJECT ISRAEL June 7, 1961 Department of Technical Operations  APPRAISAL OF THE DEAD SEA WORKS. LTD. POTASH PROJECT (Israel) SUMMARY AND CONCLUSIONS i. The Dead Sea Works, Ltd. (DSW) is the successor of Palestine Potash Conmpany, Ltd. which from 1931 through 1947 produced potash and bromine from Dead Sea brine. In 1947 production amounted to about 103,000 tons from two plants, one at the north and one at the south end of the Dead Sea. After the war only the southern plant was in Israel and it was damaged and isolated, since access to it had been by sea from the northernplant (paras. 5-7). ii. In 1952, after the shareholders of Palestine Potash had been unable to secure financing to resume operations, the Government of Israel made a settlement with the shareholders, and took over the assets of the company in Israel, forming the Dead Sea Works, Ltd. (paras. 7; 11-12). iii. The first years of reconstruction were difficult; large sums had to be expended for road construction, flood protection, power supply, fresh water wells and housing. Changes in the potash market required the develop- ment of a new refining process. Considerable effort was required to re-enter the international markets (para. 8). iv. Lack of proper management hampered the reconstruction until 1955, when a new General Manager was appointed. Since then progress has been rapid and in the 1960/61 fiscal year the DSW had potash production and sales of 136,000 tons (paras. 8-10; 20-21). v. Despite the success in overcoming operating problems and increasing production, the financial record has been poor since the DSW had to make large investments in non-productive facilities in order to commence and main- tain operations. Expenditures to date have been financed largely from Govern- ment sources (paras. 13-19). vi. The DSW cannot expand beyond a level of about 190,000 tons per year unless it undertakes a project to close off a portion of the Dead Sea itself. Technical considerations preclude undertaking this project in small steps and the! DSW must either increase its capacity threefold or stop its growth at a capacity of about 190,000 tons (para. 27).  APPRAISAL OF THE DEAD SEA WORKS, LTD. POTASH PROJECT (Israel) TABLE OF CONTENTS Paragraphs SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . i - xvi I. INTRODUCTION . . . . . . . . . . . . . . . . . . 1 - 4 II. THE COMPANY . . . . . . . . 5 - 21 A. History . . . * . ........ 5-10 B. Ownership .. . .. ....... 11 - 12 C. Financial Record . . . . . ........ 13 - 19 D. Management and Staff . . . . . . . . . .. 20 - 21 III. THE PROJECT . . . . . . . 22 -51 A. General . . . . . . . . . . . . . . . . . 22 - 24 B. Concession . . . . * . . . . 25-26 C. Features of the Project. . . . . . . . . 27 - 39 1) Potash . . . . . . . . . . ... 27 - 29 2) Bromine and Bromine Compounds . . . . 30 - 32 3) Dead Burned Magnesia . . . . . . . . 33 4) Table Salt . . . . . . . . . . . . . 34 5) Other Construction . . . . . . . ... 35 6) General Services . . . . . . . . . . 36 - 39 D. Labor . . . . . . . . . . . . . . . . . . 40 - 41 E. Present Status of the Project . . . . . . . 42 - 44 F. Construction Cost Estimates . . . . . . . . 45 - 48 G. Construction Schedule ...... . . . . . 49 - 50 H. Procurement . . . . . 51 IV. MARKETS AND IARKETING. . .. . . . . . . .. . . 52 -65 A. The Market for Potash . . . . . . . . . . . 52- 57 B. The Market for Bromine and Bromine Compounds 58 - 61 C. Table Salt . . . . . . . . . . . . . . . . 62 D. Magnesite . . . . . . . G. . . . . . .. 63 E. Marketing ..... . . . . . . . . . .. . . . . 64 - 65 V. FINANCING PLAN AND FINANCIAL PROSPECTS . . 66 - 89 A. General . . . . . . . . . . . ... . . . 66-70 B. Proposed Capital Structure . . . . . . . . 71 - 72 C. Organization and Management . . . . . . . . 73 D. Financing Plan . . .. . . .. 74 - SO E. Financial Prospects . .... . . . . 81 - 89 VI. PROTECTIVE ARRANGEIENTS . . . . . . . . . . . . . 90 -91 VII. CONCLUSION . . . . . . . . . . . . . . . . . . . 92 -93  TABLE OF CONTENTS (Cont'd.) ANNEXES 1 Palestine Potash Limited (Profit and Loss Accounts) 2 The Market for Potash 3 The Dead Sea Works, Ltd. (Income Forecasts) 4 The Dead Sea Works, Ltd. (Cash Flow Forecasts) 5 The Dead Sea Works, Ltd. (Balance Sheet Forecasts) 6 Assumptions for Financial Forecasts Map 1 - ISRAEL Map 2 - The Dead Sea Works, Ltd. - Present and Prospective Layout of Pan Area  - ii - vii. The DSW proposes to build about 47 kms. of dikes to enclose 100 sq. kms. of sea area to be used as evaporating pans. Production capacity would be increased by about 400,000 tons per year. Later, and at a rela- tively small additional cost, another 300,000 tons annual capacity could be obtained, making the ultimate annual capacity of the works about 900,000 tons. In addition, it is proposed to expand bromine and ethylene dibromide capacity from 2,900 and 1,500 tons to 10,000 and 6,000 tons respectively and to add facilities for the production of other bromine compounds, 75,000 tons of dead-burned magnesia and 20,000 tons of table salt (paras. 