CONTENTS Part 1 I INVESTMENT FUNDAMENTALS 1 SECURITIES AND ANALYSIS

1.1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 FINANCIAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 INVESTMENT ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 NON-MARKETABLE SECURITIES . . . . . . . . . . . . . . . . . . . . . . 1.6 MARKETABLE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . 1.6.1 MONEY MARKET SECURITIES . . . . . . . . . . . . . . . . . . 1.6.2 CAPITAL MARKET SECURITIES . . . . . . . . . . . . . . . . . . 1.6.3 DERIVATIVES . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6.4 INDIRECT INVESTMENTS . . . . . . . . . . . . . . . . . . . . . 1.7 SECURITIES AND RISK . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 THE INVESTMENT PROCESS . . . . . . . . . . . . . . . . . . . . . . .

2 BUYING AND SELLING

2.1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 MARKETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 PRIMARY AND SECONDARY . . . . . . . . . . . . . . . . . . . 2.2.2 CALL AND CONTINUOUS . . . . . . . . . . . . . . . . . . . . . 2.2.3 AUCTION AND OVER-THE-COUNTER . . . . . . . . . . . . . . . 2.2.4 MONEY AND CAPITAL . . . . . . . . . . . . . . . . . . . . . . 2.3 BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 TRADING STOCKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 TIME LIMIT . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.2 TYPE OF ORDER . . . . . . . . . . . . . . . . . . . . . . . . 2.5 SHORT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3FINANCIAL STATEMENT
3.1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 CASH FLOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 CASH FLOW METHODS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3INCOME STATEMENT . . . . . . . . . . . . . . . . . . . 3.4BALANCE SHEET . . . . . . . . . . . . . . . . . . .

4FINANCIAL STATEMENT ANALYSIS

4.1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 HORIZONTAL ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3VERTICAL ANALYSIS. . . . . . . . . . . . . . . . . . . 4.4RATIO ANALYSIS. . . . . . . . . . . . . . . . . . . PART 2

1PAKISTAN ECONOMICS 1 SECURITIES AND ANALYSIS

1.1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2FIRST FIVE DECADES. . . . . . . . . . . . . . . . . . . . . . . . . 1.3DEMOGRAPHICS . . . . . . . . . . . . . . . . . . . . . . . . . 1.4STRUCTURE OF ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5THE ECONOMY TODAY . . . . . . . . . . . . . . . . . . . . . .

2 TWO IMPORTANT SECTORS

2.1 AGRICULTURE IN PAKISTAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2DEFINITION. . . . . . . . . . . . . . . . . . . 2.1.3CROP SITUATION IN PAKISTAN. . . . . . . . . . . . . . . . . . . . . 2.1.4OVER LAST 5-YEAR AGRICULTURE GROWTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.5AGRICULTURAL MECHANIZATION IN PAKISTAN. . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 INDUSTRIES IN PAKISTAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2DEFINITION. . . . . . . . . . . . . . . . . . . 2.2.3INDUSTRY SITUATION IN PAKISTAN. . . . . . . . . . . . . . . . . . . . . 2.2.4 MAJOR INDUSTRIES IN PAKISTAN.. Part 3 3SECTOR OF INDUSTRY UNDER REVIEW FOR ANALYSIS 1ABOUT FERTILIZER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1DEFINITION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.22BACK GROUND. . . . . . . . . . . . . . . . . . . 1.1.3 HISTORY. . . . . . . . . . . . . . . . . . . . . 1.2THE MANUFACTURING PROCESS NITROGEN FERTILIZER COMPONENT. . . . . . . . 2RELATIONSHIPS OF AGRICULTURE AND FERTILIZER AND THE ECONOMIC . . 2.1 INTRODUCTION AND CORRELATION DEVELOPMENT . . . . . . . . . . . . . 2.2IRRIGATION AND FERTILIZER USE. . . . . . . . . . . . . . . . . . . 2.3FACTORS AFFECTING WATER AND FERTILIZER USE. . . . . . . . . . . . . . . 2.4THE INDUS RIVER BASIN IRRIGATION SYSTEM 3CURRENT WORLD FERTILIZER TRENDS AND OUTLOOK TO 2011/12 3.1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 WORLD FERTILIZER OUTLOOK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3MACRO FACTORS AFFECTING GLOBAL AGRICULTURE AND FERTILIZER DEMAND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4OUTLOOK FOR WORLD AGRICULTURE . . . . . . . . . . . . . . . . . . . 3.5SUPPLY AND DEMAND BALANCES. . . . . . . . . . . . . . . . . . . 3.6THE REGIONAL FERTILIZER SITUATION. . . . . . . . . . . . . . . . . . . . . . . . . . 4 MARKET DYNAMICS PAKISTAN FERTILIZER 4.1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 DEMAND-SUPPLY SITUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3INDUSTRY OUTLOOK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4MARKET PLAYERS. . . . . . . . . . . . . . . . . . . 4.5PRODUCT LINE OF FERTILIZER IN PAKISTAN. . . . . . . . . . . . . . . . . . . 4.6 FERTILIZER POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 FUTURES . . . . . . . . . . . . . . . . . . . . . . . PART 4 COMPANY ANALYSIS 1.1 ENGRO COMPANY ANALYSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2ENGRO RATIO ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . 2.1FFC COMPANY ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . 2.2FFC RATIO ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1FFC BIN QUSAIM COMPANY ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 FFC BIN QUSAIM RATIO ANALYSIS... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Preface
This research has developed from the lectures we have taken in MBA banking and finance. We have learned essential elements of investment analysis as a practical tool with a firm theoretical foundation. This foundation made us good enough to work on investment, banking and finance so we took investment analysis of a Fertilizer sector. This research will make a good impact on the people who are wishing to invest in the Fertilizer sector of Pakistan it would also accessible to anyone like undergraduates, students of economics, mathematics statistics, finance , corporate finance and investment analysis this will help them to understand the core concept of the courses ..

REASON FOR THE RESEARCH

All individuals have wealth of some kind if any thing else, this wealth may consist of the value of their services in the market place. Most individuals must make investment decision some time in their lifes.some people may wish to improve the return from their saving a/cs funds by investing in alternatives to insure saving account. Many employees can decide whether their provident funds are to be invested in stocks or bonds. There is wide range of securities in market place where a investor can maximize the expected returns from these opportunities. The first part of the investment decision process involves the evaluation and analysis of individual securities which is referred to as securities analysis. Professional security analyst is usually employed by institutional investor so our research is not only for them but also for individual and small investor. Of course, there is also millions of amateur security analyst in the form of individual investor. Among lot of sectors of economy in Pakistan we have chosen urea under the head of fertilizer sector because Pakistans GDP is largely based on agri sector. it is the most important input, there is a short fall in the supply side of urea there is huge opportunity for investor to invest.

LITERATURE REVIEW SUMMARY 1

Pakistans economy is agro based however our cultivated land is deficient in nutrient contents. This deficiency can only be overcome through balanced use of fertilizer. Presently there are ten manufacturing unit in Pakistan. Out of these, four units are located in the public sector and six are operating private sector. The province wise distributions confirm that 5 units are located in Punjab, 3 in sindh and 2 in NWFP. The economic boom in the country has brought about an impressive agricultural growth, putting pressure on domestic suppliers of fertilizers with demand outstripping supply, whereas local producers scramble to maximize their production to meet the rising demand. Engro chemical Pakistan is the second largest producer of urea fertilizer in Pakistan. The company was incorporated in 1965 n was formerly known as Exxon chemical Pakistan limited until 1991, when Exxon divest their fertilizer business on global basis and solid off its equity of 75% shares in our company. Shareholder pattern of engro are 25% of individual, 10% of investment companies, 39% of joint stock companies, 12% of financial institutions, 8% of insurance companies and 6% of others. Engros core business includes manufacturing and marketing of chemical fertilizers. Engro is Pakistans one of the largest producers of urea fertilizer which is manufactured at Daharki and marketed under brand name Engro. They also produce crop specific NPK fertilizers at the plant at Port Qasim Karachi and these are marketed under the brand name of ZARKHEZ. Engro also markets imported MAP fertilizer under the brand name of ZORAWAR and imported Dap fertilizer. The company also markets micronutrients zinc sulhpahte branded as ZINGRO and Boron branded as ZORON.The overall financial position of the company is stable, over the year which is one of the reason of high efficiency and profitability of Engro. All the profitability ratios are also showing increasing trend on the back of increasing Sales as well as Gross profit which is because of good utilization of assets and as well as capital employed by the company. It is expected that the company will be able to perform well because of its future expansion plan which will increase the market share from current 13% to 35%. EPS is also showing the increasing trend. One more thing which is favorable for company is its diversification projects and investment horizon. If the company would be able to continue its current stability and investments in profitable projects then the company would be able to increase its market share as well as Profitability.

Market Position
Currently, Engro market share is 13% and it expected to grow in future because of two main reasons, which includes Urea expansion plan and the other reason is that the agricultural sector in Pakistan is growing at a rate 5-6%. Therefore, being one of the largest fertilizer companies of Pakistan, Engro would be able to increase its market share in the coming years.

DIVIDEND POLICY
The dividend per share of the company is showing an increasing trend till 2005 and it is expected to increase in the coming years because of good performance of the Agricultural sector of Pakistan and high demand of both type of fertilizer. On the other Dividend Payout is showing bearish trend and it is expected to remain same till 2010 and the reason behind it is urea expansion plan which will start its working in 1st quarter of 2010.If we go throw their income

statement for 2009 the sales are 21,364,079 Rs. The expenses are 2,116,513 Rs. And profit is 2,888,226 and their basic and Diluted EPS 17.17.

THE KEY RATIOS

The Key ratios that they are using are liquidity ratios that includes current & quick ratio. If we analyze these ratios in 2006, 2007, 2008, 2009 the current ratios are 1.56, 1.92, 1.96 and 1.86 respectively, whereas the quick ratios for the same years are 0.61, 1.63, 1.65, and 1.52 respectively. The share is trading at around 0.93% discount to our DCF based fair value of Rs. 248.05 per share and PE multiple of 16.24. We recommend a Hold.

FAUJI FERTILIZER
Pakistans economy is agro-based; however our cultivable land is deficient in nutrient Contents. This deficiency can only be overcome through the balanced use of fertilizer. Presently, there are ten manufacturing units in Pakistan. Out of these, four units are Located in the public sector and six are operating in the private sector. The province-wise Distribution of units confirms that 5 units are located in Punjab, 3 in Sindh and 2 in the NWFP. The economic boom in the country has brought about an impressive agricultural growth, Putting pressure on domestic suppliers of fertilizers with demand outstripping supply, Whereas local producers scramble to maximize their production to meet the rising Demand. Fertilizer demand likely to raise by 5 percent in Pakistan this trend in fertilizer demand Push to the increased availability of cultivation area and farm loans besides the income of The peasants. Despite rise in demand, local production of fertilizers was expected to Remain raging between 4.7-5.2 million tons, which might spur the import of 1 million Tons of fertilizers in the next fiscal year for meeting the shortfall. FFC was incorporated in 1978 as a private limited company. This was a joint venture Between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S Of Denmark. The initial authorized capital of the company was 813.9 Million Rupees. Additionally, FFC has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (Formerly FFC-Jordan Fertilizer Company Limited). FFC commenced commercial production of urea in 1982 with annual capacity of 570,000 Metric tons. The shareholding pattern of FFC is 48% of charitable trust, 10% of Insurance companies, 13% of individuals, 12% of others and 10% of investment companies. The overall financial position of the company is stable, over the year which is one of the Reason of high efficiency and profitability of FFC. All the profitability ratios are also Showing increasing trend on the back of increasing Sales as well as Gross profit which is because of good investments by the company in high yielding projects. Leverage and Liquidity ratios related to FFC are also improving from past to present. If the company would be able to continue

its current stability and investments in profitable projects then the company would be able to increase its market share as well as Profitability. The dividend per share is expected to increase in the year to come because of following Points, BMR projects, Capacity expansion plans and equity investment in Local as well As Overseas, high yielding projects (FFBL, PMP). The DPS is also expected to increase Because Sales and PAT are also showing increasing trend on year on year basis If we see the income statement of the company for the year 2009 the sales are 44,349,456 Rs. the expense are 905,876 Rs. The profit after taxation is 7,073,088 Rs. The basic & Diluted and EPS is 14.33 and the weighted avg. # of shares 493,747. The Key ratios that the company is using is liquidity ratios , if we analyze the past years 2006, 2007, 2008, 2009, the current ratio are 0.90, 0.85, 0.82 and 0.69 respectively and quick ratio for the same years are 0.61, 0.76, 0.74 and 0.66 respectively. The share is trading at around 6.73% discounts to our DCF based fair value of Rs. 125.82 per share and PE multiple of 12.50. We recommend a buy.\

SUMMARY 2
In this report the researcher has given his point of view the he foresee growth in earrings of Fertilizer companies in the years to come. Similarly they said position will be with ENGRO. We expect positive earnings of ENGRO in the coming years. And looking into the future of ENGRO is also bright and having lots of potation to earns profits. Now ENGRO was EXXON and was incorporated in 1965 and was formerly Exxon Chemical Pakistan until 1991, when Exxon decided to divest their fertilizer business on a global basis and sold off its equity of 75% shares in our company. The Employees of Exxon, in partnership with leading international and local financial institutions bought out Exxons equity and the company was renamed as ENGRO Chemical Pakistan Limited The current market position of ENGRO is 13% when this research was done and the growth of the agriculture market was growing at 5 to6% and so there is a scope to increase the market share as the demand will rise as the growth rate of agriculture But the sale was 6% down due to lower industry demand. The urea market share (19%) remained the same as last year. The plant produced 692,000 tons against 738,000 tons in the same period last year due to unplanned shutdowns in June and August ENGRO manufactured at Daharki and marketed under brand name ENGRO. They also produce crop specific NPK fertilizers at the plant at Port Qasim Karachi and these are marketed under the brand name of Zarkhez". ENGRO also markets imported MAP fertilizer under the brand name of "Zorawar" and imported DAP fertilizer. The company also markets micronutrients Zinc Sulphate branded as "Zingro" and Boron branded as Zoron The report also contain the ratio analysis and the result of that shows that Estimate a Fair Value We estimate the companys stock fair value range to be Rs. 300- Rs. 315.We expect handsome earning growth as we saw in second quarter of 2007. We recommend a BUY for ENGRO at current price. The highest price of the ENGRO stock witnessed Rs307.45 on Oct 5 2007. Currently, the stock price of ENGRO limited moving around to Rs270 to Rs280 It is expected that the company will be able to perform well because of its future expansion plan Which will increase the market share from current 13% to 35%? EPS is also showing the increasing trend. One more thing which is favorable for company are its diversification projects and investment If the company would be able to continue its current stability and investments in profitable projects then the company would be able to increase its market share as well as Profitability. We recommend BUY for the scrip, and according to our fair valuation we dig out to the fair value of Rs 300 Publish 0n 30th November 2007 by Noman Abid & Co Ltd: 2nd Floor, PCG Plaza, Sarwar Shaheed Road, Saddar, Karachi researched by Muhammad Abdul Sami [Research Analyst]

SUMMARY 3
This article is by an outsider point of view and look in the world reception towards our economy and political situation and there effects on the economy and the outlook of the investing in Pakistan and how the new government deal with it In this article his has ask some question like what are the major issues in Pakistans economy. How stable is it today? Have the previous governments, since the military takeover, managed the economy better? What are the challenges facing the PPP government? To answers these question he has looked in the economic year 2007-8 the year of great importance many big event happen which wither are interlinked with each other .the first and the most important was the murder of Benazir Bhutto and the equally important was the act of gen musharraf on November 3 and the PCO and removal of Chief Justice Iftikhar Choudhary, Pakistan has faced crisis after crisis, including the lawyers movement, violence in Karachi, the Lal Masjid debacle, militancy in FATA and NWFP and the power shortage .this all lead up to During the previous fiscal year 2006-07, Pakistans economic growth rate was 6.8 per cent and it was expected that during 2007-08, it would touch 7.2 per cent. Unfortunately, the growth rate declined to 5.8 per cent during this period. Since the agricultural sector continues to be the major provider of employment to nearly twothirds of Pakistans population living in rural areas, the importance of agriculture needs to be underlined. Since water is a major issue, both droughts and floods are likely to become major causes for concern. Construction or the lack of major dams across the Indus, and the quantity of water flow on the main river and its tributaries is likely to become a matter of life and death for the majority in Pakistan The manufacturing sector will improve if the policies and the credit and the most important they become politically stable and improve its law and order situation. Much will depend on how the new government resolves vital issues at the national and provincial levels. This will improve industry and investment in Pakistan Energy sector is the back bone if Pakistan has to go head and many new plant is been out and fast track work is been done on it and import energy from Iran and a big project the Iran Pakistan India gas pipe line PPP and PML-N. Join hand on the great charter of democracy and judiciary are likely to be two crucial issues, towards reaching an understanding amongst the leading political parties PPP and PML-N. If Sharif and Zardari fail to reconcile their differences on these issues, Pakistan is likely to remain politically unstable. Besides, the new government needs to formulate a coherent policy towards dealing with Baluchistan, violence in NWFP and FATA, and taking concrete measures in terms of cross-border terrorism across the Durand line. Failure to address the latter is only likely to heighten the incidence of cross-border strikes by the US-led allies, based in Afghanistan, as happened during the second week of June. This was not the first cross-border strike and is unlikely to be the last. Thus, politically, Pakistans economy is inter-twined with not only political stability at the national level, but also with regional security. Much will depend on how the PPP led government reformulate Pakistans economic priorities and policies and link it with external relations.

An economically weak Pakistan is not in the interest of the region as well. For the investor and for foreran direct investment and for the world also Pakistans Economy Pangs of Political Instability Article written by D. Suba Chandran Assistant Director, IPCS, and New Delhi publish on June 2008.