27-44). viii. The project is estimated to cost $72 million equivalent, including start-up expenses, working capital, interest during construction and other miscellaneous construction works. The plans for the project are technically sound and cost estimates have been calculated on a conservative basis. A market study indicates that the DSW should be able to market its products at a profit (paras. 45-65). ix. Because of the magnitude of the project, the DSW cannot generate all the necessary funds and it has been apparent from the first that a finan- cial reorganization would be required to establish a financial structure which would permit the company to raise new equity and loan funds. A basic objec- tive has been to turn the company back to private control. During the past year discussions have centered on how this objective could best oe accomplished (paras. 66-67). x. In considering the conversion of the company's debt to the Govern- ment, the Government has agreed that it would not hold more than 45% of the shares and that it would not have more than 35% of the voting rights. The Government also stated its policy to encourage private investment in industry. In order to facilitate the raising of IL 27 million by a public share issue, it was agreed, on the advice of the underwriters, that the new shares should bear a fixed rate of interest during the construction period. Within this framework it was then possible to work out a detailed plan for the recapi- talization of the company (paras. 68-70). xi. Agreement has been reached among the interested parties on the details of the plan. The company has taken the necessary steps to amend its Articles of Association and to carry out the other steps in the plan (paras. 71-73). xii. During the construction period, the total financial requirements are estimated at $79.3 million equivalent for the project, including working capital and interest during the construction period, repayment of medium- term debt, replacements and renewals of equipment in the present plant and interest payments on the new Ordinary Shares. It has been assumed that these requirements would be met, in addition to company-generated funds of $21.1 million equivalent, by the sale of $15 million equivalent of Ordinary Shares5 long-term borrowings of $35 million equivalent and $8.2 million equivalent from other sources (paras. 74-8O).  - iii - xiii. On the basis of these and other assumptions included in Annex 6, the long-term debt/equity ratio would not rise above 54:46 in the last year of construction. The liquidity position would be poor in the last two years of construction but should improve rapidly thereafter. After capacity opera- tions are reached, expected in 1967, net income after taxes, should amount to 16% on the shareholders' average equity or 20% on share capital. These should increase to 19% and 32% respectively on the assumption that the ex- pansion to the 900,000 ton level is completed in 1969. Income before interest and taxes would amount to about 15% on the net investment in 1967 arid 24% in 1970 (paras. 81-85). xiv. Total debt service coverage is adequate. After 1967 when capacity operations of the Project are expected, the DSW could maintain service on its total long-term debt if sales revenues were to decline by 28% or operating costs were to increase by 44% (paras. 86-89). xv. Contractual arrangements provide for a restriction on borrowings, a restriction on investments in other than the Project and the achievement and maintenance of a current ratio (paras. 90-91). xvi. The Project is soundly conceived technically and the market prospects are favorable. The management of the company is good. The profitability prospects are good after the completion of the Project and should be more favorable when the second stage expansion is completed. The financing plan, although it may be tight during the last two years, is, on the whole, satis- factory. Subject to the successful completion of the public share issue, the Project is a suitable basis for a Bank loan of $25 million equivalent for a term of 15 years, including a 5-year grace period.  I. INTRODUCTION 1. Late in 1959 the Government of Israel asked the Bank to assist in financing development projects of high priority. The Bank agreed to consider this request and asked that details be submitted on a number of projects. After a preliminary examination of the data, it was decided that a project to expand potash production should be examined in more detail in Israel. 2. A mission made a detailed field study of the Dead Sea Works, Ltd. program for the expansion of potash production and other related products during March and April 1960. The mission concluded that the expansion pro- gram was sound but that the company could not carry out the work unless it could raise a substantial amount of new equity capital. 