SUMMARY 4
In this article he is doing a sector analysis Fertilizers - a theme with a bright future .the world economy and population is growing steadily and we have to meet the entire thing like housing, plants, roads or other infrastructure. To improvement of the standard of living of the population we have to give then food with its all nutritional value. As the demand for the good is going and the changes in the. Ecological, gasoline, which decreases the quantity available for humans and the animals. This context reinforces the necessity to use fertilizers to produce food. They constitute the vital element for the fertilization of the soil and are, in addition to good Weather conditions, the essential ingredient to obtain abundant crops. As the time has passed the farmer has also realize the importance of the mixing of ingredients used to fertilize grounds. The three main types of fertilizer are nitrogen result from ammonia And its by-product the urea. The phosphate is obtained from rocks containing an ore of calcium of phosphor. Finally, the potash is produced from mineral reserves, mainly under the shape of chlorides of potassium hydroxide (KCI). The nitrogen (N) is the nourishing element the most important for plants it is 80 %gas in the atmosphere it is very good for plants. And fertilizers based on N are the urea and the nitrates of ammonia which represent each approximately half of the market which is made from natural gas and the nitrogen contained in the air itself. About 34.400 cubic feet of natural gases are needed to produce one ton of nitrogen. Natural gas represents 70 to 90 % of the production cost of the ammonia which is a gas that can be stored in the liquid state under pressure or refrigerated. Contrary to the ammonia which is a product that requires a consequent investment for its storing and transport, the urea is a solid that is easy to store. The market of urea will come up new places like China and in the Middle East (abundance of gas) are planned. The lack of engineering capabilities and the development of new and more sophisticated technologies of production limit the number of investments; the producers are more and more disciplined in the Middle East to avoid a price collapse; the closure of capacities, particularly very polluting factories in China is not to be excluded. Besides, the Chinese authorities introduced taxes to discourage the exports. As are salt the supply will progress on average by 5 to 6 % until2012, what should enable to balance the market. The supply of phosphate is at present sharply insufficient. So it is effecting the production of dap and this article also tell the most major production company like Potash Corporation, Agrium Inc, Mosaic Co , CF Industries , Yara International are almost 25 % of production of fertilizer And they are most performing company in the stock exchange and fertilizer sector offered a glittering performance to the investors, for example the price of Potash was multiplied by 6 over the last 3 years. The perspectives remain brilliant, because, except for an unexpected increase in the supply, the only danger could result from the introduction of seeds with lesser intensity of fertilizer, a risk which is not for the immediate. The supply of fertilizers is lagging, particularly as regards potash. A chronic deficiency Of fertilizers is foreseen at least for the next two years. This opens interesting opportunities for the investors. We recommend either the purchase of an individual stock (Potash or Mosaic) or that of a diversified basket

Sector analysis Fertilizers - a theme with a bright future article by Roland Duss March on 2008publish by Gonet & Cie. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or specific product.

SUMMARY 5
In this article they are thronging light on the Indian fertilizer sector and telling it is the most energy intensive sectors within the Indian and it has both national and international valve because as the agriculture increase both fertilizer and energy will be required. So the fertilizer industry has to have energy saving and high productivity. In India Aluminum, cement, fertilizer, iron and steel, glass, and paper this industry is energy intensive industries Together they account for 16.8% of manufacturing value of output (VO) and consume 38.8% of all fuels consumed in the manufacturing sector The fertilizer sector holds a considerable share within these energy intensive industries. In 1993, it accounted for 23% of value of output within the six industries and for 3.8% in the manufacturing sector Then he describe who different type of fertilizer is produce and then the tell the year by year how many tons of fertilizer is produce and hoe much energy was used. 80% of the energy consumption for nitrogenous fertilizer since new capacity in the form of gas based fertilizer plants was added in the 1980s the share of gas has increased substantially. In 1992-93, the shares of feedstocks in ammonia production were: 54.2% natural gas, 26.1% naphtha, 18.2% fuel oil, and 1.5% coal (TERI, 1996) while, in 1981- 82, it was: 52% naphtha, 19% fuel oil, 19% coke oven gas and 10% coal (Kalra, 1989). The shift towards the increased use of natural/associated gas and naphtha is beneficial in that these feedstocks are more efficient and less polluting than heavy fuels like fuel oil and coal. Furthermore, capacity utilization in gas based plants is generally higher than in other plants. Therefore, gas and naphtha present the preferred feedstocks for nitrogenous Then the tell about the demand of the fertilizers year to come in(million tones of nutrients)

Demand projections for fertilizer consumption up to the year 2001-02 are presented in. Due to continued increase in population and food requirements, demand for fertilizer is expected to further grow at an optimistically stable mix of nutrients NPK). This will help to substantiate agricultural growth. Then we give Overview of Policies Regarding the Fertilizer Industry from 1957 to 1994 and how it shifts and turns by governmental the policy .Energy policies in general and price-based policies in particular can help overcome these barriers in giving proper incentives and correcting distorted prices. Appropriate provisions should be made in the retention pricing scheme to further encourage investment in energy conservation projects. Originally, normative consumption of various inputs was taken into account under the retention price system which encouraged the implementation of energy efficiency measures. These and other fiscal incentives need to be reinstated under the current scheme. Through the removal of subsidies energy prices would come to reflect their true costs. In a deregulated market, firms would adjust their behavior in order to minimize costs of production.

Therefore, in the short term, energy price increases would push less productive and inefficient mostly smaller units out of the market or force these units to take immediate initiatives to improve productivity and efficiency. On a long term basis, substantial further investments in energy efficiency technologies for existing and new plants have to be made. Therefore, sectoral policies should be devoted to the promotion of such investments. A stable foreseeable policy environment would substantially help firms to reduce the risk of taking large investments. Our economic results pointed out that technological change has been biased3 towards the use of energy inputs. This implies that price-based policies albeit effective in reducing energy use could have a negative long run effect on productivity, and thus welfare. An optimal policy strategy would therefore consist of a mix of regulatory and price based incentives within a set political a economic framework. Article Indias Fertilizer Industry: Productivity and Energy Efficiency written by Katja Schumacher and Jayant Sathaye Environmental Energy Technologies Division July 1999This work was supported by the Environmental Science Division, Office of Biological and Environmental Research (OBER), Office of Energy Research, U.S. Department of Energy, under Contract No. DE-AC03- 76SF00098.

SUMMARY 6
This article talks about the tools of analysis and it throws light on the focal points for the analysis of leveraged buyouts. It contains leveraged buyout's (LBO) introduction, risks involved with it its credit quality and the best method to get control over it. This article is written by the Merton Miller who is awarded the Nobel Prize in Economics in 1990 on the research which pertains the usage of debt financing. The point he raised is that the financial markets are self correcting and this term is applies particularly to the market for leveraged buyouts. He tells us the big cause of failure which is that when there is too much money chasing a limited number of good deals then the market will overheat which will lead to an increase in the number of failures. He examines the LBO marketplace and also matches this thing with the current market condition. Now this portion of article tells us the cause that why leveraged buyout occurs the reason is given when a large amount of debt capital is used to replace equity capital because there is no standard definition for an LBO the advantage of an LBO is that is can be used as an management tool which can control on the activities

RISK THAT THE BOOM WILL TURN INTO A BUST

LBOs tend to be structured with three layers of funding. There is usually a bank layer. Banks are usually collateralized and can further reduce risk by diversifying into several industries and geographic areas through the use of loan participations and swaps. Banks have tightened their lending standards during 2000. The mezzanine layer is often referred to as the junk bond layer; this is a high risk bond that usually pays a relatively high interest rate to investors. Finally, there is an equity layer; the equity layer tends to range from 10% to 30% of the total LBO funding. Kohlberg Kravis Roberts & Co. (KKR) is the best known equity layer participant. However, there are as many as 750 private equity limited partnerships that invest as little as $250,000 into equity investment pools. The fee income is excellent; however, the credit quality of the investment pools is sometimes suspected. Junk bonds are bonds with a rating of Baa or below. The leading junk bond experts have issued warnings concerning turmoil in the marketplace during the year 2000. Moodys the leading bond rating agency, has indicated that defaults are up. Donaldson Luftkin & Jenrette (DLJ) is the leading underwriter of junk bonds; DLJ has also increased its estimate of the defaults on junk bonds. Finally, Professor Edward I. Altman, the leading academic researcher of junk bonds, has indicated that a significant number of junk bonds are now trading at distressed prices in the marketplace.

SUMMARY 7
In this article writer has emphasized on the importance of financial ratios as he says that financial ratios are the snapshot of company's financial health it tells us where organization is standing. He did not throw light on all the ratios but he gave an overview on some of the important ones and he has also told us the way to us them for different purposes. He says that financial ratios are relatively easy and simple way to get the basic understanding of the financial health of an organization which also depends of the nature of the organization. This document is divided into three sections first section tells us that ratios falls in two categories liquidity and financial performance, the second section is explaining some Ratios those are useful only in particular circumstances and the final section is an introduction to the Concept of shareholder value added. He has also explained the liquidity that it refers to the ability to produce cash. He has also elaborated liquid ratios like quick ratio, current ratio and interest coverage ratio. Where quick ratio reveals whether an organization can cover its immediate liabilities without selling any inventory it might have, for companies which have large and liquid inventories it may not be the most appropriate. The Current liquidity; Ratio is similar to the Quick Ratio, except that it includes all short term assets. The current ratio is the most commonly used measure of it gives an indication of the Efficiency of a companys operating cycle and how well it turns products into cash and The Interest Coverage Ratio indicates the ease with which an organization can meet its interest payment obligations from cash flows. This ratio is commonly found in debt covenants and is a good indication of the likelihood of financial distress. He also mentioned some other ratios as well which includes return on assets, return on equity and price/earnings ratio some other ratios include inventory turnover and collection ratios. With the formulas he has supported his documents with the purpose and use as well. Writer also gave us the knowledge of cost of capital and its importance for individual investor and for company as well. He tells us that investors expect a certain percentage return. Anything below this return is unacceptable, and anything above it is good. The return that investors expect for a given level of risk is known as the cost of capital and for companies the cost of capital will depend on the financial structure of the company (debt vs. equity), the industry in which it operates, and some function of the risk of the average project the company invests in. Because costs of capital are very hard to measure.

SUMMARY 8
There are three parts in this vary article in which the first part relates to the introduction throws lights on the importance and usage of financial ratios, second part relates to the analysis of balance sheet ratios includes liquidity and leverage ratios and the third part belongs to the analysis of income statement ratios. In the introduction portion writer gives us the knowledge that The Balance Sheet and the Income Statement are essential, but they are only the starting point for successful financial management. Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this compare your ratios with the average of businesses similar to yours and compare your own ratios for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important early warning indications that allow you to solve your business problems before they destroy your business. In the balance sheet ratio analysis writer tells us that Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay its bills as they come due) and leverage (the extent to which the business is dependent on creditors' funding). He also tells us about the ratio comes under the head of liquid ratios these ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, and Working Capital. Where Current Ratio = Total Current (S/T) Assets / Total Current (S/T) Liabilities Quick Ratio = (Cash + Short term financial investments + Receivables) / Total Current (S/T) Liabilities Working Capital = Total Current Assets - Total Current Liabilities He tells that the Leverage Ratio indicates the extent to which the business is reliant on debt financing (creditor money versus owner's equity): Leverage Ratio = Total Liabilities / Net Worth (Total Assets-Total Liabilities) In the third part which relates to the income statement ratio analysis which measure profitability includes Gross Profit = Net Sales - Cost of Goods Sold Net Profit Margin Ratio = Net Profit before Tax / Net Sales In this document he also threw light on some management ratios derived from Balance Sheet and Income Statement information like account receivable ratio which indicates how well accounts receivable are being collected. If receivables are not collected reasonably in accordance with their terms, management should rethink its Collection policy. If receivables are excessively slow in being converted to cash, Liquidity could be severely impaired. Getting the Accounts Receivable Turnover Ratio

Is a two-step process and is calculated as follows: Daily Credit Sales = Net Credit Sales per Year / 365 (Days) Accounts Receivable Turnover (in days) = Accounts Receivable / Daily Credit Where return on assets measures how efficiently profits are being generated from the assets employed in the business when compared with the ratios of firms in a similar business. A low ratio in comparison with industry averages indicates an inefficient use of business assets. The Return on Assets Ratio is calculated as follows: Return on Assets = Net Profit before Tax / Total Assets

SUMMARY 9
Article tell us about a whole scenario of banking and finance which includes its overview its resourses,FAQS and advertising .The author says that investment banking is a broad term used interchangeably. He tells us that why finance is used in the corporate firms and in multinationals. It is just because it actually controls and manages the overall internal as well as external financial functions. It teaches the companies how to deal with financial markets, institutions and the glitz of strategic planning. It is beneficial for financial and non financial institutions especially for banks and money management firms in the areas of corporate finance, investment analysis, and portfolio Management, trading, mergers and acquisitions, private equity investing, and institutional and retail sales. In this particular article he also gave lot of links and resources from where we can get more wisdom about finance these resources includes some web sites as well as the name of some books. In FAQ portions some questions and their answers are given which gave a lasting effect on the contest. The questions which are given in the end are following what do firms look for when they are selecting candidates? If I'm not an economics major, what classes should I take? How can I demonstrate my interest in financial services? How can I show my interest in a specific company? How can I get a summer internship in finance? What should I do to prepare for the interview? Is there lifestyle issues associated with working in finance? Answers of these questions are quite short and simple he didnt quote too much but only the valid points. These questions are basically made for those people who are interested in doing their studies in some finance subjects so approximately all the questions which arise in the mind of a student before starting something in finance are versed with their proper answers. For example in the question that Are there lifestyle issues associated with working in finance? he says that Investment banking involves long hours, stress and often great uncertainty hours hunched behind computers, poring over financial statements and churning out spreadsheet after spreadsheet" and that you "shouldn't go into banking only for the money...to survive, much less to do well, in I-banking, you'll need to like the work itself and about the salary package he says that it vary depending on geographic location, the size of the company, and other factors, so keep that in mind when you think about offers.

METHODOLOGY
This methodology help us in the best manner to under stand balance sheet and income and financials notes as we have to look into the secondary data publish by the company so to give more purpose to that data we use this methodology and it leads us to the point where we can analyses investment, economies of Pakistan and the sector under review and there ratios analysis and there interpretation of there results for better decision

METHODOLOGY
A. CAPITAL STRUCTURE 1.ORDINARY SHARE CAPITAL This represents the total paid-up capital against issue of ordinary shares. These are amounts of capital actually paid by the shareholders to the institution for acquiring its shares. It includes shares paid in cash (subscribed/right issued), issued as bonus shares and shares issued for considerations other than cash (eg. for settlement of receivables/debts or debts redeemable into stock etc.). 2. RESERVES It is evaluated by aggregating all kinds of reserves except depreciation reserve and reserve for bad and doubtful debts plus the balance of profit and loss account and subtracting there from intangible or fictitious assets (e.g., goodwill, patents, trade mark) and adverse balance of profit and loss figures. The reserves entering into the calculation are: (i) General (ii) Capital (iii) Development (iv) Dividend equalization (v) Proposed issue of bonus shares (vi) Profit on re-issue of forfeited shares (vii) Premium on shares (viii) Capital profit arising from the sale of fixed assets (ix) Special reserves under relevant provision of Income Tax Act 3. SHAREHOLDERS EQUITY This item purports to represent the total stake of the shareholders in the business and has been obtained by adding the ordinary share capital to the surplus.

4. PREFERENCE SHARES As the name indicates these are ordinary shares of a company and pays a fixed dividend (whether the company is earning profit or making loss during operation), but its shareholders have no voting privilege. In case of liquidation of the company its status is normally considered prior to the status of ordinary shareholders. The difference between ordinary shares and preference shares is as follows: a) Ordinary shareholder will receive dividend, which varies according to the prosperity of the company but preference shareholder will receive a fixed amount dividend every year. b) Ordinary shareholder has a right of voting in the companys annual general meeting while the preference shareholder has no voting right. c) Ordinary shareholders have to claim on the net assets of the company in case of liquidation, while the claim of the preference shareholders is paid earlier. 5. DEBENTURES / TFCS These are bonds/certificates issued by a company to raise funds for long-term period (generally more than one year) for a specific purpose, sometimes convertible into stock. At present, debentures have been replaced by TFCs (Term Finance Certificates). 6. OTHER FIXED LIABILITIES The liabilities, which are required to be discharge after a period of more than one year from the date of balance sheet, are termed as other fixed liabilities or loan capital. They may consist of the following items: (i) Loans from financial institutions. (ii) Loans from non bank financial institutions. (iii) Loans from specialized financial institutions (iv) Foreign loans (v) Vendors account 7. TOTAL FIXED LIABILITIES It is the sum of the preference shares, debentures and other fixed liabilities. 8. TOTAL CAPITAL EMPLOYED It is the sum of shareholders equity and total fixed liabilities.

B. LIQUIDITY
1. CURRENT ASSETS
An asset is to be a current asset, which can be readily convertible into cash or equivalent without any significant loss in value. The current assets comprise of liquid assets, inventories and other current assets.

A)

LIQUID ASSETS Broadly speaking, liquid assets comprise of all assets like cash, bank balance, marketable security, etc., which are easily realizable almost at book value. While there can not be two opinions regarding the status of cash, current accounts and government securities in this context, the treatment of savings and fixed deposits and of shares of joint stock companies not quoted on stock exchange leaves the analyst in doubt. The classification of borderline cases had therefore, to be made partly in keeping with the objective of the analysis and partly on ones own subjective judgment. For this study, liquid assets that are also sometimes referred to as liquid capital have been bifurcated as cash and investments and comprise of the following items: (i) Cash in hand (ii) Cash in transit (iii) Current deposits (iv) Saving deposits (v) Call deposits (vi) Fixed deposits (vii) Deposits held abroad (viii) Government and corporate securities (ix) Savings and Unit Trust Certificates (x) Debentures stock of local or foreign companies B) INVENTORIES It comprises of stocks of raw material in hand, work in progress and finished goods at the closing date C) OTHER CURRENT ASSETS The following items are taken as other current assets: (i) Book debts including bad and doubtful debts (ii) Stores (iii) Work in progress(current) (iv) Advances, prepayments, etc.

2. CURRENT LIABILITIES
All liabilities, which are required to be discharge within one year, are termed as current liabilities. Alternatively, these cover those obligations whose liquidation is expected to be made out of current assets. They are usually incurred in the normal course of business and are required to be paid at fairly definite dates. The current liability consists of the following items. (A) SUNDRY CREDITORS (i) Income tax payable (ii) For expenses (iii) For other finance (iv) Bills payable (v) Advances from customers against orders

(B) PAYMENT BECOME DUE BUT OUTSTANDING (i) Income tax payable (ii) Proposed, unpaid and unclaimed dividends (iii) Estimated liabilities in respect of outstanding claims whether due or intimated (iv) Gratuities becoming payable (v) Provident Fund becoming payable (vi) Current installment and interest payable on fixed liabilities (vii) Provision for taxation estimated on current profits (viii) Workers profit participation fund (C) LOANS, DEPOSITS AND ADVANCES (i) Loans secured by stock or other current assets (ii) Bank overdrafts and other unsecured loans (iii) Short term loans acquired against the security of fixed assets (iv) Unsecured loan from directors, parent company, and subordinate loan (v) Due to managing agents (vi) Advances by directors (vii) Guarantee and security deposits of customers and staff (D) NON-CURRENT LIABILITIES These are liabilities, which are required to be discharged after one year. Usually their maturity time period is more than one year, but less than five years. (i) Raw material price equalization (ii) Tax equalization (iii) Contingency (iv) Leave passage (v) Workmens compensation fund (vi) Gratuity, pension or provident fund (vii) Investment depreciation but not including provision for actual shortfall of market (viii) value as compared with book value (ix) Publicity (x) Employees housing and welfare fund (xi) Charities (xii) Deferred liabilities (xiii) Taxation reserves including deferred taxation reserves, but not including provision (xiv) for assessed or estimated on actual or part of profits

3. TOTAL LIABILITIES
This item pertains to sum of total fixed liabilities and current liabilities except shareholders equity.

4. NET CURRENT ASSETS

It has been obtained by deducting the amount of current liabilities from current assets.

5. CONTRACTUAL LIABILITIES
This item pertains to all secured debentures, long-term loans, finance lease, short term secured loans and bank overdraft (Interest bearing secured loans).

6. NET LIQUID ASSETS

This is the difference of liquid assets and the current liabilities.

C. FIXED ASSETS
1. Fixed Assets at Cost In contra distinction to current assets, fixed assets consist of items, which are not readily convertible into cash during the course of normal operations of an enterprise. These items are not subject to periodical exchange through sales and purchases. Fixed assets are of permanent nature and are not normally liquidated or intended to be turns into cash except in the form of depreciation, which is added to the cost of goods sold. The following balance sheet items are included in the category of fixed assets: (A) REAL ESTATE (i) Freehold and leasehold land (ii) Factory and office buildings (iii) Residential buildings (iv) Capital projects in progress at cost (B) PLANT, MACHINERY AND ROLLING STOCK (i) All types of plant and machinery used for production and not for sale (ii) Crockery, cutlery, silverware and enamelware in hotels (iii) Construction tools (iv) Livestock in farming company (v) Cars, lorries, trucks, ships, launches etc. (vi) Railway siding and trolley lines (vii) Computers and other electronic equipments. (C) FURNITURE, FIXTURES, FITTINGS AND ALLIED EQUIPMENT (i) Electric fans, refrigerators, air conditioners, electric heating, sanitary and other fittings (ii) Laboratory equipment (iii) All types of office furnitures and equipment (iv) Advertising, fixtures and fittings

2. FIXED ASSETS AFTER DEDUCTING ACCUMULATED DEPRECIATION

Deducting the accumulated depreciation from the fixed assets of the company gives this item.

3. DEPRECIATION FOR THE YEAR

It includes all the depreciation charges to the profit and loss account. Owing to the absence of uniform accounting standards, depreciation is a subjective item and very from company to company. It is important for the analyst to know what effect such variation could have on the net profit.

4. TOTAL ASSETS
This item is sum of fixed assets at cost after deducting accumulated depreciation, and current assets.

D. OPERATIONS
1. GROSS SALES This item represents the sale proceeds of the company. Sales revenue is classified as local sales and export sales. 2. GROSS PROFIT Subtracting cost of sales from sales revenue arrives at gross profit. 3. OVERHEAD AND OTHER EXPENSES These are total expenses that are incurred on the operational activities of a company except financial expenses and include: i) Cost of sales ii) Administrative and general expenses iii) Selling and distribution expenses iv) Other expenses 4. OPERATING PROFIT Subtracting overhead and other expenses from gross sales and adding thereto-non-operating income gives operating profit. 5. FINANCIAL EXPENSES These are interest expense incurred on borrowing of long and short terms loans. It includes the following items;

(i) Mark-up and interest on long term loan (ii) Mark-up and interest on debentures and redeemable capital (iii) Mark-up and interest on short term loan (iv) Interest on private loan (iv) Financial charges against assets subject to finance lease (v) Interest and mark-up on supplier credit (vi) Interest on workers profit participation fund. (vii) Bank charges and commission. (viii) Excise duty on long and short-term finance. (ix) Discounting charges on receivables. (x) Exchange losses.

6. NET PROFIT BEFORE TAX PROVISION

It is the profit earned by the company during the year before tax provision.

7. TAX PROVISION
It is provision of taxation made on current years profit.

8. TOTAL AMOUNT OF DIVIDEND

It is the total dividend including interim dividend distributed or proposed to be distribute out of the current years profit

9. TOTAL VALUE OF BONUS SHARES ISSUED

This is the total amount of bonus shares issued to the shareholders as appropriation net profit after tax of the company during the year.

E. SOURCE OF INCREASE IN CAPITAL EMPLOYED

1. INCREASE/ DECREASE IN CAPITAL EMPLOYED The difference in value of total capital employed (i.e., share capital, surplus, preference capital, debentures and other fixed liabilities) at the beginning of the year and the corresponding figures at the end of the year and shown as increase (+)/ decrease (-). 2. RETENTION IN BUSINESS This item is obtained by deducting the provision for the tax and the total dividend distributed or proposed to be distributed from the net profit for the year. 3. FINANCE FROM OUTSIDE THE COMPANY The difference between the increase in the capital employed and the retention in the business is the finance from out side the company. It is possible for this item to be negative. Indeed in some

circumstances it is also possible for the increase in the capital employed as well as the retention in business to be negative, for instance where dividends are distributed not out of the current earnings but out of the reserves.

F. CASH FLOW DATA

1. DEPRECIATION FOR THE YEAR PLUS RETENTION IN BUSINESS The total funds that corporation generates internally for investment in the modernization and expansion of plant and equipment. 2. DEPRECIATION FOR THE YEAR PLUS CHANGES IN CAPITAL EMPLOYED Depreciation for the year is added in the difference of two successive years figures of total capital employed.

G. Operating Financial & Investment Ratios

1. GEARING RATIO This item shows the proportion that the fixed loan capital bears to the total capital employed. Where there is preference capital, there is an item of Gearing i.e., the fixed loan capital plusthe preference capital as the ratio of the total capital employed. The justification for taking the preference capital together with the fixed liabilities is that, from the ordinary shareholders point of view, both items represent a fixed charge on the profits. Total capital employed is shareholders equity plus total fixed liabilities. Gearing becomes inapplicable when the shareholders equity becomes zero or negative. 2. CURRENT RATIO This item tells a lender about the liquidity of the assets and as a result its ability to pay the shortterm debts. 3. ACID TESTS OR QUICK RATIO The acid test or quick ratio is used to determine how quickly a company would be able to pay off its current liabilities if it needs to convert its quick assets into cash. 4. DEBT EQUITY RATIO In debt equity ratio, the total debt is compared with the shareholders equity; the lower the ratio the better the companys solvency, the higher ratio is a risk to a present or future creditor. 5. RETURN ON ASSETS This ratio is considered a measure of how effectively assets are used to generate a return.

6. SELF -FINANCING RATIO The ratio expresses the amounts retained in business as percentage of increase/ decrease in the capital employed. 7. CASH FLOW RATIO This ratio has a purpose somewhat similar to the self-financing ratio described under F.3 the only difference being that it takes into account the amount of depreciation. 8. SHAREHOLDERS EQUITY AS % OF ORDINARY SHARE CAPITAL It is the shareholders equity to the ordinary share capital, which means the stake of ordinary shareholders in the total equity of the company. 9. OVERHEAD AND OTHER EXPENSES AS % OF GROSS SALES It shows the ratio of overhead and other expenses to the gross sales. This is an important ratio, which indicates the contribution of operating expenses in the operating revenue through sales of the company. Lowering the percentage, the company is more viable and efficient. 10. FINANCIAL EXPENSES AS % OF OPERATING PROFIT This shows the ratio of financial expenses to operating profit. It identifies how much weight the company will bear from its operating profit before reaching to the net profit before tax. Smaller ratio is a good for a company. 11. FINANCIAL EXPENSES AS % OF GROSS SALES It shows the ratio of financial expenses to gross sales. Lowering the ratio indicates the financial discipline of the company and the increasing ratio indicates that the company is facing financial expense burden out of its gross sales revenue 12. FINANCIAL EXPENSES AS % OF CONTRACTUAL LIABILITIES It shows cost incurred (interest/mark up paid) on contractual liabilities. 13. TAX PROVISION AS % OF NET PRE-TAX PROFIT It shows the portion of net profit set aside for tax provisions. 14. SUNDRY DEBTORS AS % OF GROSS SALES It is the ratio of outstanding credit (all sales receivables) to the total sale proceeds of the company. Higher the percentage, the company is increasing its debtors and credit risk and reducing its liquidity position.

15. Net Profit as % of Shareholders Equity It is worked out by dividing the net profit before tax by the shareholders equity, expressing the result in percentage.

H. KEY PERFORMANCE INDICATORS

1. DIVIDEND COVER RATIO The ratio of net profit after tax to total amount of dividend. 2. DIVIDEND RATIO TO EQUITY This item has been worked out by dividing the total amount of dividend by the shareholders equity, expressing the result in percentage 3. NET PROFIT MARGIN. This ratio shows how much profit comes from every rupee of sales. 4. EARNING PER SHARE It has been arrived by dividing the net profit (before/after tax) by the number of ordinary shares. 5. AVERAGE ANNUAL % DEPRECIATION ON WRITTEN DOWN FIXED ASSETS This item is simple depreciation rate and is intended to give some idea of the companys practice with regard to depreciation. Since there are so many items in the fixed assets schedule, it is not practicable to calculate depreciation rate for all the items individually. Therefore, an aggregate depreciation rate for all the item taken together has been worked out. The method is to take total depreciation provided during the financial year and dividing it by the written down value of the total fixed assets at the beginning of the financial year. The result is expressed in percentage. 6. SALES AS % OF TOTAL ASSETS: This item indicates how efficiently the business of a company generates sales on each rupee of assets. 7. SALES GROWTH (CURRENT YEARS SALES LAST YEARS SALES): Sales growth is the percentage increase or decrease in sales between two time periods. 8. BREAK-UP VALUE OF ORDINARY SHARES It is obtained by dividing the sum of ordinary share capital and the surplus by the number of ordinary shares

DATA COLLECTION TECHNIQUES AND PROCEDURE

As your research is of Qualitative type in which data is categorizes data into patterns as the primary basis for organizing, stakeholder and reporting results. Qualitative researchers, typically relay on four methods for gathering information: Participation in the setting Direct observation In depth interviews Analysis of documents and material As your topic is an investment analysis so we have to use the method analysis of the documents and materials. In this research we have to look into large volume of accounting information which is summarized into simple financial measurements like which are balance sheet, income statement and cash flow statement known as the snapshot of all the financial information and use to audit by chartered accountants. While determining the health (or illness) of a business for investment we use the most common and complex Financial Ratios (or Financial Indexes). We use financial ratios to give an indication of the viability of a business. Just as a doctor might take your pulse, temperature and blood pressure to give them information on your health, Financial ratios are a significant tool to analyze and compare the relationship between different pieces of financial information and to understand the operations of the firm. That helps Investors, creditors and stakeholders so they must be able to compare financial information among firms and over time. Comparative financial statements enable users to compare year-to-year financial position, results of operations, and cash flows. This comparison is enhanced by expressing each item as a percentage of that same item in the financial statements of another year.

1. 2. 3. 4.

SOURCES OF COLLECTING DATA

There are generally three or four methods of data collecting which are being used. Simply people use internet, questioners structured interviews journals or published articles etc. In our case we had the choice to collect date from internet, from stock exchange because they got all the latest financial information or on the other way around we can simply ask to the particular company to provide information included balance sheet and financial statement. and the world fertilizer section

Introduction
In the early stages of mankind development investment was always on the priority list. In the era when there was no wheel, people used to invest not in monetary terms but they sow trees so they can get food, energy, shelters and wood for making weapons. Now in the era where the mother of inventions was invented, people invested in that particular field so they can explore new places for better livings, more over they explored the gifts of God like minerals they put their sweat & blood so they could become able to provide better facilities to their upcoming generations. After that the era comes which is known for its barter system where people invested in businesses land Farming so they can produce more things for exchange and full fills their desires. The need of investment was always present but the modes of investment have changed & improved as well. Now investment means combinations of funds to one or more assets that will be held for some future time. The field of investment there for involves the study of investment process. The term investing can over a wide range of activities. It often refers to investing money on certificates of deposit .bonds common stocks and mutual funds, more knowledgeable investor would include other paper assets such as warrants put and call future contracts and convertible securities as well as tangible assets, such as gold, real estate and collectables. Investing encompasses very conservative positions as well as aggressive speculation.

PART I INVESTMENT FUNDAMENTALS CHAPTER 1 SECURITIES AND ANALYSIS

Learning investment analysis is a journey into a wealth of knowledge That is an exciting mix of the practical and the analytical. It Looks to technique to evaluate and to theory to explain. It is natural To feel a degree of trepidation at the start of such a journey. To help Offset this we need to familiarize ourselves with the landscape and Landmarks, to develop an overview of our route. Some of these landmarks May be familiar others may be new or be seen from a different Perspective. Armed with this we can map out our route. 1.1 INTRODUCTION The investment of wealth in financial securities they ranges from bond, financial paper and government securities and they can be traded in the formal and in formal market so fist we look in to different types of market . It provides an introduction to the tools of investment analysis that can be used to guide informed investment decisions. These tools range from the knowledge of the securities that are available in the market and how they are traded, through the techniques for evaluating good investments decision. Some investments can be very successful. An investor placing RS10, 000 in August 1998 in the stock of PSO, a PETROLUM company traded On KSE, would have stock worth RS107, 096 in September 2003. Similarly, a Purchase of RS10, 000 in September 2001 of WORLD CALL stock, an internet Retailer traded on the LAHORE Stock Exchange, would be worth RS134, 143 in August 2003. PSO and WORLD CALL are far from being alone in offering these levels of gain. Many high technology companies match and can even outstrip their performance. On the down side, losses in value can be even more spectacular. Anyone investing RS10, 000 in September 2000 in dost steel. That falls like house of cards.

The starting point for investment analysis is the market data on the values of securities which describes how they have performed in the past this market data is taken as given and we study how we should invest on the basis of that data. This generates a set of tools which, even if an investor does not apply them literally, provide a powerful framework in which to think rationally about investment. This framework continually emphasizes why many regretful investors have found to their cost that the maxim there is no such thing as a free lunch is especially true in financial markets. A serious investor will want to go beyond just accepting market data and progress to an understanding of the forces that shape the data

1.2 FINANCIAL INVESTMENT It is helpful to begin the analysis with a number of definitions that make precise the subject matter of financial investment. A standard definition is that investment is the sacrifice of current consumption in order to obtain increased consumption at a later date from this perspective, an investment is undertaken with the expectation that it will lead, ultimately, to a preferred pattern of consumption for the investor This definition makes consumption the major motivation for investment. In contrast, many investors would argue that their motivation for investment is to Increase their wealth in terms of both social and there size of volute. This observation can be related back to the definition by noting that wealth permits consumption or, in more formal language, an increase in the stock of wealth permits an increase in the flow of consumption. Wealth and consumption are, therefore, two sides of the same picture. Two different forms of investment can be identified

REAL INVESTMENT

is the purchase of physical capital such as land and Machinery to employ in a production process and earn Increased profit. is the purchase of paper securities such as stocks

FINANCIAL INVESTMENT Bonds.

and We do not discuss real investments because it out of you research boundary. Firms or investor (individual, venture capital, mutual fund) undertake real investment to generate the maximum profit given the market conditions that they face. There are many interesting issues raised by the real investment activities of investor including issues of research and development, capacity expansion, and marketing. But consideration of these matters falls strictly outside the scope of a research focus is upon financial investment. It should be noted, though, that a real investment by an individual, such as the purchase of a house or a painting, must be considered as part of the overall portfolio of assets held by that investor. There are strong links between the two forms of investment. For example, the purchase of a firms shares is a financial investment for those who buy them but the motive for the issue of the shares is invariably that the firm wishes to raise funds for real investment. Similarly, the commitment of

a householder to a mortgage, which is a financial investment, generates funds for a real investment in property. The issues concerning financial investment that are addressed in the following The forms of security available: where and how they are bought and sold;

The investment process: the decision about which securities to purchase, and how much of each; Financial theory: the factors that determine the rewards from investment and the risks.