3. Throughout the remainder of 1960, and early 1961, discussions con- tinued with the company, the Government, and financial groups in order to arrive at a financing plan by which the company could undertake the expansion program. Such a plan has been developed and the expansion pr6gran can now be considered for a proposed loan from the Bank. 4. This report is based on the results of the field study and on in- formation submitted by the company and by the Government of Israel. The investment cost estimates and market prospects were checked for the Government by the firm of Arthur D. Little, Inc. II. THE COMPANY A. History 5. The Dead Sea Works Ltd. is the successor of Palestine Potash Company Ltd. formed in 1930. The late Mr. Moshe Novomeysky, the founder of the origi- nal company, began experiments in 1911 to determine whether the salts present in the Dead Sea, principally potassium chloride (potash) and bromine, could be recovered commercially. In 1920 Mr. Novomeysky applied for a concession but it was not until 1929, after long and difficult negotiations that he ob- tained the concession. The concession was transferred to the Palestine Potash Comparny Ltd. on January 1, 1930. Production of bromine started in 1931 and production of potash in 1932 at a plant constructed at the north end of the Dead Sea; in 1937, potash production was started at a second plant at the south end of the Sea. In 1947 total production of potash amounted to about 103,000 tons, of which about 58,000 tons were produced at the southern plant. 6. Although the complete records of the early years are not available, Palestine Potash had earnings from 1937 through 1947, the last year of opera- tiois, and made dividend payments on preference shares from 1938 through 1947 inc'Luding the payment of arrears in 1940 (see Annex 1). After 1943, the capital consisted of I, 390,000 6% preference shares and fl 610,000 ordinary shares. In 1946, the company paid its first dividend of 5% on the ordinary shares and in 1947 a 24% interim dividend on the ordinary shares. At the end of 1947 the company had an accumulated depreciation reserve of 3; 604,000 and net assets of I; 774,000.  - 2- 7. Production stopped with the onset of the war in 1948. At the end of the war, the northern plant in Jordan was destroyed. The southern plant, near Sdomn, in Israel,9 was damaged and isolated since access to it had been by sea from the northern plant (see Map 1). In 1952, after the share- holders of Palestine Potash Company Ltd. had been unable to secure financing to r-esume operations, the Government of Israel made a settlement with the shar-eholders and took over the assets in Israel, forming the Dead Sea Works Ltd. (DSW). Palestine Potash Co. Ltd. received 1.22 million shares (If, 1.0 par value, Founders FIBI?) in the DSW plus I12 390,000 (If, 1.0 each) of 5% deben- tures due in Decem2ber 2002. The debentures were tied to the pound sterling. Palestine Potash Ltd. in turn distributed the debentures and 390,000 DSW shar-es to its shareholders. 8. ~The first years of reconstruction were difficult; large sums had to be expended for non-productive purposes such as road construction, flood protection, power supply, fresh water wells and housing. Changes in the potash markcet required developm~ent of a new refining process since the old plant coul-6 not produce a product of the desired quality. In addition, considerable effort had to be expended in re-entering the international markets. Lack of coordina- tioni of the work hampered the reconstruction unti'l 1955, when a new General Manager was appointed. Since 1955, the capacity of the plant has been tripled. 9. Potash production and sales have expanded rapidly since fiscal 1956/ 57, increasing from 41,000 tons in that year to 88,600 tons in 1957/58, 105,100 tons in 1958/59, 115,000 tons in 1959/60 and 136.,000 tons in 1960/61. 10. Although. Palestine Potash had produced both potash and bromine, DSW set up a small wholly-owned bromine subsidiary which, in 19159/60, had a pro- duction of bromine and bromine compounds equivalent to 2,050 tons of elemen- tal bromine and in 1960/61, an equivalent of 2,900 tons of elemental bromine. B. Owesi 11. On March 31,, 1961, DSW had outstanding 3,660,001 shares of 112 1.0 par- value stock, denominated and held as follows: Class Held bNI~umber Votel% Fo-unders "Allf Government of Israel 1 51 Fo-unders "B" Palestine Potash Co. Ltd. 830,000 Individuals (PPL Shareholders) 390, 000 1,220,000 16 Ordinary "All Solel Boneh 310,000 Government of Israel 300.000 610,0008-j Ordinary "B"t Government of Israel 610,000 81 Ordlinary 'IC" Government of Israel 610,000 Ordiinary I'D" Government of Israel 61,0 3,660,00C1 So-Lel Boneh is an Israeli construction company.  - 3 - 12. Each class of shares is entitled to the fixed percentage of the total votes, as shown above; within its class each share has one vote. C. Financial Record 13. The DSW has been burdened with large investments in non-productive facilities which were necessary for the company to start operations. Despite the progress in eliminating operating problems and increasing production, the earnings record is poor. The financial requirements of the two companies have been met entirely from Government sources. With the present facilities, the prospects are that DSW would be able to cover only a modest interest rate on the total debt to the Government. 14. Condensed comparative DSW income statements supplied by the company and balance sheets are shown below (It 1000): Year ended March 31, 1959 1960 1961 Net Sales 6,975 6,997 7,689 Other Income 2L 114 833 2 Total 6,999 7,111 8,522 Manufacturing Cost 3,741 3,853 3,558 General Expense 903 665 690 Depreciation 1,692 1,957 2,390 Operating Income 663 636 1,884 Interest: 5% Debentures(due 2002) 98 98 98 Government 123 - 1,050 Other 141 204 42 Net Income 301 334 309 1/ Represents amount transferred from Contingency Reserve. 2/ Interest on long-term Government loan for which DSW did not charge any interest in its income accounts in previous years.  -4- As at March 31, 1959 1960 1961 ASSETS Current Assetsl/ 3,067 4,722 5,463 Stock of Stores, Spare Parts, Tools, etc. 1,255 1,477 1,772 Investment in Bromine Co. 550 550 550 Other Investments 245 299 346 Fixed Assets 32,086 39,437 2/ 45,033 Less: Depreciation 2,004 _63817 1 Net Fixed Assets 30,082 35,620 38,952 Development Expenses on Existing Plant 4,658 4,538 4,419 Intangibles _ 767 829 529 Total Assets LO2624 48,035 331 LIABILITIES Current Liabilities 5,722 7,586 9,832 Medium-term Debt 1,500 404 1,375 Lonig-term Debt: 5% Debentures (due 2002) 390 1,966 1,966 Mortgages 71 57 112 Government 29,281 34,362 35,077 Reserves - - 309 Share Capital 3,660 3,660 3,660 Total Liabilities & Equity LOt624 48_035 5I L 71/Current Assets include the following amounts due from the DSB: 1959 - If 334,000; 1960 - If 844,046; and 1961 - IS 1,326,161. 2/ Includes a write-up of If 1,973,000 on 5% Debentures (due 2002) and loan from Government Foreign Loan Department. 15. In the period prior to March 31, 1958 the company capitalized If 4,777,000 of development expenses which normally would have been charged to profits. During the same period the company charged less than IS 500,000 for depreciation but charged to operations some items for replacerents and renewals which normally would be capitalized. In 1959/60 the DSIi wrote up the value of ite net fixed assets by IL 1,973,000 in connection with the wr.Lting up of its 5% Debentures (due 2002) and loan fror the Foreign Loan Department. What the combined effect of these opposing factors may be makes it difficult to say whether the valuation of fixed assets, as shown on the most recent balance sheet, is realistic. In view of the size of the proposed Project, over-valuation, if any, will be rclatively uninportant on completion of construction.  16. Manufacturing costs in 1959/60 and 1960/61 have included amounts which represent preliminary expenditures on the new expansion program and ordinarily would be capitalized. Depreciation charges in these years are based on generally accepted rates. 17. The long-term debt to the Government at March 31, 1961 includes: a) From Development Budget IS 31,614,508 b) From Foreign Loan Department 3,819,521 c) Accrued interest on (b) 605,923 d) Company Registration Fees (Secured) 36,700 Total It 35.076,652 18. The bromine subsidiary is not included in the foregoing figures. Condensed comparative income statements and balance sheets for the Dead Sea Bromine Co., Ltd. are shown below (IS '000): Year ended March 31, 1959 1960 1961 Net Sales 1,318 1,532 2,637 Manufacturing Costs 1,272 1,377 1,899 General Expenses 143 94 220 Depreciation - - 285 Interest: Government - / - / 144 Other 108 61 4 Net Income (Loss) (205) 8 85 1/ Due to the lack of earnings, depreciation and interest on Government debt were not charged and interest was not paid.  -6- As at March 31, 1959 1960 1961 ASSETS Current Assets 1,041 870 1,137 Stores, Spare Parts, etc. - 653 1,164 Fixed Assets 3,298 3,559 4,398 Less: Depreciation - - 285 Net Fixed Assets 3,298 3,559 4,113 Intanigibles 313 772 868 Total Assets A.652 5,860 7.282 LIABILITIES Current Liabilities 1,419 2,335 2,815 Long-term Debt: Government 3,103 3,250 3,658 Other - - 448 Mortgages 16 12 12 Reserves (141) - - Capital (Paid in by DSW) 550 550 550 Surplus (Loss) (295) (287) (201) Total Liabilities and Equity 4.652 5____ 7,282 19. The accounts are audited by independent auditors, in accordance with Israeli law. D. Management and Staff 20. The DSW was fortunate in being able to rehire a number of key people who had been with the old Palestine Potash Company. However, the rapid pro- gress in increasing production during the last few years has been due largely to the organizational abilities of the Managing Director, General M. Makleff, who was appointed in 1955, and to his success in building up an outstanding technical staff, both for operations and research. Production facilities are now operating smoothly and it appears that the difficult rehabilitation period is over. The DSW has an aggressive sales policy. The present sales manager was sales manager for Palestine Potash Co. Ltd. and is well acquainted with the potash and bromine markets. 