The first step is to introduce the most important forms of securities that are available to the investor and the ways in which they can be traded. The next step is to analyze the general issues that are involved determining the preferred choice of investment. This is undertaken advantage and disadvantage and particular features of different securities. Next, we consider the financial markets and which provide further insight into the investment decision. Finally, we return to detailed analysis of some special types of securities that raise especially interesting analytical questions. 1.3 INVESTMENT ANALYSIS Investment analysis is the study of financial securities for the Purpose of successful investing. This definition contains within it a number of important points. Firstly, there are the institutional facts about financial securities: how to trade and what assets there are to trade. Secondly, there are analytical issues involved in studying these securities: the calculation of risks and returns, and the relationship between the two. Then there is the question of what success means for an investor, and the investment strategies that ensure the choices made are successful. Finally, there are the financial theories that are necessary to try to understand how the markets work and how the prices of assets are determined. EXAMPLE The website for Gins Global Index Funds puts it this way Very few professional fund managers can beat the market. Since there is no reliable way to identify the fund managers who will outperform the market, investors are best served by buying a broad spectrum of stocks at lower cost. (www.ginsglobal.co.za/company_profile.htm). Knowledge of investment analysis can be valuable in two different ways. It can be beneficial from a personal level. The modern economy is characterized by ever increasing financial complexity and extension of the range of available securities. Moreover, personal wealth is increasing, leading to more funds that private individuals must invest. The study of investment analysis can also provide an entry into a rewarding professional career. There are many different roles for which investment analysis is useful and the material covered in this research h will be useful for us. The training to become a financial analyst requires

knowledge of much to his analysis. Further, there are positions for brokers, bankers and investment advisors for whom knowledge of investment analysis is a distinct advantage. EXAMPLE The Association for Investment Management and Research (AIMR) is an international organization of over 50,000 investment practitioners and educators in more than 100 countries. It was founded in 1990 from the merger of the Financial Analysts Federation and the Institute of Chartered Financial Analysts. It oversees the Chartered Financial Analyst (CFA R) Program which is a globally-recognized standard for measuring the competence and integrity of financial analysts. CFA exams are administered annually in more than 70 countries. (For more information, see www.aimr.org).

1.4 SECURITIES A legal contract representing the right to receive future benefits Under a stated set of conditions. The piece of paper (e.g. the share certificate or the bond) defining the property rights is the physical form of the security. The terms security or asset can be used interchangeably. If a distinction is sought between them, it is that the term assets can be applied to both financial and real investments whereas a security is simply a financial asset. For much of the analysis it is asset that is used as the generic term. From an investors perspective, the two most crucial characteristics of a security are the return it promises and the risk inherent in the return. An informal description of return is that it is the gain made from an investment and of risk that it is the variability in the return. The return can be defined as the percentage increase in the value of the investment Return = EXAMPLE At the start of 2003 an investor purchased securities worth RS20000.These securities were worth RS25000 at the end of the year. The return on this investment is 25000 20000 100 = 25%. 20000 The return on a security is the fundamental reason for investor to hold it. The return is determined by the payments made during the lifetime of the security plus the increase in the securitys value. The importance of risk comes from the fact that the return on most securities is not known with certainty when the security is purchased. This is because the future value of security is unknown and its flow of payments may not be certain. The risk of a security is a measure of the size of the variability or uncertainty of its return. Return = final value of investment initial value of investment 100. Initial value of investment

It is a fundamental assumption of investment analysis that investors wish to have more return but do not like risk. Therefore to be encouraged to invest in assets with higher risks they must be compensated with greater return. This fact, that increased return and increased risk go together, is one of the fundamental features of assets. A further important feature of a security is its liquidity. This is the ease with which it can be traded and turned into cash. For some assets there are highly developed markets with considerable volumes of trade. These assets will be highly liquid. Other assets are more specialized and may require some effort to be made to find buyers and sellers who are agreed to do transition. All other things being equal, an investor will always prefer greater liquidity in their assets. The major forms of security are now described which can be found in the market for buying and selling 1.5 NON-MARKETABLE SECURITIES The first form of security to introduce are those which are non-marketable, meaning that they cannot be traded once purchased. Despite not being trade able, they are important because they can compose significant parts of many investors portfolios. The important characteristics of these securities are that they are personal the investor needs to reveal personal details in order to obtain them so that the parties on both sides know who is involved. They tend to be safe because they are usually held at institutions that are insured and are also liquid although sometimes at a cost. Some of the non marketable securities are Savings Account This is the standard form of deposit account which pays interest and Can be held at a range of institutions from commercial banks through To credit unions. The interest rate is typically variable over time. In Addition, higher interest will be paid as the size of deposit increases And as the notice required for withdrawal increases. Withdrawals can Sometimes be made within the notice period but will be subject to Penalties. The bonds issued by government or the bong which is gerent by the government of that country in the official gusset

Government savings Bonds

Non-negotiable These are certificates issued by a bank, financial organization that confirm that a sum of money has been received by the issuer with a Of deposit implied agreement that the issuer will repay the sum of money and That they are not a negotiable (or trade able) instrument. CDs can Have a variety of maturities and penalties for withdrawal. 1.6 MARKETABLE SECURITIES Marketable securities are those that can be traded between investors. Some are traded on highly developed and regulated markets while others can be traded between individual investors with

brokers acting as middle-men. This class of securities will be described under four headings. They are classified into

Money market securities Capital market securities Derivatives Indirect Investments

which have short maturities which have long maturities. whose values are determined by the values of other Assets. represent the purchase of assets via an investment Company.

1.6.1 MONEY MARKET SECURITIES Money market securities are short-term debt instruments sold by governments, financial institutions and corporations. The important characteristic of these securities is that they have maturities when issued of one year or less Money market securities tend to be highly liquid and safe assets. Because of the minimum size of transactions, the market is dominated by financial institutions rather than private investors. One route for investors to access this market is via money market mutual funds TREASURY BILLS Short-term treasury bills are sold by most governments as a way of obtaining revenues and for influencing the market. They sell at a discount (meaning a price different to, and usually less, than face value) and pay no explicit interest payments. The benefit to the investor of holding the bill is the difference between the price paid and the face value received at maturity. Treasury bills with 3-month and 6-month maturities are sold when government want An important component in some of the analysis of treasury bills is risk-free asset. This is defined as an asset which has a known return and no risk. Because Pakistan Treasury Bills (and those of other governments with a similar default-free record) are considered to have no risk of default and a known return, they are the closest approximations that exist to the concept of a risk free investment. For that reason, the return on Treasury Bills is taken as an approximation of the riskfree rate of return COMMERCIAL PAPER Commercial paper is a short term promissory note issued by a corporation, typically for financing accounts for which payment is due to be received and for financing inventories. The maturity 270 days or less. They are usually sold at a discount. These notes are rated by ratings agencies who report on the likelihood of default. NEGOTIABLE CERTIFICATES OF DEPOSIT

As for non-negotiable CDs, these are promissory notes on a bank issued in exchange for a deposit held in a bank until maturity. They entitle the bearer to receive interest. A CD bears a maturity date (mostly 14 days to 1 year). A specified interest rate, and can be issued in any denomination. CDs are generally issued by commercial banks. And in Pakistan national saving center also issued that. These CDs are traceable with dealers making a market (meaning they buy and sell to give the market liquidity). BANKERS ACCEPTANCE A bankers acceptance is a short-term credit investment created by a non-financial firm but which is guaranteed by a bank. The acceptances can be traded at discounts from face value. Maturities range from 30 - 180 days. Bankers Acceptance are very similar to treasury bills and are often used in money market funds.

REPURCHASE AGREEMENTS A repurchase agreement involves a dealer selling government securities to an investor with a commitment to buy them back at an agreed time. The maturity is often very short with many repurchase agreements being overnight. They constitute a form of short term borrowing for dealers in government securities. The interest rate on the transaction is the difference between the selling and repurchases prices. They permit the dealer to attain a short position (a negative holding) in bonds 1.6.2 CAPITAL MARKET SECURITIES Capital market securities include instruments having maturities greater than one year and those having no designated maturity at all. In the latter category can be included common stock and bonds. The discussion of capital market securities divides them into fixed income securities and equities. FIXED INCOME SECURITIES Fixed income securities promise a payment schedule with specific dates for the payment of interest and the repayment of principal. Any failure to conform to the payment schedule puts the security into default with all remaining payments. The holders of the securities can put the defaulter into bankruptcy. Fixed income securities differ in their promised returns because of differences involving the maturity of the bonds, the call ability, and the creditworthiness of the issuer and the taxable status of the bond. Call ability refers to the possibility that the issuer of the security can call it in, that is pay off the principal prior to Maturity. If a security is callable, it will have a lower price since the issuer will only call when it is in their advantage to do so (and hence against the interests of the holder). Creditworthiness refers to the predicted ability of the issuer to meet the payments. Income and capital gains are taxed differently in many countries, and securities are designed to exploit these differences. BONDS

Bonds are fixed income securities. Payments will be made at specified time intervals unless the issuer defaults. However, if an investor sells a bond before maturity the price that will be received is uncertain. The par or face value is usually $1000 in the US and 100 in the U k and in Pakistan RS100. Almost all bonds have a term - the maturity date at which they will be redeemed. Coupon bonds pay periodic interest. The standard situation is for payment every 6 months. Zero coupon or discount bonds pay no coupon but receive the par value at maturity. The return on a discount bond is determined by the difference between the purchase price and the face value. When the return is positive, the purchase price must be below the face value. Hence, these bonds are said to sell at a discount. TREASURY NOTES AND BONDS The government of Pakistan issues fixed income securities over a broad range of the maturity spectrum through the Treasury. These are considered safe with no practical risk of default. Treasury notes have a term of more than one year, but no more than 10 years. Treasury bonds have maturities that generally lie in the range of 10 - 30 years. Notes and bonds are sold at competitive auctions. They sell at face value with bids based on returns. Both notes and bonds pay interest twice a year and repay principal on the maturity date. MUNICIPAL BONDS A variety of political entities such as states, province, Municipal Corporation, WADA authorities raise funds to finance projects through the issue of debt. The credit ratings of this debt vary from very good to very poor. Two types of bonds are provided. General obligation bonds are backed by the full faith and credit whereas revenue bonds are financed through the revenue from a project. CORPORATE BONDS Corporate bonds are similar to treasury bonds in their payment patterns so they usually pay interest at twice yearly intervals. The major difference form government bonds are that corporate bonds are issued by business entities and thus have a higher risk of default. This leads them to be rated by rating agencies. Corporate bonds are senior securities which mean that they have priority over stocks in the event of bankruptcy. Secured bonds are backed by claims on specific collateral but unsecured are backed only by the financial soundness of the corporation. Convertible bonds can be converted to shares when the holder chooses. COMMON STOCK (EQUITY) Common stock represents an ownership claim on the earnings and assets of a corporation. After holders of debt claims are paid, the management of the company can either pay out the remaining earnings to stockholder in the form of dividends or reinvest part or all of the earnings. The holder of a common stock has limited liability. That is, they are not responsible for any of the debts of a failed firm. There are two main types of stocks: common stock and preferred stock. The majority of stock issued is common stock which represents a share of the ownership of a company and a claim on a portion of profits. This claim is paid in the form of dividends. Stockholders receive one vote per

share owned in elections to the company board. If a company goes into liquidation, common stockholders do not receive any payment until the creditors, bondholders, and preferred shareholders are paid. PREFERRED STOCK Preferred stock also represents a degree of ownership but usually doesnt carry the same voting rights. The distinction to common stock is that preferred stock has a fixed dividend and, in the event of liquidation, preferred shareholders are paid before the common shareholder. However, they are still secondary to debt holders. Preferred stock can also be callable, so that a company has the option of purchasing the shares from shareholders at anytime. In many ways, preferred stock falls between common stock and bonds.

1.6.3 DERIVATIVES Derivatives are securities whose value derives from the value of an underlying security or a basket of securities. They are also known as contingent claims, since their values are contingent on the performance of the underlying assets OPTIONS An option is a security that gives the holder the rights to either buy (a call option) or sell (a put option) a particular asset at a future date or during a particular period of time for a specified price. If they wish to conduct the transactions. If the option is not exercised within the time period then it expires FUTURES A future is the obligation to buy or sell a particular security or bundle of securities at a particular time for a stated price. A future is simply a delayed purchase or sale of a security. Futures were originally traded for commodities but now cover a range of financial instruments. 1.6.4 INDIRECT INVESTMENTS Indirect investing can be undertaken by purchasing the shares of an investment company and mutual fund. An investment company sells shares in itself to raise funds to purchase a portfolio of securities. The motivation for doing this is that the pooling of funds allows advantage to be taken of diversification and of savings in transaction costs. Many investment companies operate in line with a stated policy objective, for example on the types of securities that will be purchased and the nature of the fund management. UNIT TRUSTS A unit trust is a registered trust in which investors purchase units. A portfolio of assets is chosen, often fixed-income securities, and passively managed by a professional manager. The size is determined by inflow of funds. Unit trusts are designed to be held for long periods with the retention of capital value a major objective.

INVESTMENT TRUSTS Closed-End Investment Trust Issue a certain fixed sum of stock to raise Capital. After the initial offering no additional shares Are sold. This fixed capital is then managed by the Trust. The initial investors purchase shares, which are Then traded on the stock market. Continues to sell shares after the initial public offering. As investors enter and leave the company, its Capitalization will continually change. Money-market Funds hold money-market instrument while stock and Bond and income funds hold longer-maturity assets.

Open-End Investment Company (Or mutual fund)

1.7 SECURITIES AND RISK The risk inherent in holding a security has been described as a measure of the size of the variability, or the uncertainty, of its return. Several factors can be isolated as affecting the riskiness of a security and these are now related to the securities introduced above. The comments made are generally true, but there will always be exceptions to the relationships described. MATURITY The longer the period until the maturity of a security the more risky it is. This is because underlying factors have more chance to change over a longer horizon. The maturity value of the security may be eroded by inflation or, if it is denominated in a foreign currency, by currency fluctuations. There is also an increased chance of the issuer defaulting the longer is the time horizon. CREDITWORTHINESS Therefore they have the highest levels of creditworthiness being judged as certain to meet their payments schedules. Some are so lacking in creditworthiness that an active junk bond market exists for high return, high risk corporate bonds that are judged very likely to default. In Pakistan some company how give creditworthiness of other company PRIORITY Bond holders have the first claim on the assets of a liquidated firm. Only after bond holders and other creditors have been paid will stock holders receive any residual. Bond holders are also able to put the corporation into bankruptcy if it defaults on payment. This priority reduces the risk on bonds but raises it for common stock. LIQUIDITY Liquidity relates to how easy it is to sell an asset. The existence of a highly developed and active secondary market raises liquidity. A securitys risk is raised if it is lacking liquidity.

The bonds of some other countries bonds may have a risk of default. Indeed, there are countries for which this can be quite significant. As well as an inflation risk, holding bonds denominated in the currency of another country leads to an exchange rate risk. The payments are fixed in the foreign currency but this does not guarantee their value in the domestic currency. Corporate bonds suffer from inflation risk as well as an enhanced default risk relative to government bonds. Common stocks generally have a higher degree of risk than bonds. A stock is a commitment to pay periodically a dividend, the level of which is chosen by the firms board. Consequently, there is no guarantee of the level of dividends. The risk in holding stock comes from the variability of the dividend and from the variability of price. Generally, the greater the risk of a security, the higher is expected return. This occurs because return is the compensation that has to be paid to induce investors to accept risks. Success in investing is about balancing risk and return to achieve an optimal combination. 1.8 THE INVESTMENT PROCESS The investment process is description of the steps that an investor should take to construct and manage their investment and portfolio. These proceed from the initial task of identifying investment objectives through to the continuing revision of the investment in order to best attain those objectives. DETERMINE OBJECTIVES Investment policy has to be guided by a set of objectives. Before investment can be undertaken, a clear idea of the purpose of the investment must be obtained. The purpose will vary between investors. Some may be concerned only with preserving their current wealth. Others may see investment as a means of enhancing wealth. What primarily drives objectives is the attitude towards taking on risk. Some investors may wish to eliminate risk as much as is possible, while others may be focused almost entirely on return and be willing to accept significant risks CHOOSE VALUE The second decision concerns the amount to be invested. This decision can be considered a separate one or it can be subsumed in the allocation decision between assets (what is not invested must either be held in some other form which, by definition, is an investment in its own right or else it must be consumed). CONDUCT SECURITY ANALYSIS Security analysis is the study of the returns and risks of securities. This is undertaken to determine in which classes of assets investments will be placed and to determine which particular securities should be purchased within a class. Many investors find it simpler to remain with the more basic assets such as stocks and fixed income securities rather than venture into complex instruments such as derivatives. Once the class of assets has been determined, the next step is to analyze the chosen set of securities to identify relevant characteristics of the assets such as their expected returns and risks. This information will be required for any informed attempt at portfolio construction.

Another reason for analyzing securities is to attempt to find those that are currently mispriced. For example, a security that is under-priced for the returns it seems to offer is an attractive asset to purchase. Similarly, one that is overpriced should be sold. Whether there are any assets are underpriced depends on the degree of efficiency of the market. More is said on this issue later. Such analysis can be undertaken using two alternative approaches: TECHNICAL ANALYSIS This is the examination of past prices for predictable trends. Technical analysis employs a variety of methods in Attempt to find patterns of price behavior that repeat Through Time. If there is such repetition (and this is a disputed issue), Then the most beneficial times to buy or sell can be identified. The basis of fundamental analysis is that the true value of a Security has to be based on the future returns it will yield. The analysis allows for temporary movements away from This relationship but requires it to hold in the long-rum. Fundamental analysts study the details of company activities To makes predictions of future profitability since this Determines dividends and hence returns.