21. The management is capable and should be able to supervise the con- struction of the project and operate the expanded plant without difficulty. Additional top technical staff have been added in preparation for the project but the DSW intends to add senior staff to assist with long-range financial planning.  III. THE PROJECT A. General 22. The purpose of the proposed project is to increase the production of potash and bromine from the Dead Sea brine and to add new facilities in order to recover as by-products magnesia and table salt from a portion of the spent brine. The Dead Sea covers an area of about 880 sq. kms. and is about 400 metres below sea level. The brine contains a number of salts: Magnesium chloride - 130.0 gr. per litre Sodium chloride - 87.0 " ? it Calcium chloride - 37.0 " t' " Potassium chloride - 11.5 " " " M4agnesium 'oromide - U " " Calcium sulfate - 1.0 " " " It has been estimated that the Dead Sea contains two billion tons of potassium chloride (potash). 23. The production of potash is divided into two main stages: a) concentration of the brine in ponds by solar energy to precipitate first the sodium chloride and finally carnallite. The carnallite is recovered by small suction dredgers and pumped to the refinery for final processing; b) at the refinery, decomposition of the carnallite results in the co-precipitation of sodium chloride and potassium chloride. The mixture is being separated by flotation in the present plant but another method, the hot leach and crystallization process, is to be adopted for the project. 24. From the spent carnallite brines, DSW plans to recover increased amounts of bromine, to increase the production of bromine compounds and to initiate production of dead burned magnesia and table salt. B. Concession 25. As noted in para. 5, Palestine Potash Company, Ltd. had a concession for the production of potash and other products from the Dead Sea. A royalty of about 5% of the fob plant sales prices were paid to the Palestine and Jordanian Governments until production was stopped by war. However, the DSW has been operating without a concession and to date has not made any royalty payments to the Government.  - 8 - 26. In preparation for financing the project, the DSW recently applied for a concession. The Dead Sca Concossion Law was approved by the Kr.esset on Hiay 31, 1961. The principal provisions are: i) the concession will run until 1999; ii) royalties will be payablc on products made after April 1, 1964; iii) royalty payments will be at the rate of 5% of the ex-works sales prices as defined in the concession. C. Features of the Project 1) Potash 27. The most important and most costly part of the project concerns the expansion of potash production. The DSW has now used almost all of the landl area suitable for the construction of evaporating and crystallizing pans. Capacity cannot be increased beyond 190,000 tons annually without using the Dead Sea itself. It is now proposed to do this by building about 47 1ms. of dikes to enclose 100 sq. kms. of sea area for use as concentrating pans (see Map 2). 28. The project provides for an increase in production capacity of 400,000 tons annually. Technical considerations preclude expansion in smaller steps. The company must either embark on a project of more than twice the capacity of its present works or remain at its present size. Later, and at a relatively small additional cost, an additional 300,000 tons per year could be obtained, making the ultimate annual capacity of the works about 900,000 tons. 29. A new refinery, based on the hot leach and crystallization method would be built for the project. The present refinery, using the flotation method, would continue to process carnallite from the existing pans. 2) Bromine and Bromine Compounds 30. The DSB, a wholly-owned subsidiary of DSW, now has an annual pro- duction capacity of about 4,500 tons of elemental bromine and 3,000 tons of ethylene dibromide. Production capacity was expanded from 2,900 tons of bromine and 1,500 tons ethylene dibromide during 1960/61. Capacity would be increased to 10,000 tons of bromine and 6,000 tons of ethylene dibromide annually. 31. A subsidiary company of DSB, Bromine Compounds Company Ltd. (BCC), has been established recently together with two well-known foreign companies, one British and one U.S., to produce various bromine compounds. The main products involved would be methyl bromide, (900 tons per annum) and ethyl-, butyl-, and propyl- bromides, ammonium-, sodium- and potassium-bromides and various bromates. Consumption of bromine for these products is expected to be 2,000 tons by 1963/64. The new company is owned 50% by DSB and 25% by each of the other two partners.  32. Chlorine, which is necessary for the production of bromine, is now obtained from Haifa at a high cost because of the freight charges for shipping high-pressure containers. The production of chlorine at the DSW is under study but this is not included in the project. 