FUNDAMENTAL ANALYSIS

CHAPTER 2
BUYING AND SELLING In chess, after learning the names of the pieces, the next step Is to understand the moves that the pieces may make. The ability Of each piece to move in several ways provides the complexity of The game that has generated centuries of fascination. By combining These moves, chess manuals describe the standard openings, the Philosophies of the middle game and the killer finishes. Similar rules Apply to trading securities. Much more is involved than simply buying And selling. Getting to know the rules of the game and the trades That can be made will help the investor just as much as it helps the Chess player. 2.1 INTRODUCTION A fundamental step in the investment process is the purchase and sale of securities. There is more to this than is apparent at first sight. An order to buy or sell can take several forms, with characteristics that need to be determined by the investor. A variety of brokers with different levels of service, and corresponding fees, compete to act on the investors behalf. Some brokers are even prepared to loan funds for the investor to purchase assets. 2.2 MARKETS Securities are traded on markets. A market is a place where buyers and sellers of securities meet or any organized system for connecting buyers and sellers. Markets are fundamental for the trading of securities Markets can have a physical location such as the Karachi stock Exchange or the London International Financial Futures Exchange. Both of these have a trading floor where trade is conducted. But many people can use internet to open new market like The London Stock Exchange once possessed a physical location, but now trade is conducted through a computer network that links dealers.

2.2.1 PRIMARY AND SECONDARY PRIMARY MARKETS Are security markets where new issues of securities are traded? When a company first offers shares to the market it is called an initial public offering. If additional shares are introduced later, they are also traded on the primary market. The price of Shares is normally determined through trade but with new Shares there is no existing price to observe. The price for Initial public offerings has either to be set as part of the offer, or determined through selling the shares by tender or auction. SECONDARY MARKETS Are markets where existing securities are resold. The Karachi, Lahore, London and New York stock exchanges are both primarily secondary markets. The role of the primary Market in helping to attain economic efficiency is clear: the Primary market channels funds to those needing finance to undertake real investment. In contrast, the role of the Secondary market and the reason why so much attention is paid to it is probably less clear. TWO IMPORTANT ROLES FOR THE SECONDARY MARKET THAT CAN BE IDENTIFIED: LIQUIDITY One of the aspects that will be important for the purchaser of a new security is their ability to sell it at a later date. If it cannot be sold, then the purchaser is making a commitment for the lifetime of the asset. Clearly, given two otherwise identical assets an investor would prefer to own the one which can most easily be traded. Thus new securities would have a lower value if they could not be subsequently traded. The existence of a secondary market allows such trading and increases the liquidity and value of an asset. VALUE Trading in assets reveals information and provides a valuation of those assets. The assignment of values guides investment decisions by showing the most valuable uses for resources and helps in the attainment of economic efficiency. Without the secondary market this information would not be transmitted. 2.2.2 CALL AND CONTINUOUS A second way to classify markets is by the nature of trading and the time periods at which trading can take place. Call Market trading takes place at specified times. Those who wish to trade are Called together at a specific time and trade for a limited period. A Single price is set that ensures the market clears. This can cause Significant movements in price from one trading time to the next, so Call markets can have provisions to limit movement from the initial

Price. Continuous Market there is trading at all times the market is open. Requests to buy and Sell are made continuously. Trade is often facilitated by market Makers who set prices and hold inventories.

2.2.3 AUCTION AND OVER-THE-COUNTER Auction Market buyers and sellers enter a bidding process to determine the Trading price of securities. This typically takes place at a Specified location. involves direct negotiation between broker and dealers over a Computer network or by telephone. The market will have a Network of dealers who make a market and are willing to buy And sell at specified prices. They earn profit through the spread: The difference between the price at which they will buy and the Price at which they will sell (the latter being higher).

Over-The-Counter Market

2.2.4 MONEY AND CAPITAL The money market is the market for assets with a life of less than 1 year. This includes money itself and near-money assets such as short term bonds. The capital market is the market for assets with a life greater than 1 year such as equity and long-term bonds. 2.3 BROKERS On most markets, such as the New York and London Stock Exchanges, an individual investor cannot trade on the market directly. Instead they must employ the services of a broker who will conduct the trade on their behalf. This section discusses brokers and the services offered by brokerages. A broker is a representative appointed by an individual investor to make transactions on their behalf. The reward for a broker is generated through commission charged on the transactions conducted. This can lead to incentive problems since it encourages the broker to recommend excessive portfolio revision or churning. The accounts of individual investors at a brokerage are dealt with by an account executive. Institutional investors deal through special sections of retail brokerage firms Brokerage firms can be classified according to the services offered and the resulting level of fee charged. Traditional brokerages, now called full-service brokers, offer a range of services including information, investment advice and investment publications. They conduct the trading business of the clients and aim to guide them with their investment decisions. In addition to earning income from commissions, full-service brokers also generate revenue from a range of Other activities. Amongst these are trading on their own account, commission from the selling of investment instruments such as mutual funds and payment for participation in initial public offerings.

Discount brokers offer fewer services and charge lower fees than full-service brokers. Effectively, they do not provide advice or guidance or produce publications. Their major concentration is upon the execution of trading orders. Many discount brokers operate primarily internet-based services. 2.4 TRADING STOCKS To trade stocks through a broker it is necessary to provide a range of information. Some of this information is obvious, others parts require explanation. The details of the transaction that need to be given to the broker are: The name of the firm whose stock is to be traded; Whether it is a buy or a sell order; The size of the order; The time limit until the order is cancelled; The type of order.

Of these five items, the first three are self-explanatory. The final two are now explored in more detail. 2.4.1 TIME LIMIT The time limit is the time within which the broker should attempt to fill the order. Most orders can be filled immediately but for some stocks, such as those for small firms, there may not be a very active market. Also, at times when the market is falling very quickly it may not be possible to sell. In the latter case a time limit is especially important since the price achieved when the order is filled may be very different to when the order was placed. A day order is the standard order that a broker will assume unless it is specified otherwise. When a day order is placed the broker will attempt to fill it during the day that it is entered. If it is not filled on that day, which is very unlikely for an order concerning a sale or purchase of stock in a large corporation, the order is cancelled. An open-ended time horizon can be achieved by placing an open order, also known as a good-tillcancelled order. Such an order remains in effect until it is either filled or cancelled. In contrast, a fill-or-kill order is either executed immediately or, if this cannot be done, cancelled. Finally, a discriminatory order leaves it to the brokers discretion to decide when to execute or cancel. 2.4.2 TYPE OF ORDER The alternative types of order are designed to reduce the uncertainty associated with variations in price. Market order is the simplest transaction. It is a request for the broker to either buy or sell, with the broker making their best effort to complete the transaction and obtain a beneficial price. With a market order the price at which the trade takes place is uncertain but, unless it is for a very illiquid asset, it is usually certain that the broker will complete the transaction. In a limit order a limit price is specified. For a stock purchase, the limit price is the maximum price at which the investor is willing to buy. For a stock sale, the limit price is the minimum they are willing to accept. Execution of a limit order is uncertain since the limit price may be

unobtainable. If the transactions does precede then the upper limit on price (if buying) or the lower limit on price (if selling) is certain. With a stop order, a stop price has to be specified. This stop price acts a trigger for the broker to initiate the trade. For a sale, the stop price is set below the market price and the broker is instructed to sell if the price falls below the stop price. A stop-loss strategy of this form is used to lock-in profits. Alternatively, for a buy order, the broker is instructed to buy if the price rises Above the stop price (which is set above the current market price). This strategy could be employed by an investor waiting for the best moment to purchase a stock. When its price shows upward movement they then purchase. The execution of a stop order is certain if the stop price is passed. However the price obtained is uncertain, especially so if there are rapid upward or downward movements in prices. A stop-limit order combines the limit order and the stop order. A minimum price is placed below the stop price for a sell and a maximum price is placed above the stop-price for a buy. This has the effect of restricting price to be certain within a range but execution is uncertain since no transaction may be possible within the specified range. 2.6 SHORT INCOME A short sale is the sale of a security that an investor does not own. This can be achieved by borrowing shares from another investor. It is part of the role of a broker to organize such transactions and to ensure that the investor from whom the shares are borrowed does not suffer from any loss.

Figure 2.1: A Short Sale

Figure 2.2: After the Short Sale Figures 2.1 and 2.2 illustrate a short sale. Investor A is the short-seller. The shares are borrowed from B and legally transferred to the buyer C. This is shown in Figure 2.1. To ensure that B does not lose from this short sale, A must pay any dividends that are due to B and the broker provides an annual report and voting rights. The report can come from the firm and the voting rights can be borrowed from elsewhere - either from other shares owned by the broker or from other brokers. Figure 2.2 illustrates this. To close the transaction, the investor A must eventually purchase the shares and return them to B. A profit can only be made from the transaction if the shares can be purchased for less than they were sold. Short-selling is only used if prices are expected to fall.

CHAPTER 3 FINANCIAL STATEMENT

3.1 INTRODUCTION Financial accounts are concerned with classifying, measuring and recording the transactions of a business. At the end of a period (typically a year), and they are income statement, balance sheet and cash flow. The basis of these statements is trial balance .the trial balance includes all the accounts from the ledger the nature of which may be either, personal, real or nominal .it should be noted be noted that from the trial balance only nominal accounts are transferred to the profit and loss accounts .the real or personal accounts go to the balance sheet. 3.2 CASH FLOW The ISA 7 deals with cash flow The cash flow statement analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less

from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an enterprise's cash management are also included as a component of cash and cash equivalents. Key principles specified the preparations of a cash flow statement are as follows: Operating Activities are the main revenue-producing activities of the enterprise That is not investing or financing activities, so operating Cash flows include cash received from customers and cash Paid to suppliers and employees are the acquisition and disposal of long-term assets and Other investments that are not considered to be cash Equivalents are activities that alter the equity capital and borrowing Structure of the enterprise .interest and dividends received And paid may be classified as operating, investing, or Financing cash flows, provided that they are classified Consistently from period to period .cash flows arising from Taxes on income are normally classified as operating, unless They can be specifically identified with financing or Investing activities .for operating cash flows, the direct Method of presentation is encouraged, but the indirect Method is acceptable

Investing Activities

Financing Activities

3.2.1 METHOD DIRECT METHOD Shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the cash flow Statement under the direct method would appear something like this. Cash receipts from customers Cash paid to suppliers Cash paid to employees Cash paid for other operating expenses Interest paid Income taxes paid Net cash from operating activities xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x

INDIRECT METHOD Adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the cash flow Statement under the indirect method would appear something like This. Profit before interest and income taxes Add back depreciation Add back amortization of goodwill Increase in receivables Decrease in inventories Increase in trade payables Interest expense Less Interest accrued but not yet paid Interest paid Income taxes paid Net cash from operating activities xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x xx,xx x

3.3INCOME STATEMENT There are two names to this statement trading and profit and loss accounts / income statement .as the name of this accounts itself indicates, it is made up of two accounts i.e. trading accounts and profit and loss .trading concerns which purchase good from one market and sell it in another market . This may be preparing either in account from that is t from or in report from statement from. Trading and profit and loss account in both the forms give the same information. The accounts or t from is traditional and is used widely but in recent years many business houses prefer to present the profit and loss account /income statement in the report form A sample profit and loss account /income statement in the report form Income Statement December 31, Years Revenues:

Net Revenues Cost of Net Revenues Gross Profit Operating Expenses: Expenses: Income and Marketing Product development General and Administrative Payroll expense on stock options Amortization of intangibles Merger related costs Total Operating Expenses Income (loss) from Operations Interest and other income, et. Interest Expense Income before tax, minority interest Provision for Income Tax Minority Interest Equity interest in Partnership income Total Other Net Income GROSS INCOME This item represents the sale proceeds of the company. Income revenue is classified as local income and export income. GROSS PROFIT Subtracting cost of income from income revenue arrives at gross profit. OVERHEAD AND OTHER EXPENSES These are total expenses that are incurred on the operational activities of a company except financial expenses and include: Cost of sales Administrative and general expenses Selling and distribution expenses Other expenses

OPERATING PROFIT Subtracting overhead and other expenses from gross sales and adding thereto-non-operating income gives operating profit.

FINANCIAL EXPENSES These are interest expense incurred on borrowing of long and short terms loans. It includes the Following items; Mark-up and interest on long term loan Mark-up and interest on debentures and redeemable capital Mark-up and interest on short term loan Interest on private loan Financial charges against assets subject to finance lease Interest and mark-up on supplier credit Interest on workers profit participation fund. Bank charges and commission. Excise duty on long and short-term finance. Discounting charges on receivables. Exchange losses.

NET PROFIT BEFORE TAX PROVISION It is the profit earned by the company during the year before tax provision. TAX PROVISION It is provision of taxation made on current years profit. TOTAL AMOUNT OF DIVIDEND It is the total dividend including interim dividend distributed or proposed to be distribute out of the current years profit TOTAL VALUE OF BONUS SHARES ISSUED This is the total amount of bonus shares issued to the shareholders as appropriation net profit after tax of the company during the year 3.4 BALANCE SHEET A balance sheet is a statement drawn up at end of each trading period stating there in all the assets and liabilities of a business arranged in the customary order to exhibit the true and correct statement of affairs of the concern as on given date. Statement of assets and liabilities at the end of the accounting period (a "snapshot") of the business. A balance sheet is prepared from trail balance after the balances of nominal accounts are transferred either to the trading account or the profit and loss account. The remaining balance of personal and real accounts represents either assets or liabilities at the closing date. These assets

and liabilities are shown in the balance sheet in a classified form. The assets being show on the right side and the liabilities on the left hand side. And new from its report from.

Comparative Balance Sheets December 31, Years 2004 & 2005 Assets Current Assets: Cash Short Term Investments Accounts Receivable Other Current Assets Total Current Assets

Prop., Plant, & Equip.: Long Term Investments Prop, Plant, & Equipment, net Intangible Assets Restricted Cash and Investments Deferred Tax Assets Total Long Term Assets Total Assets

Liabilities Current Liabilities: Accounts Payable Accrued Expenses Deferred revenue and Cuts. Adv. Short Term Debt Income Taxes Payable Other current liabilities Total Current Liabilities Long-Term Liabilities Other liabilities Minority Interests Total Liabilities Stockholders Equity: Preferred Stock, Common Stock (RS 10Par) Paid in Capital in Excess of Par Notes receivable from stockholders Unearned Stock Based Comp Retained Earnings Accum other comprehensive Income

Total Stockholder's Equity Total liabilities and Equity ASSETS An asset is any right or thing that is owned by a business. Assets include land, buildings, equipment and anything else a business owns that can be given a value in money terms for the purpose of financial reporting. LIABILITIES To acquire its assets, a business may have to obtain money from various sources in addition to its owners (shareholders) or from retained profits. The various amounts of money owed by a business are called its liabilities. LONG-TERM AND CURRENT To provide additional information to the user, assets and liabilities are usually classified in the balance sheet as: Current: those due to be repaid or converted into cash within 12 months of the balance sheet date; Long-term: those due to be repaid or converted into cash more than 12 months after the balance sheet date; FIXED ASSETS A further classification other than long-term or current is also used for assets. "fixed asset" is an asset which is intended to be of a permanent nature and which is used by the business to provide the capability to conduct its trade. Examples of "tangible fixed assets" include plant & machinery, land & buildings and motor vehicles. "Intangible fixed assets" may include goodwill, patents, trademarks and brands although they may only be included if they have been "acquired". Investments in other companies which are intended to be held for the long-term can also be shown under the fixed asset heading. CAPITAL As well as borrowing from banks and other sources, all companies receive finance from their owners. This money is generally available for the life of the business and is normally only repaid when the company is "wound up". To distinguish between the liabilities owed to third parties and to the business owners, the latter is referred to as the "capital" or "equity capital" of the company. In addition, undistributed profits are re-invested in company assets (such as stocks, equipment and the bank balance). Although these "retained profits" may be available for distribution to shareholders - and may be paid out as dividends as a future date they are added to the equity capital of the business in arriving at the total "equity shareholders' funds". At any time, therefore, the capital of a business is equal to the assets (usually cash) received from the shareholders plus any profits made by the company through trading that remain undistributed.

CHAPTER 4 FINANCIAL STATEMENT ANALYSIS

Finance is the language of business. Financial Analysis is the ability to use that information to make solid informed business decisions. When used properly financial information is an invaluable tool, used to develop, manage, and grow successful businesses.

4.1 INTRODUCTION Analyzing financial statements is a process of evaluating a firm's past financial performance and its future prospects. The process requires the application of common sense and judgment in addition to analytical techniques. As we already know, there are many users of a firm's financial data: Creditors, owners and management, suppliers, competitors etc. The analysis helps the above users in understanding the numbers presented in statements and serves as a basis for financial decision making. Investors, creditors, and others must be able to compare financial information among firms and over time. Comparative financial statements enable users to compare year-to-year financial position, results of operations, and cash flows. This comparison is enhanced by expressing each item as a percentage of that same item in the financial statements of another year (base amount). This is referred to as horizontal analysis. Vertical analysis involves expressing each financial statement item as a percentage of an appropriate corresponding total or base amount within the same year. For example, net income and each expense can be restated as a percent of revenues. The most common way of comparing accounting numbers is ratio analysis. Evaluating information in ratio form facilitates comparisons by controlling for size differences over time and among firms and by highlighting important relationships 4.2 HORIZONTAL ANALYSIS This is the most direct method of focusing on change and in this the number are compared from period to period. With horizontal analysis the change in amount from period to period are converted to percentages (change/year amount). 4.3VERTICAL ANALYSIS Is used to analyze change in income statement balances, gross sales are set at 100% and all other amounts are converted to a percentage of sales. Vertical Analysis creates what is called a Common-Size analysis. By putting all the results on a percentage basis a company can compare its results to any period or to other competitors 4.4RATIO ANALYSIS While determining the health (or illness) of a business for investment we use the most common and complex Financial Ratios (or Financial Indexes). We use financial ratios to give an indication of the viability of a business. Just as a doctor might take your pulse, temperature and blood pressure to give them information on your health, Financial ratios are a significant tool to analyze and compare the relationship between different pieces of financial information and to understand the operations of the firm. That helps Investors, creditors and stakeholders so they must be able to compare financial information among firms and over time. Comparative financial statements enable users to compare year-to-year financial position, results of operations, and cash flows. This comparison is enhanced by expressing each item as a percentage of that same item in the financial statements of another year.