3) Dead Burned Magnesia 33. The DSW plans to install facilities for the production of 75,000 tons annually of dead burned magnesia (Magnesite). End brines from potash production containing a high percentage of magnesium chloride would be treated with lime to precipitate magnesium hydroxide, which after filtering and washing would be calcined. Dolomite has been found within a few kilo- meters of the plant. Some further experimental work remains before a final decision is made to proceed with the construction of the magnesite plant. However, for the purposes of this report, the magnesite facilities are in- cluded in the project and in the financial forecasts. For this portion of the project, a new subsidiary, Dead Sea Magnesite Co. (DSM) would be formed, in which two well-known U.S. companies share a half interest. Magnesite would be marketed to basic refractory producers by one of the partners and its European subsidiaries. 4) Table Salt 34. The DSW also plans to install facilities for the production of 20,000 tons table salt annually. Salt of 99.5% purity can be produced by the! recrystallization of waste salt from the potash production unit. The advantage of the process is that it does not require evaporation of the brine to induce crystallization and the only fuel requirement is for drying of the final preduct. 5) Other Construction 35. In addition to the main part of the project, the DSW plans to com- plete a number of minor works. These items include completion of an evapora- ting pan to increase potash capacity from 165,000 to 190,000 tons annually, related expansion and improvement of plant installations and pumping stations (If 6.8 million); drilling of additional fresh water wells (It 2.2 million); a warehouse at Eilat (If 750,000); and an office building at Beersheba, laboratories and pilot plants (IL 1.25 million). Some of this work was started during 1960/61. The remainder would be completed during 1961/62 andL 1962/63. 6) General Services 36. Fuel requirements until recently were met by imported oil, but a pipeline has been laid from the newly discovered Zohar gas field, about 30 kilometers from the plant. Gas will be used for all heating and drying pur- poses. In addition, it might be possible to convert the diesel stand-by power plant tooperate on gas. 37. Power is now supplied from the Israeli network by a line from Dimona designed to carry 4,000 KW, but which can be operated at an overload with higher line losses. The total operating load, after the completion of the proposed project, would be about 14,000 KW. The project would include the installation of a back-pressure turbo-generator for the production  - 10 - of 10,000 KW of by-product power, giving a total power supply of 14,000 KW. In order to supply peak loads and stand-by when the turbo-generator is being serviced, an additional line from the Israeli network will be required. The cost of this connection is not included in the project on the expectation that it would be built as a part of the national grid. The existing 3,000 KW diesel station would be used as an emergency stand-by. The turbo-generator would also supply steam for bromine production. 38. Available sources of water will be sufficient for the project. The DSW has drilled a number of wells which are adequate for present requirements. During the last year extensive drilling has been successfully carried out to provide a safety margin as well. In order to complete the system, further work will be carried out in 1961/62. 39. The finished potash and bromine is transported from the plant by truck, under contract with a private firm, to the port of Eilat or the rail terminus at Beersheba. Products destined for Europe and Latin America are transshipped by rail from Beersheba to Haifa. Products going to the Far East and the east coast of Africa are shipped through Eilat which will presently be connected to Sdom by a new and shorter asphalted road now under construc- tion. The extension of the railway from Beersheba to Dimona and the increase in tonnage because of the project are expected to reduce domestic transport costs substantially. Improvement of port facilities at Eilat, in the near future, and at Ashdod in the more distant future, should allow further savings in unit handling and loading costs. D. Labor 40. The DSW employs a total labor force of about 550, including about 400 skilled and unskilled laborers. The project will require the addition of about 300 workers. No difficulties are expected in obtaining the necessary additional personnel. 41. The labor force has a low turnover rate. This has not always been the case as labor turnover was a major problem in restarting the plant. This problem was solved by developing a housing program for the workers at Dimona instead of at the Dead Sea. Although Dimona is about 40 kilometers from the plant and the DSW has to pay for transport, it is above sea level and climatic conditions are more pleasant than those at the plant. The DSW enjoys good labor-management relationships. E. Present Status of the Project 42. Preliminary designs and cost estimates for the dike system were pre- pared by Construction Aggregates Corporation, Chicago. These estimates were reviewed and modified to a minor extent by the Rijkswaterstaat (Government Water Authority) of Holland, by the Rijksinstituut Voor Drinkwatervoorziening (Government Institute for Water Supply), and by the Laboratorium Voor Grondmechanica (Delft Soil Mechanics Laboratory). The detailed design  - 11 - and specifications of the dike system are being prepared by J. van Hasselt en de Koning Engineering Co., Holland. This company is also preparing all docu- men-ts necessary for international bidding and would supervise construction. It is expected that bids for the dike system would be called about August 1961 in order that construction could start by the end of 1961. 43. Designs and cost estimates for the potash refinery were prepared by -the Stearns-Roger Corporation, Denver. This company is now in the last stage of preparing the detailed engineering estimates for this plant, which are expected to be ready by mid June 1961. Stearns-Roger also will prepare the detailed designs and specifications and will supervise construction. Designs and estimates for the by-product facilities have been prepared by company engineers with the assistance of Pfaudler Co., Rochester, for the bromine expansion, F. W. Berk & Co. for the bromides production and of Harbison-Walker Refractories Company and Stearns-Roger for the magnesite project. 44. The arrangements for engineering and construction supervision are satisfactory. F. Construction Cost Estimates 45. The estimated investment cost of the project is as follows (IfS '000 equivalent): Foreign Local Exchange Currency Total Potash: Pans 27,350 21,408 48,758 Refinery 16.370 10.919 27,289 Sub-total Potash 43,720 32,327 76,047 Table Salt 230 406 636 Bromine and Derivatives 2,240 1,690 3,930 Sub-total 46,190 34,423 80,613 Other Construction 5,500 5,500 11,000 SteLrt-up Expenses - 226 226 Working Capital 2,410 13,407 15,817 Int;erest during Construction 9,788 - 9,78 ,ub-total 63,888 53,556 117,444 Investment in B.C.C. - 540 540 Investment in D.S.M. 7,110 4.590 11,700 Total 70,998 58,686 229%684 Total - $ '000 Equivalent 39,443 32,603 72,046  - 12 - 46. The estimate of the civil works for the evaporating pans is based on extensive field data and engineering designs as stated above. Detailed construction drawings are expected to be ready by the beginning of July, 1961. The estimate for the refinery is based on U.S. prices cur- rent in Yarch, 1961. Stearns-Roger have designed several similar plants in the United States during the last few years. Purchase of the equipment in. Europe might reduce the refinery cost somewhat. Detailed designs for the bromine expansion and salt plant are completed. Detailed designs for the magnesite plant have not been started although the present esti- mates have been made on a sound basis. The company has only recently completed bromine and ethylene dibromide facilities, thus the cost of these is known. All the estimates contain at least a 10% contingency allowance, some contain 15%--20%. The total. allowance should be adequate to cover physical contingencies and reasonable increases in cost levels during the construction period. 47. On the basis of the work completed, an amount of IL 129.7 million (;,72.0 million equivalent) is a realistic estimate of the cost of the pro- ject, including working capital and interest capitalized during construction. 48. It is planned, in the future, to expand potash production by an additional 300,000 tons per year with an incremental investment of $]33-$15 million equivalent; a cost of about $50 per annual ton compared to about 105 per annual ton for the present project. G. Construction Schedule 49. The construction time of the dikes and pans is estimated at 42 months; the refinery at 36 months. This schedule includes time for the import and assembly of necessary heavy construction equipment for the dikes. The plant will be operated before final completion of the dike system, to utilize raw material produced at intermediate stages, during the construction period. The DSW wishes to let contracts by November 1961 to assure that the pans will be ready for operation in April 1965, at the beginning of an evaporation season. 5C). The bromine and ethylene dibromide plants are expected to be completed by December 1961, and the bromine compounds plant by April 1962. The magnesite plant is expected to be completed by October 1963. H. Procurement 5-L. The DSW intends to procure goods and services on an international competitive basis to the fullest practicable extent. Invitations to bid on certain chemical process equipment may be limited necessarily to manufacturers w:Lth specialized experience.  - 13 - IV. MARKETS AND MARKETING A. The Market for Potash 52. Potash is one of the three major chemical fertilizer materials. Although it ranks behind phosphates and nitrogen in quantity consumed, its consumption has increased more rapidly than that of phosphates and only a little less rapidly than that of nitrogen in the last 20 years. Sustained high crop yields require properly balanced application of all three ferti- lizer materials; increased consumption of one has been accompanied or followed by increased consumption of the other two. 53. Consumption of potash in countries outside the Soviet Bloc amounted to about 6 million tons K20 in 1958/59.1 On the basis of reasonably conser- vative assumptions, it is estimated that it could reach 8.7 million tons K20 by 1966/67 when the Dead Sea project is expected to be in full operation. This assumes a lower rate of growth than has occurred in recent years, except in India. The Third Five Year Plan calls for a very substantial increase in fertilizer consumption, and although it seems unlikely that the targets will be reached, it is assumed that the planned levels will be approached. 54., Potash is produced in a small number of countries: in 1958/59 5.5 million tons K20 out of total world output estimated at 8.3 million tons K20 were accounted for by West Germany, France, Spain and the United States and 2.6 million tons by the U.S.S.R. and East Germany. This has facilitated a tight control over marketing which has survived the disappearance in the second World War of an organized international syndicate. 55. It is estimated that by 1966/67, production capacity in the coun- tries outside the Soviet Bloc could amount to 8.4-9.1 million tons K20. This takes account of additions to capacity in Western Europe and the U.S. to 1960, and of the following further additions: 600,000-1.2 million tons K20 in Canada; two mines with a capacity of 600,000 tons K20 whose completion has been long delayed by water problems are now expected to be completed by 1962. If it develops that the cost of sinking water-free shafts is not unreasonably higrh and demand justifies it, additional projects may bring Canadian produc- tion to the higher figure by 1966/67; 700,000 tons in the United States, from a new large mine being developed by Texas Gulf Sulphur at Moab, Utah and two smaller projects nearing completion. It is assumed that any further expansion would be balanced by cutbacks at Carlsbad where a reduction in production is needed to extend the useful life of the area; 200-300,000 tons K20 in Sicil: from three projects being financed by the IBRD; 250-350,000 tons K20 in West Ger t France and Spain; and 280,000 tons K20 in Israel. Because of the limited number of potash producers and their past record of concern for orderly marketing, expansions other than those already firmly planned seems unlikely, unless justified by demand. The assumption of expansion in Western Europe, outside of Sicily, is not based on firm plans, but the Western 1/ In previous paragraphs, tonnage figures have referred to potash or potassium chloride. In this section, the data refers to K20 content. Potash materials vary in K20 content but DSW potash contains about 60-62% K20.  - 14 - European producers may make such modest expansions as has been assumed to keep abreast of rising Western European demand. The Soviet Bloc has plans for a substantial increase in capacity but there is no way of appraising their realism. In any case, there is room for considerable expansion of consumption by the Soviet Bloc's lagging agriculture. It is assumed, there- fore, that Soviet Bloc exports to other countries will remain urchanged. 56. As a result of the large planned expansion in North America, its exportable surplus will grow. Until now, U.S. exports have gone mainly to Canada, Latin America, Japan and other Far Eastern countries, South Africa and Oceania. It may be expected that U.S. exports to these markets will grow both as a result of growth in their demand and at the expense of the Western European exporters. Western Europe's exportable surplus will remain at best unchanged and the Western European producers will be able to continue exporting on the present scale only if Western Europe continues its present imports from the Soviet Bloc and, to a minor extent, Israel. Western European producers may choose to permit their exports to Latin America, Japan and other Far Eastern countries, South Africa and Oceania to decline in order to keep step with growing demand in their present profitable market on the east coast of the United States. Even in that case, there may be room for additional exports from Israel to Western Europe. Israel's exports to Italy, now its largest market in Western Europe, are likely to decline once Italian produc- tion is established, but Israel has also established markets in the United Kingdom, the Netherlands and Sweden. In the growing markets of Asia, outside of the Far East, Africa, other than South Africa, it would have a decided freight advantage over the U.S. as well as Western Europe, which, in any case, would have only limited quantities for sale. 57. After declining from 1951 to 1959, the price of U.S. potash was increased by 3