4.4.1 TYPES OF RATIO There are a number of types of ratios of interest to the various stakeholders of a business. The main classifications of ratios are as follows:

Liquidity Ratios Activity Ratios Financial Ratios Investment Ratios Profitability Ratios Debt Ratios LIQUIDITY RATIO They measure the firm's ability to meet short-term obligations/liabilities from its current assets. ACTIVITY RATIO It measures how frequently a firm converts its current assets into cash. It also measures how well a firm uses its fixed assets and total assets to generate sales. DEBT RATIO It measures the amount of debt financing used by the company. It also measures the firm's ability to meet interest payments. PROFITABILITY RATIO It measures the effectiveness of management in generating profits on sales, total assets and owners' equity INVESTMENT RATIO This group of ratios is concerned with analyzing the returns for shareholders. These examine the relationship between the numbers of shares issued, dividend paid, value of the shares, and company profits. For obvious reasons these are quite often categorized as shareholder ratios.

PART 2 PAKISTAN ECONOMICS UNDER REVIEW CHAPTER 1

1 INTRODUCTION

Pakistan (the Islamic Republic of Pakistan; Urdu: Islam-I Jamahiriya-e Pakistan) is a country in South Asia with an area of 796,095 square kilometers and a population of 152.53 million. It is bordered on the west by Iran, on the north by Afghanistan, on the northeast by China, on the east and southeast by India, and on the south by the Arabian Sea. The capital is Islamabad. Pakistan was created at the time of the partition of British India on August 14, 1947, in order to create a separate homeland for Indian Muslims under the leadership of Quaid-e-Azam (Urdu word for great leader) Muhammad Ali Jinah. Since 1947, the predominantly Muslim (80%) Jammu and Kashmir region, along the western Himalayas, has been disputed between Pakistan and India (Mahmood, 2000). India controls two-thirds of Kashmir and Pakistan the rest. The two countries have gone to war over the territory three times: in 1948-49, 1965, and 1971. The tension with India has led to a constant increase in defense expenditures at the cost of development and welfare budgets Pakistan has the third fastest growing economy in Asia. Its economy encompasses textiles, chemicals, food processing, agriculture and other industries. In terms of purchasing power, it is the 26th largest economy in the world while in absolute dollar terms it is the 47th largest. The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery the last decade. Substantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy. The middle term however may be less turbulent, depending on the political environment. The EIU estimates that inflation should drop back to single digits in 2010, and that growth should pick up to over 5% per annum by 2011. Although less than the previous 5 year average of 7%, it would represent a overcoming of the present crisis wherein growth is a mere 3.5-4% 1.2First five decades Pakistan was a very poor and predominantly agricultural country when it gained independence in 1947 from British occupied India. Pakistan's average economic growth rate since independence has been higher than the average growth rate of the world economy during the period. Average annual real GDP growth rates were 6.8% in the 1960s, 4.8% in the 1970s, and 6.5% in the 1980s. Average annual growth fell to 4.6% in the 1990s with significantly lower growth in the second half of that decade. Industrial-sector growth, including manufacturing, was also above average. In the late 1960s Pakistan was seen as a model of economic development around the world, and there was much praise for its economic progression. Later, economic mismanagement in general and fiscally imprudent economic policies in particular, caused a large increase in the country's public debt and led to slower growth in the 1990s. Two wars with India in 1965 and 1971 adversely affected economic growth. In particular, the latter war brought the economy close to recession, although economic output rebounded sharply until the nationalizations of the mid-1970s. This is a chart of trend of gross domestic product of Pakistan at market prices estimated by the International Monetary Fund with figures in millions of Pakistani Rupees.

Year 196 0 198 0 198 5 199 0 199 5 200 0 200 5

Gross Domestic Product 100 283,460 569,114 1,029,093 2,268,461 3,826,111 6,581,103

US Dollar Exchange 4.76 Pakistani Rupees 9.97 Pakistani Rupees 16.28 Pakistani Rupees 21.41 Pakistani Rupees 30.62 Pakistani Rupees 51.64 Pakistani Rupees 60.40 Pakistani Rupees

1.3DEMOGRAPHICS

With a per capita GDP of over $3000 (PPP, 2006) compared with $2600 (PPP, 2005) in 2005 the World Bank considers Pakistan a medium-income country, it is also recorded as a "Medium Development Country" on the Human Development Index 2007. Pakistan has a large informal economy, which the government is trying to document and assess. Approximately 49% of adults are literate, and life expectancy is about 64 years. The population, about 168 million in 2007, is growing at about 1.80%. Relatively few resources in the past had been devoted to socio-economic development or infrastructure projects. Inadequate provision of social services, high birth rates and immigration from nearby countries in the past has contributed to a persistence of poverty. An influential recent study concluded that the fertility rate peaked in the 1980s, and has since fallen sharply. Pakistan has a family-income Gini index of 41, close to the world average of 39 1.4Structure of economy Agriculture accounted for about 53% of GDP in 1947. While per-capita agricultural output has GDP growth by sector, as a percentage of GDP Sector Agriculture Industry Manufacturin g Service Real GDP (fc) 200304 0.03 0.61 1.71 2.47 3.1% 200405 1.01 1.08 1.11 2.75 4.8% 200506 0.53 2.74 2.31 3.16 6.4% 200607 1.74 2.46 2.19 4.16 8.4%

grown since then, it has been outpaced by the growth of the non-agricultural sectors, and the share of agriculture has dropped to roughly one-fifth of Pakistan's economy. In recent years, the country has seen rapid growth in industries (such as apparel, textiles, and cement) and services (such as telecommunications, transportation, advertising, and finance).

1.5THE ECONOMY TODAY By October 2007, Pakistan raised back its Foreign Reserves to a handsome $16.4 billion. Exceptional policies kept Pakistan's trade deficit controlled at $13 billion, exports boomed to $18 billion, revenue generation increased to become $13 billion and attracted foreign investment of $8.4 billion

Economic Comparison of Pakistan 1999-2008 Indicator GDP GDP Purchasing Power Parity (PPP) GDP per Capita Income Revenue collection Foreign reserves Exports Textile Exports 1999 $ 75 billion $ 270 billion $ 450 Rs. 305 billion $ 700 million $ 7.5 billion $ 5.5 billion $5 billion at 700 points $1 billion 65% of GDP 34% 45% Rs. 80 billion 2007 $ 160 billion $ 475.5 billion $ 925 Rs. 708 billion $ 16.4 billion $ 18.5 billion $ 11.2 billion $ 75 billion at 14,000 points $ 8.4 billion 26% of GDP 24% 53% Rs. 520 billion 2008 $ 170 billion $ 504.3 billion $1085 $ 10 billion $ 56 billion at 9,000 points and moving down Rs. 549.7 billion

KHI stock exchange (100-Index)

Foreign Direct Investment Debt servicing Poverty level Literacy rate Development programs

CHAPTER 2 TWO IMPORTANT SECTORS

2.1AGRICULTURE IN PAKISTAN
2.1.1Introduction Agriculture is the mainstay of Pakistans economy. Nearly twenty-two percent of total output (GDP) and 44.8 percent of total employment is generated in agriculture. Not only that 44.8 percent of countrys work force is employed in agriculture but also 65.9 percent of countrys population living in rural areas is directly or indirectly linked with agriculture for their livelihood. Agriculture also contributes to growth as a supplier of raw materials to industry as well as market for industrial products. Whatever happens to agriculture is bound to affect not only the country `s growth performance but to a large segment of the countrys population as well 2.1.2DEFINITION Agricultural marketing includes all business activities that direct the flow of goods and services from the farm producers the consumers so as to get at the time, place and in form they want them and at the price they are prepared today for them Agriculture sector plays a vital role in economic development of a country. Any poor and backward economy can de developed by promoting its agricultural sector. It earns 45% off Foreign exchange. Overall growth rate of economy depends upon growth rate achieved in this sector 2.1.3CROP SITUATION IN PAKISTAN There are two principal crop seasons in Pakistan, namely the "Kharif", the sowing season of which begins in April-June and harvesting during October-December; and the "Rabi", which begins in October-December and ends in April-May. Rice, sugarcane, cotton, maize, mong, mash, bajra and jowar are Kharif" crops while wheat, gram, lentil (masoor), tobacco, rapeseed, barley and mustard are "Rabi" crops. Major crops, such as, wheat, rice, cotton and sugarcane account for 90.1 percent of the value added in the major crops. The value added in major crops accounts for 35.2 percent of the value added in overall agriculture. Thus, the four major crops (wheat, rice, cotton, and sugarcane), on average, contribute 31.7 percent to the value added in overall agriculture. The minor crops account for 12.3 percent of the value added in overall agriculture. Livestock contribute almost 50 percent to agriculture much more than the combined contribution of major and minor crops (47.5%). MAJOR CROPS Major crops, accounting for 35.2 percent of agricultural value added, depicted a negative growth of 3.6 Percent as against impressive 17.8 percent growth last year. Besides measuring from a high base, value added in major crops registered a decline primarily on account of a 13.0 percent

decrease in cotton production (12.4 million bales as against 14.3 million bales of last year) mainly on account of adverse weather conditions. Sugarcane is another major crop, which registered negative growth of 6.2 percent (from47.2 million tones to 44.3 million tones). Rice and maize, the two major crops, registered a growth of 10.4 percent and 27.3 percent, respectively but failed to compensate the decline in two major crops. Wheat production marginally increased by 0.4 percent and stood at 21.7million tons as against 21.6 million tons in 2005-06. It may be pointed out that these five crops account for over 90percent of value addition in major crops. MINOR CROPS Minor crops, accounting for 12.3 percent of value added in overall agriculture, grew by 1.6 percent Slight decline from last years growth of 3.0 percent. Production of pulses such as masoor, mung, and mash registered a sharp decline of 13.5%, 12.6%, and 9.8 percent respectively. Vegetables such as potatoes and onions exhibited mixed performance as the former registered a decline of 17.9 percent while the later posted a rise of 29.0percent. Chilies, being an important minor crop, registered a sharp rise of 27.9 percent during the year under review. 2.1.4Over last 5-year agriculture growth Year 2000-1 2001-2 2002-3 2003-4 2004-5 2005-6 Agriculture -2.2 -.1 4.1 2.3 6.7 2.5 Major crop -9.9 -2.5 6.5 1.9 17.8 -3.6 Minor crop -3.2 -3.7 .4 4.0 3.0 1.6

Share in GDP and growth rates of Agriculture sector during Fiscal Year 2007 & 2008

A number of adverse development hit agriculture sector to record a dismal 1.5 percent growth during FY 2008, significantly lower than the 4.8 percent target for the year, as well as, the lowest growth since FY03. Shortfalls in wheat and cotton output overshadowed the record sugarcane harvest and relatively improved performance of minor crops, livestock and fishing sub-sectors during FY08. A disappointing performance of major crops sub-sector is largely attributed to resource management issues and absence of a clear pricing policy. For instance, reduction in cultivated area under cotton, rice and wheat was a result of water shortages at sowing time. Delays in harvesting of cotton and sugarcane (mainly due to pricing issues), and lack of clear incentive signals (as Government could not announce its pricing policy before sowing time) also resulted in area deficit for wheat crop. In addition, high prices of fertilizers and pesticides also drained farmers to use appropriate agriinputs; resulting in depressed yields by most of the major crops. Agriculture sector, however, benefited from continued support through strong growth of institutional credit. A significant 25.3 percent rise in agri-credit during FY08 helped farmers to partly compensate the impact of high fertilizer prices. 2.1.5AGRICULTURAL MECHANIZATION IN PAKISTAN Farm mechanization is one of the packages of green revolution technology. It is complete package, which includes ace of chemicals, fertilizers as well as machines. Intensive use of agriculture machinery needs to be popularized among farmers with a view to improving the average yield. It may be noted that population density is increasing, land-to-man ratio is deteriorating and food requirement is growing. It is well known that effective use of agricultural machinery not only speeds up cultivation process but also accelerate harvesting and threshing operations. It also results in considerable saving of fodder and feed through a reduction in bullock population. Thus, a transition from subsistence farming to commercial farming cans only be achieved through the transfer of the latest, most efficient and cost effective technology to the farming system. The efficient use of scarce agriculture resources and accelerated agriculture mechanization is, therefore, vital and demand comprehensive strategic planning for the future

2.2INDUSTRY IN PAKISTAN

The word industry is used as a shorthand term to describe the making and selling of goods as well as services .however there is a difference between manufacturing industry and services industry .as far as industry important is concerned it is a fact that all the developing nations are economically developed due to their strong industrialization 2.2.1INTRODUCTION Pakistan's industrial sector accounts for about 24% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 66% of the merchandise exports and almost 40% of the employed labor force. Other major industries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals, machinery, and food processing. At the time of independence .Pakistan received only 34 industry units as our share out of 921 industrial units The government is privatizing large-scale parastatal units, and the public sector accounts for a shrinking proportion of industrial output, while growth in overall industrial output (including the private sector) has accelerated. Government policies aim to diversify the country's industrial base and bolster export industries 2.2.2DEFINITION An industry (from Latin industries, "diligent, and industrious") is the manufacturing of a good or service within a category. Although industry is a broad term for any kind of economic production, in economics and urban planning industry is a synonym for the secondary sector, which is a type of economic activity involved in the manufacturing of raw materials into goods and products 2.2.3 SITUATION IN PAKISTAN Pakistans manufacturing sector recorded the weakest growth in a decade during the outgoing Fiscal year 2007-08. Overall manufacturing posted a growth of 5.4 percent during the first nine Months of the current fiscal year against the target of 10.9 percent and 8.1 percent of last year. Large-scale manufacturing, accounting for 69.5 percent of overall manufacturing registered a growth of 4.8 percent in the current fiscal year 2007-08 against the target of 12.5 percent and last years achievement of 8.6 percent. Heightened political tension, deteriorating law and order situation, growing power shortages, cumulative impact of monetary tightening and rising cost of doing business are responsible for poor showing of manufacturing in 2007-08. Taking a longer term view, the manufacturing growth exhibits a moderating trend

Production of Selected Industrial Items of Large-Scale

Large-Scale Manufacturing Growth (%) 1999-00 till 2007-08

Share in GDP and growth rates of Industry sector during Fiscal Year 2007 & 2008

Throughout FY08, domestic industrial sector muddled through a mix of major economic, political and structural setbacks. While the aggregate demand had already seen some relative moderation in the preceding year, rising fuel and commodity prices and intensifying energy shortages in the country further obstructed FY08 industrial activities.

The heightened political uncertainty and law & order issues during the year also took their toll. As a result, the provisional estimates place the FY08 industrial growth at a slackening 4.6 percent compared with 8.0 percent in FY07. The sharpest weakening was seen in electricity and gas distribution activities. This sub-sector registered a decline during FY08 mainly on account of losses incurred by the power companies. However, major blow to industrial activities came from a six-year low growth in manufacturing sector (given its largest share in the industry). Construction sector growth, though moderated, recorded at 15.2 percent against 18.0 percent during FY07; whereas a high growth of 4.9 percent was seen in mining & quarrying sub-sector during the year comparing 3.1 percent during FY07 2.2.4 Major industries in Pakistan 1. TEXTILE INDUSTRY The cotton and cotton textile industry are the backbone of Pakistans economy. It continues to enjoy the status of the largest industry and commands comparative advantages in resource utilization. It accommodates the largest number of employment to industrial labor force (38%) and the largest source of foreign exchange earnings (60%). It accounts for 27% of value addition in the manufacturing sector. 2. A. ANCILLARY TEXTILE INDUSTRY COTTON SPINNING SECTOR The spinning sector of textile is one of the most important sectors. At present, it is comprised of 442 textile mills in the country (50 composite units and 392 spinning units) with 8442 million spindles and 145796 rotors installed. B. WEAVING & MAKE-UP SECTOR The pattern of the weaving sector and made-up sub-sectors i.e. hosiery, towels, canvas and bed wear is different from that of the spinning sector. There are three different sub-sectors in weaving viz. integrated, independent weaving units and power loom units. The addition of the power-loom sector has modernized the textile industry and registered phenomenal growth. C. FILAMENT YARN MANUFACTURING INDUSTRY The synthetic filament yarn manufacturing industry picked up momentum in the mid-1980s in anticipation of rising demand in the international markets. In addition, the private sector was asked to enhance its role. At present nearly 25 units are engaged in manufacturing of these kinds of filament yarn. The total installed capacity of all these units is 100 thousand tones.

D.

ART SILK AND SYNTHETIC WEAVING INDUSTRY

The Art silk and synthetic weaving industry is mainly a cottage industry and based on power loom units comprising of 8 to 10 looms. There are approximately 90,000 power looms in operation to prepare yarn in the country. About 30,000 looms are engaged in production of blended yarn and 60,000 looms are producing filament yarn. Jute Industry: There are 12 jute mills in the country with an installed capacity of 38894 spindles and 2124 looms. Two of these units are closed due to shrinking demand for jute goods in the country. The main products of the jute industry are jute sacks and Hessian cloths used for packing. 3. FERTILIZER INDUSTRY There are 10 fertilizer units operating in the country (Punjab 6, Sindh 2 and NWFP 2) with an installed capacity of 4,651.6 thousand tones. Out of these 10 units, four units having capacity of 2,721 thousand tones are in the private sector and 6 units having 1,930 thousand tones capacity are in public sector. 4. VEGETABLE GHEE There are 166 units producing vegetable ghee and cooking oil with an installed capacity of around 2.7 million tones. Against this capacity, 1.2/1.5 million tons of vegetable ghee/cooking oil are being produced to meet annual national requirement of about 1.4 million tones. 5. SUGAR INDUSTRY There are 78 sugar mills working in the country, out of which 40 are in Punjab, 32 in Sindh and 6 in NWFP, having an installed capacity of 5.0 million tones sugar production. 6. CEMENT There are 25 cement units in the country with total installed capacity of 16300 thousand tones. Out of these 25 units, 4 units with installed capacity of 1831 thousand tones are in public sector and 21 units; having capacity of 14,440 thousand Tones are in the private sector.

Sector of industry under review for analysis is fertilizer

PART 3 CHAPTER 1
ABOUT FERTILIZER 1.1.1 DEFINITION Fertilizer is any naturally occurring or chemically synthesized material that increases the nutritional value of soil needed to enhance plant growth and yield 1.1.2BACK GROUND Although, fertilizers in the form of manure were utilized by ancient farmers, the research into the chemical or nutritional needs of plants and the mounting pressure upon the earth for growing food to meet the demands of the ever-increasing global population triggered the manufacture and use of chemical fertilizers. Modern synthetic fertilizers mainly contain compounds of nitrogen, phosphorus and potassium with secondary nutrients. Like all living organisms, plants growth depends on nutrients contained in the soil. The availability of these components in the soil diminishes as it is extracted by the plant for its growth. Thus the more a soil is used for cultivation, the more barren and parched of nutrients it becomes, resulting in the reduction in the plant quality and yield. Create more nourishment than the soil is naturally able to supply. 1.1.3 HISTORY The process of adding substances to soil to improve its growing capacity was developed in the early days of agriculture. Ancient farmers knew that the first yields on a plot of land were much better than those of subsequent years. This caused them to move to new, uncultivated areas, which again showed the same pattern of reduced yields over time (this farming practice is known as slash and burn, swidden cultivation or shifting cultivation). Eventually it was discovered that plant growth on a plot of Land could be improved by spreading animal manure throughout the soil. Over time, fertilizer technology became more refined. New substances that improved the growth of plants were discovered. The Egyptians are known to have added ashes from burned weeds to soil. Ancient Greek and Roman writings indicate that various animal excrements were used, depending on the type of soil or plant grown. It was also known by this time that growing leguminous plants on plots prior to growing wheat was beneficial (crop rotation). Other types of materials added include seashells, clay, vegetable waste, waste from different manufacturing processes, and other assorted trash. The chemical fertilizer industry, however, had its beginnings with a patent issued to Sir John Lawes, which outlined a method for producing a form of phosphate that was an effective fertilizer. The synthetic fertilizer industry experienced significant growth after the First World War, when facilities meant for ammonia and synthetic nitrates for explosives were converted to the production of nitrogenous fertilizers.

1.2 THE MANUFACTURING PROCESS NITROGEN FERTILIZER COMPONENT

Fully integrated factories have been designed to produce compound fertilizers. Depending on the actual composition of the end product, the production process will differ from manufacturer to manufacturer.

NITROGEN FERTILIZER COMPONENT Ammonia is produced using Nitrogen of air and Natural gas as raw material. In the process natural gas, steam and air are reacted to form Carbon Dioxide, Hydrogen and Nitrogen. The Carbon Dioxide is removed leaving behind mixture of Hydrogen and Nitrogen, which react at elevated temperature & pressure over iron catalysts produces Ammonia. Though Ammonia itself is sometimes used as a fertilizer, it is often converted to Urea, Ammonium Sulphate, Ammonium Nitrate and Ammonia Phosphate for ease of handling.Nitric Acid is produced by reaction of water with nitrous oxide formed by burning Ammonia with air in a vessel containing catalyst. Subsequently the Nitric Acid is neutralized with Ammonia to produce Ammonium Nitrate. The material is a good fertilizer as it contains high concentration of Nitrogen. While ammonia itself is sometimes used as a fertilizer, it is often converted to other substances for ease of handling. Like Ammonium Nitrate etc. Nitric Acid is produced by reaction of water with nitrous oxide formed by burning Ammonia with air in a vessel containing catalyst. Subsequently the Nitric Acid is neutralized with Ammonia to produce Ammonium Nitrate. The material is a good fertilizer as it contains high concentration of Nitrogen.

CHAPTER 2

RELATIONSHIPS OF AGRICULTURE AND FERTILIZER AND THE ECONOMIC

Agriculture is still the single largest sector of the economy, contributing 21 percent to GDP.and the correlation between and agriculture is GDP is.98 and agriculture and fertilizer is (anaxx1) Agriculture performed poorly in 2007-08, growing at 1.5 percent against the target of 4.8 percent and 3.7 percent of last year. The poor performance of agriculture can be attributed to an equally poor performance in major crops and forestry, registering a negative growth of 3 percent and 8.5percent, respectively. Livestock, minor crops and fishing have been the saving grace for agriculture as these sectors have performed reasonably well to compensate the poor performance of the major crops and forestry. Major crops, accounting for 34percent of agriculture and 7.1 percent of GDP, suffered on account of poor showing of wheat and cotton and a less than satisfactory performance of the rice crop. Sugarcane and maize, being the other Two major crops, performed impressively in 2007-08.The cotton crop suffered for a variety of reasons, Including heavy rainfall in May 2007 causing poor germination in Punjab, high temperatures during August and September 2007 causing more shedding of fruit parts and pest attacks, especially the dangerous mealy bug infestation. Consequently, cotton production declined to 11.7million bales this year from 12.9 million bales last year thus registering a negative growth of 9.3percent. The wheat crop was also adversely affected by the 23.3 percent shortage of irrigation water over normal supplies during Rabi, and the sharp pick up in prices of DAP fertilizer. Accordingly, production of wheat declined to 21.7million tons from 23.3 million tons last year, thus registering a decline of 6.9 percent. In sheer contrast, the two other major crops performed better with sugarcane recording the highest ever production level of 63.9 million tons, 16.8 percent higher than last year. The production of rice witnessed a modest growth of 2.3 percent and stood at 5.6 million tons. The production of other major crops such as maize was up by 7.3 percent, while gram pulse registered a negative growth of1.8 percent, mainly on account of a higher base effect as this crop grew by 75 percent last year. Minor crops, accounting for 12 percent in agricultural value added, posted a growth of 4.9 percent against the negative growth of 1.3 percent last year. The performance of livestock, accounting for 52 percent of agricultural value added, was satisfactory at best as it grew by 3.8 percent this year. The performance of fisheries has been impressive as it grew by 11 percent in 2007-08while forestry continued its traditional pattern of negative growth for the fifth year in a row. The growth performance of agriculture over the last six years has been of a volatile nature- ranging from 1.5 percent to 6.5 percent. The volatility in agricultural growth is mainly caused by the crops sector which is associated with the vagaries of Mother Nature, pest attacks, adulterated pesticides etc. Such volatility is detrimental to income growth of farmers and hampers government efforts to reduce poverty. For Pakistan, the notion of food security should move beyond a relatively static focus on food availability. Higher agricultural growth, particularly emanating from the crop sector, will provide food security by increasing supply, stabilizing prices, and raising incomes of poor farm households. While the current global food crisis is creating difficulties, primarily for net-food importing countries, it also provides an enormous opportunity to gain from recent food price hike. Pakistan can certainly benefit from the current global food crisis. What Pakistan needs is a change in policy orientation from the current practice of focusing exclusively on price to yield

enhancement and simultaneously address structural issues such as poor crop management and skills of farmers; use of cheaper seeds; lack of agricultural infrastructure and higher post-harvest losses; limited research as well as the gap between available research and practical applications; and inadequate funding for research and development. The emerging economies have become more affluent as they have sustained higher economic growth in recent years. Such affluence is impacting the consumption patterns of households, including dietary change towards higher quality food such as meat and dairy products. As a result, the Production of these items is rising globally. In Pakistan, however, the livestock and dairy sector has received little or no attention by the successive governments in the past despite the fact that it accounts for 52 percent of agriculture, 11 percent of GDP, and affects the lives of 30-35 million people in rural areas. It is an irony that the entire government machinery has focused its attention on major crops, that too on only four crops (rice, wheat, cotton, sugarcane), which accounts for only34 percent to agricultural value added, while livestock, which accounts for 52 percent, has never received similar attention in the past. In order to achieve higher sustained growth in agricultural value added, it is absolutely necessary to give due attention to the livestock and dairy sector to achieve multiple objectives of attaining food security as well as poverty reduction. A reasonable volume of new investment in fertilizer industry for enhancing its production capacity is under way. A new project of Fatima Fertilizer Company with a capacity of 400 thousand tons of urea, 450 thousand tons of CAN, 400 thousand tons of NP and 300 thousand tons of NPK is under construction. It is expected that this project will start production by 2010. Expansion/BMR of Fauji Fertilizer Bin Qasim Limited (FFBL) for 220 thousand tons of DAP and 100 thousand tons of urea is expected by 2008. A new project of 1300 thousand tons of urea of Engro Chemical is also expected by 2010. The Pak American Fertilizer Company has planned to install a plant of 200 thousand tons per annum of DAP fertilizer by 2010. Suraj Fertilizer Industries are setting up a new plant of SSP at Harappa (Sahiwal) with a production capacity of 150 thousand tons annually. It is hoped that this plant will start production in 2008. Along with this, there are a few companies, which have started SSP production at small scale. SSP plant at Haripur is in the process of privatization, while the plant at Jaranwala (Faisalabad) has already been sold to Al-Hamd Chemicals (Pvt.) Limited, Lahore. Fertilizer sector is the second largest consumer of gas after power sector. Natural gas is used as feedstock as well as fuel in the manufacturing of nitrogenous fertilizers. Three companies namely Sui Northern Gas Pipeline Limited, Sui Southern Gas Company Limited and Mari Gas Company Limited are providing gas to fertilizer sector. The consumption of gas during 2006-07 was 249,649 m mufti. Out of this 81.2 percent was used as feed stock and 18.8 per cent as fuel. For enhancement/expansion in production capacity of fertilizer industry, the process of allocation of gas to Pak American Company and Suraj Fertilizer Industries is under way.

2.2IRRIGATION AND FERTILIZER USE Fertilizer use has increased by a factor of more than 60 in Pakistan since 1962, and the correlation between water for agrituture and fartalizer used is while Increasing by a factor of about 30 in Syria and by a factor of less than 10 in Morocco. The Lower growth rates in Syria and Morocco reflect the smaller returns to fertilizer use on the Rain fed lands that account for most of the agricultural area in those countries. Since 1980, Fertilizer use has increased at a slightly faster pace in Syria than in Pakistan, as the irrigated Area in Syria has increased substantially. Fertilizer use in Morocco has remained relatively Constant since 1985 Value added in the agriculture sector of Pakistan has grown by a factor of four since 1950, but Annual growth rates in crop production have fluctuated substantially. Growth rates in crop Production grew from less than 2 percent per year in the 1950s to as high as 8.18 percent in the 1960s (Table 4). Much of the gain in the 1960s was due to improvements in productivity per Hectare made possible by the adoption of higher yielding varieties of wheat and rice and rapid increases in the use of fertilizer and irrigation water (Ahmed, 1987; Chaudhry et al., 1996). There were sustained gains in productivity per hectare of about 2.5 percent per year from the late 1970s to the early 1990s, while the average increase in cropland area fluctuated between 0.15 and 1.58 percent per year. The rate of growth in aggregate inputs has exceeded the rate of growth in crop production during two of the five most recent five-year periods shown in Table

The rate of growth in total factor productivity (TFP) has been negative or less than 1.5 percent in all periods since 1970. An examination of data describing the average productivity of land, water and fertilizer during the 1980s and 1990s can yield insights into the causes of declining growth rates in crop yields in Pakistan. Fertilizer use has increased substantially on wheat-rice and wheat-cotton rotations and throughout Punjab, Pakistan, while the proportion of area irrigated and the cropping intensity have also increased (Table 5). Water use has increased on the wheat-rice rotation, but not on the wheat-cotton rotation. The wheat-rice rotation uses a larger volume of water from tube wells, while the wheat-cotton rotation uses a greater amount of canal water. In general, the use of tube well water has increased over time, while canal water use has declined. For the whole of Punjab, the proportion of water provided by tube wells has increased from 23 percent in the green revolution period to 43 percent in the post-green revolution period.

The limited volume of water available in canals and the inherent rigidity of Pakistans rotational irrigation system have motivated farmers to install private tube wells. Credit subsidies and flat-rate pricing of electricity beginning in the 1960s enhanced the pace of installation. By the early 1980s, there were 182 000 tube wells in Punjab, 19 300 in Sindh, 7 850 in Baluchistan and 5 400 in North-West Frontier Province (NWFP) (Chaudhry, 1990). By the late 1980s private tube wells supplied more than 30 percent of farm gate available water in Pakistan (Mustafa and Pingali, 1995). By the mid-1990s more than 300 000 private tube wells were supplying about 40 percent of total irrigation water in Pakistan (Ahmad and Faruqee, 1999). Tubewells enhance agricultural production and land quality in regions where shallow groundwater is not saline, but they contribute to Stalinization in regions with brackish shallow groundwater (Faruqee, 1996). The extensive use of tube wells has enabled farmers in Punjab to increase the cropping intensities of cotton-wheat and rice-wheat rotations from about 100 percent in 1960 to about 150 percent in 1990. The rates of yield increase in areas cropped and irrigated have declined in recent decades in Pakistan. In particular, for the areas cultivated, cropped and irrigated in Pakistan, yields increased by 23, 31 and 42 percent respectively between 1960 and 1980. From 1980 to 1999, the yield increases in these areas were 7, 19 and 22 percent respectively. Both cropping intensity and irrigation intensity have increased since the late 1970s, reaching values of 105 and 82 percent respectively in 1998-99. The declining rates of growth in both average productivity and cultivated area contribute to the declining rate of growth in total food grain production. Given that limited

water supplies will be a constraint on increases in cultivated and irrigated areas, efforts to boost productivity growth will be necessary in order to maintain growth in total food production.

Substantial public investment enabled the improvements in crop yields and the increases in cropping and irrigation intensities of the 1960s and 1970s. Private investments in large-scale and small-scale irrigation facilities, improved seeds, mechanization and subsidized prices for water, energy and fertilizer also contributed significantly to these gains. Average water availability increased by 34 percent from 4 700 m3/ha in 1959-60 to 6 300 m3/ha in 1980-81 as a result of the completion of several large reservoirs and the widespread installation of public and private tube wells (Table 6). The average area served per tube well declined from 3 066 ha in 1959-60 to 97 ha in 1980-81. The use of improved seeds increased by a factor of 2.63 between 1980-81 and 1996-97, while aggregate fertilizer use increased by 97 percent during that time to an average of 110 kg/ha. These rates of increase in the use of key inputs are substantially higher than the observed rates of increase in average crop yields in the 1980s and 1990s, suggesting that TFP declined in that period. Closer examination of crop production and input use in these decades could provide a better understanding of factors that may have contributed to the declining productivity of land, water and fertilizer inputs. The aggregate amount of fertilizer used in agriculture have increased more rapidly than irrigated area since 1980-81. Total fertilizer consumption increased by a factor of about 2.5 during that time. At province level, nitrogen fertilizer consumption increased most rapidly in Punjab, rising by a factor of more than 2.5 in the period. Nitrogen use doubled in both Sindh and NWFP in this period. Phosphate fertilizer consumption doubled in Punjab and NWFP, while rising by

a factor of 1.8 in Sindh. Phosphate fertilizer consumption has been more variable than nitrogen consumption in recent years. Punjab accounts for 67 percent of the nitrogen fertilizer and 68 percent of the phosphate fertilizer consumed in Pakistan. The amount of water available for irrigation will limit further increases in cropland area in Pakistan. Hence, future gains in agricultural production will require improvements in the average productivity of land and water resources within the Indus River basin and in rain fed areas outside the basin. Such improvements will require substantial efforts to restore the rates of growth in crop yields achieved in the 1960s and 1970s, particularly with respect to rice and wheat. The declining growth rates observed since 1980 are in part the consequence of the degradation of land and water resources caused by the inappropriate management of resources on farms and throughout irrigated areas (Mustafa and Pingali, 1995; Pingali and Shah, 1999; Murgai et al., 2001). Repairing the damage caused by water logging, Stalinization and poor management of soil fertility will be expensive and time consuming. Changes in public policies that have encouraged inefficient use of land and water resources could help restore productivity.

2.3FACTORS AFFECTING WATER AND FERTILIZER USE In Pakistan, the introduction of HYVs of rice and wheat and the rapid adoption of intensive production methods generated substantial increases in crop yields during the 1960s and 1970s. However, gains in crop yields have been minimal in the last 20 years. The increase in areas affected by water logging and salinity and the decline in soil fertility in some areas have probably contributed to the declining rates of growth in crop yields. These problems are in part the result of: seepage of water from large, earthen canals; the extensive use of saline groundwater; and the inefficient use of water and fertilizer on farms. Successful efforts to reverse the declining growth rates will require policies and programmers that promote wiser use of limited resources, while maintaining the output required to sustain the livelihoods of rural residents and provide food supplies for urban areas. The increases in crop production have not matched the rate of increase in irrigated area, largely because of inefficiencies and inequities in the water delivery system that have contributed to structural and environmental degradation Large seepage losses from canals and excessive irrigation with brackish shallow groundwater contribute to water logging and Stalinization, while the misallocation of water among regions and farmers reduces economic returns. Rising water tables and groundwater salinity may be important factors in agricultural productivity and sustainability in the Indus River basin Poor quality groundwater, low fertilizer efficiency and increased losses to weeds and diseases have contributed to slower growth rates in crop yields in Pakistan . The degradation of soil and water resources that has occurred over a long period in Pakistan has probably contributed to the declining rates of growth in productivity. The problems of water logging and salinity are a concern in most arid regions. In the Indus River basin, the sustained use of saline groundwater for irrigation has probably accelerated the pace of soil Stalinization in some areas, contributing to the declining rates of growth in crop yields. Other potential causes of the declining growth in productivity include the persistent planting of rice-wheat rotations. The pounding of water on rice fields degrades the quality of soil with respect to wheat production, leading to lower yields than those achieved where wheat rotates with other field crops. However, wheat yield reductions may also result where farmers delay the planting of wheat in order to maximize their cotton yields by obtaining an additional picking of their cotton fields in the late autumn season. Inappropriate nutrient applications may also have contributed to declining productivity growth rates. In particular, while the application of supplemental nitrogen has increased substantially since the 1960s, farmers have not always applied phosphorus, potassium and other nutrients in suitable proportions. As a result, the deficiency of one or more important nutrients may be reducing crop yields in some regions, even though farmers apply large amounts of supplemental nitrogen and other nutrients. A sustained effort to restore nutrient balance and to reduce the rate of increase in areas affected by water logging and salinity may help restore positive rates of growth in crop yields. The government has subsidized the purchase of important inputs such as irrigation water, fertilizer, electricity, pesticides and seed for many years. However, it withdrew the subsidy on pesticides in the early 1980s and it has reduced fertilizer subsidies substantially in recent years. Subsidies remain in place for diesel and electric tube wells, purchased seeds, canal water and

credit (.The reduction and removal of input price subsidies in Pakistan in the 1980s caused substantial increases in farm-level input prices and reductions in farm-level net returns The governments role in the supply of farm inputs also includes its activities in the importation, production and distribution of selected inputs. For example, the government imports and distributes phosphorus fertilizer and it produces a large portion of the seed required by farmers each year. Distortions caused by government intervention limit the supply of these inputs to farmers .Farm-level difficulties in acquiring the seeds of modern crop varieties and in obtaining sufficient phosphorus fertilizer for timely application have probably contributed to the declining rates of growth in crop yields. The government has traditionally supported the farm-level prices of all major crops through guaranteed minimum prices or other price support programmers . The government procures about 30 percent of the wheat produced each year at a predetermined support price and releases wheat flour to consumers through government-owned utility stores and through private markets . There is also a price support scheme for basmati rice although much of this crop goes for export. In 2001, the government announced that it would remove price supports on all crops except wheat, rice, cotton and sugar cane. In addition, it plans to liberalize the market for wheat by 2003. Private sector participation in the exporting of rice increased in the 1990s. The government discourages cotton production by imposing an export tax that prevents farmers from receiving the world price for their output. Removal of the export tax would stimulate cotton production, raise rural incomes and generate a more diverse set of rural, non-agricultural employment opportunities . Cotton is a relatively profitable crop in Pakistan and requires less irrigation water than sugar cane does. Reducing the price support level for sugar, while at the same time reducing cotton export taxes, would generate greater net benefits and may reduce some of the pressure on land and water resources in the Indus River basin. The intensification of agricultural production in Pakistan has stemmed largely from the development of small-scale and large-scale irrigation systems, the introduction of HYVs, mechanization and the use of chemical fertilizers and pesticides. Many farmers augment the surface water they divert from the Indus River canal system with groundwater pumped from private and public tube wells. The enhanced volume and reliability of irrigation water have enabled farmers to plant wheat and cotton or wheat and rice in continuous rotation for many years. The use of tractors and mineral fertilizer has increased in support of the higher intensity of cropping activities. Irrigation with tube wells enhances productivity in regions with high-quality groundwater. However, productivity may decline over time in regions with brackish or saline groundwater where the supply of higher quality surface water is not sufficient to leach salts from the root zone. The combination of higher cropping intensities and increased use of saline groundwater may substantially increase the rate at which salts accumulate in arid zone soils. Problems of water scarcity, water logging and salinity, inefficient water delivery and use, inequitable distribution and inadequate maintenance of the irrigation and drainage system limit the productivity of land and water in lower portions of the Indus River basin on severely affected suggest that water logging and Stalinization affect 6.3 million ha in Pakistan, with direct impacts on the livelihoods of 16 million people.

The data examined suggest that soil and water quality in Punjab have declined since the 1960s. In particular, organic matter content and available phosphorus have decreased in soils, while the level of soluble salts has increased. At the same time, measures of residual carbonate and electrical conductivity of tube well water have increased. Hence, although farmers have been applying more tube well water in recent years than in the 1960s and 1970s, the salt content of irrigation water has increased substantially. The decline in resource quality has probably contributed to relatively low estimated rates of annual growth in TFP. These rates range from -0.50 percent per year for the wheat-rice rotation to 1.57 percent per year for the wheat-cotton rotation. The estimated aggregate rate of growth in TFP for the crop sector of Punjab is 1.26 percent per year. The authors suggest that growth in TFP would have been significantly higher in the absence of resource degradation. Profit-maximizing farmers who receive a partial irrigation supply that is not sufficient to Generate maximum yield on all of their land will apply irrigation water to maximize the net return per unit of water received (Upton, 1994). This will occur when the incremental productivity of water is the same on all land parcels. Hence, farmers will attempt to spread limited water supply across a larger land area than project planners imagined originally. Farmers will also augment surface water with groundwater where it is available at reasonable cost, thereby enabling them to diversify cropping patterns and increase cropping intensities. 2.4THE INDUS RIVER BASIN IRRIGATION SYSTEM Pakistans canal irrigation system is the largest contiguous irrigation system in the world, with 60 000 km of canals and more than 80 000 watercourses, channels and ditches . An estimated 130 000 million m3 of water enter the canal system each year, but only 60 percent of it reaches farm gates because of inefficiencies in the delivery system . Extensive use of public and private tube wells that extract water from shallow aquifers helps augment the canal water supply. An estimated 29 000 million m3 of groundwater with a salinity level of less than 1 500 mg/liter are available in the Indus River basin each year Water is the input that limits the intensification of agriculture in Pakistan. Nearly 90 percent of Pakistans irrigated area lies within the canal command area of the Indus River basin irrigation system. The irrigated area increased substantially during the 1970s and 1980s following completion of the Mangla, Chashma and Tarbela dams and with expansion of the area irrigated with private tube wells. Overall Between 1980 and 1999, the irrigated area in Pakistan increased from 14.7 to 18 million ha, while the total area planted with annual and permanent crops increased from 20.3 to 21.9 million Ha. The irrigated area increased by about 25 percent in Punjab and NWFP, and by more than 50 percent in Baluchistan. The irrigated area in Sindh has declined by more than 10 percent since 1980-81, possibly due to water logging and Stalinization problems in lower the reaches of the Indus River basin irrigation system. The increase in the number of public and private tube wells from 186 000 in 1980-81 to more than 515 000 in 1998-1999 made a major contribution to enabling the 22-percent increase in total irrigated area in Pakistan. Since 1980, the number of tube wells has increased almost threefold in Punjab and Baluchistan, by a factor of 2.4 in NWFP, while the cumulative rate of increase in Sindh has been 50 percent. At present, more than 90 percent (465 000) of Pakistans private tube wells are in Punjab, while there about 20 000 tube wells in Sindh and Baluchistan and 11 000 tube wells in NWFP

Chapter 3 CURRENT WORLD FERTILIZER TRENDS AND OUTLOOK TO 2011/12

This chapter presents world nitrogen, phosphate and potash fertilizer medium term supply and demand projections for the period 2007/08 to 2011/12. The FAO/Fertilizer Industry Working Group made the forecasts in October 2007. The balances in Annexes present a medium-term indication for possible changes in fertilizer nutrient demand and supply by region and sub region. Changes in installed supply capacity, operating rates and demand vary annually. Annex 1 provides explanatory notes on supply and demand balances. FAO, in collaboration with experts from the Fertilizer Industry Working Group dealing with fertilizer production and trade, provides five-year forecasts of world and regional fertilizer supply and demand balances. All fertilizer references are in terms of plant nutrients: nitrogen (N), phosphate (P2O5) and potash (K2O). The fertilizer demand data refer to the calendar year. For countries that report their fertilizer statistics on a fertilizer year basis, data appear under the fertilizer year that begins in the same calendar year. The contributions made by the fertilizer industry associations and their representatives are gratefully acknowledged. 3.2WORLD FERTILIZER OUTLOOK Fertilizer demand has historically been influenced by changing and often interrelated factors such population and economic growth, agricultural production, prices and government policies. This still holds. However, three developments distinguish the current state of agricultural markets from past fluctuations, namely that the hike in world prices concern nearly all major food and feed commodities, that record prices are being achieved at a time not of scarcity but of abundance, and that linkages between agricultural commodity markets and other markets are strengthening. Such phenomena already manifest in 2006 strengthened in 2007 a year characterized by persistent market uncertainty, record prices and unprecedented volatility in grain markets. The magnitude and nature of these changes have led some observers to refer to a paradigm shift in agriculture away from decreasing real food prices over the past thirty years. Given the inextricable link between food production and fertilizer use, it is opportune to consider such changes when reviewing prospects for fertilizer demand and supply balances until 2011/12.

3.3MACRO FACTORS AFFECTING GLOBAL AGRICULTURE AND FERTILIZER DEMAND ECONOMIC CONTEXT After solid and broad-based growth for three consecutive years the world economy decreased slightly in 2007 with anticipated GDP growth back to 2005 levels at 4.9% and 3.3% forecast for 2008 by the World Bank (2007). Developing countries and economies in transition continued their strong economic performance though with a mild reduction in 2007 growth rates when compared with the previous year, i.e. 5.9% for developing countries and 6.5% for countries in transition. Among developing countries, Sustained high though slightly decreasing growth in China and India engendered endogenous growth through increasing South-South trade and financial linkages. This is reflected in, among other things, continued strong demand and higher prices for energy and primary commodities including food. Notwithstanding the strong performance by most developing countries they remain vulnerable to any slowdown in major developed economies and to the volatility of international commodity and financial markets. OIL So far oil prices have not had a significant dampening effect on the world economy largely due to buoyant non-oil commodity prices offsetting rising import costs (due to higher oil prices), and the cushioning effect of the depreciating United States dollar (9.5% relative to major currencies between January-September 2007) in which many international commodity prices are denominated. High oil prices contributed to price increases for most agricultural crops by raising input costs on the one hand, and by boosting demand for agricultural crops used as feedstock in the production of alternative energy sources (bio-fuels) on the other. The combination of high oil prices and the desire to deal with environmental issues is driving the rapid expansion of the biofuels sector. This is likely to boost the demand for feed stocks mainly maize, sugar, rapeseed, soybean, palm oil and wheat for many years to come. However, much will also depend on the supply and demand fundamentals of the bio-fuel sector itself. High oil prices could depress the use of oil-based fertilizers which have been behind much of the increase in farm production during the past half century. Trade World trade expanded rapidly in the recent three years driven by increased trade of both oil and non-oil commodities as well as capital goods. Growth of world exports is more than double that of global output indicating a further deepening of global economic integration. The growth of world trade is expected to moderate to approximately 7% in 2008. FREIGHT RATES Freight rates have become a more important factor in agricultural markets than in the past. Increased fuel costs, stretched shipping capacity, port congestion, and longer trade routes due to altered trade patterns, have pushed up shipping costs. The Baltic Exchange Dry Index, a measure

of shipping costs for bulk commodities such as grains and oilseeds, has recently passed the 10,000 mark for the first time with freight rates up 154 percent in November 2007 from a year earlier. High though decreasing freight values influence the geographical pattern of trade as countries opt to source their import purchases from nearer suppliers to save on transport costs. High freight rates are expected to last till 2009 when a large number of ships are expected to be launched. The impact of transport costs on fertilizer prices will grow as fertilizer is produced in fewer localities close to raw materials and ample energy availability. EXCHANGE RATES Exchange rate swings play a critical role in all markets including agricultural markets. Yet, rarely have currency developments been as important in shaping agricultural prices as in recent months. The decline in the United States dollar against most currencies since 2005 has made imports from the United States cheaper and lessens the true impact of the rise in world prices. This is a major reason behind the brisk world import demand that, in spite of high prices, shows little sign of retreat. OVERALL Medium term perspectives point to a slowing down of the world economy with a smoothing of the upward trend in emerging economies. Global growth is seen as remaining sufficiently robust to sustain demand for food (especially high value foods such as meat, fruit and vegetables) in emerging economies thereby strengthening demand for fertilizers. THE AGRICULTURAL CONTEXT Global population and economic growth are the major forces driving increased world food demand, crop production and fertilizer use. These and other factors influencing fertilizer use are outlined briefly in this section POPULATION In spite of world population growth slowing from 1.26% (1996-2005) to1.10% (projected 20062015); absolute annual increments continue to be large. It is anticipated that between 50 and 70 million people will be added annually to the world population until the mid 2030s. Almost all of this increase is expected to take place in developing countries especially the group of 50 least developed countries. More food and fiber will be required to feed and clothe these additional people and to increase the daily food uptake of the still 830 million undernourished worldwide (2002-04). There is thus significant scope for further increases in demand for food even as population growth slows down. INCOME GROWTH AND DIETARY CHANGE The value of total agricultural output (all food and non-food crop and livestock commodities) has almost trebled in real terms since 1961, an average increase of 2.3 percent per year, well ahead of global population growth (1.7 percent per year). Much of this growth originated in developing countries and also reflects the rising share of high value commodities such as livestock and horticulture products in the total value of production. Global agricultural value added per capita has grown at an average rate of 0.4 percent per year

in real terms since 1961. Latin America and South Asia have seen a small increase, while East Asia and the Pacific has more than doubled agricultural value added per capita over the last four decades. Sub-Saharan Africa is the only region in which per capita agricultural value added has not seen a sustained increase, with a declining trend on average for the period and considerable variation over time and across countries. Both reflecting and driving these changes in agricultural production, global dietary patterns have changed dramatically over the past four decades. Income growth, relative price changes, urbanization and shifts in consumer preferences have altered dietary patterns particularly in developing countries. Diets have shifted away from staples such as cereals, roots and tubers and pulses towards more livestock products, vegetable oils and fruits and vegetables. Total meat production in developing countries more than quintupled from 27 million tones to 147 million tons between 1970 and 2005, and, although the pace of growth is slowing down, global meat demand is expected to increase by more than 50 percent by 2030. Increased meat and aquaculture production will require more feed (coarse grains and oilseed meals). Conversion of grain areas to vegetable and fruit production will translate into higher fertilizer demand as average application rates for the latter is about double those for grain crops. The above trends support continuing and increasing demand for mineral fertilizers to restore and enhance fertility of the worlds agricultural land for higher yields and improved produce quality. BIO-FUELS High oil prices are creating new markets for agricultural commodities that can be used as feedstock for the production of bio-fuels. Bio-fuels are being promoted as contributing to a wide range of policy objectives, most notably as providing greater energy security with regard to liquid fuels, increasing rural incomes, lowering greenhouse gas emissions and providing economic opportunities for developing countries. Production of ethanol and bio-diesel has soared in OECD countries since early 2004 and will probably continue to increase at least till the end of the decade due to processing capacity soon to come on line, and due to the difficulties of dismantling existing subsidies and protective measures . It is difficult to predict the impact of bio-fuels feedstock production on fertilizer demand because the former is more dependent on a large array of support measures in pursuit of sometimes contradictory policy objectives, rather than on market fundamentals such as oil and feedstock prices. While the magnitude and nature of incentives and support for investment in the industry will probably ensure current support levels well into the future, increasing scrutiny of the high fiscal, developmental and environmental costs could influence the political economy of biofuels. The predicted impact of increased bio-fuel production on world fertilizer demand is expressed in two ways; percentage fertilizer consumed by bio-energy crops and, total fertilizer used for feedstock production. Variance within and among such estimates show how approximate they are. For example, Sheets and Fauji (2006) estimate that bio-energy crops will account for 1 to 8% of fertilizer consumption in 2015, and 2 to 16% in 2030, while) estimate 27.6% in 2010/11. In the light of the uncertainty about the direct impact of bio-energy crop production on fertilizer use, four scenarios were examined by Tenkorang et al (2007). Only two of these

estimates suggest that bio-fuel production could have a significant impact on fertilizer consumption in the near future. Tentative hypotheses put forward by the IEA suggest that if biofuel use grows 50% over the next ten years, and it is assumed that 21 million hectares of food crops are displaced by bio-energy crops implying greater intensification to make up the loss in food production, the net effect would be an increase in fertilizer use of 2.4 million tones. An Integer (2007) report estimates total fertilizer consumption for bio-fuel crop production at about 6.4 million tons in 2012, while according to Smeets and Fauji (2006) it could be 13.5 million tons by 2015. Such variation in estimates is not surprising given the many and complex variables governing the relationship between bio-fuel production and fertilizer consumption. The most obvious are that: Demand for and financial viability of bio-fuels are strongly influenced by the oil price which is volatile; Increased land used for feedstock production does not translate directly into increased fertilizer use as it will be at least partially offset by less land used for other crops. Such changes in land use affects fertilizer consumption as crops do not all have neither the same total fertilizer requirements nor the same balance of nutrient uptake. Adequate data on crop fertilizer use would be required to compute the effects of such interrelated factors accurately. Increased demand for feedstock can be partially met by bringing more land into production thereby alleviating price hikes. Technology enabling the use of a wider diversity of feedstocks such as grass, wood and municipal waste to produce bio-ethanol could Significantly reduce demand for cultivated carbohydrate-producing crops with a corresponding effect on fertilizer demand. While research is being conducted on such technology, the latter is unlikely to be applied widely during the outlook period. The effect of such market related factors is compounded by sometimes incoherent policies supporting bio-fuel production in response to vested sector interests. It is salutary to consider the possible impact of bio-fuels on global fertilizer consumption. As indicated previously, there are currently about 14 million hectares or one percent of arable land planted with bio-fuel crops which provide some one percent of transport fuels. Even if the IEA estimate that this could more than double to some 35 million hectares by 2030 do materialize, the increase over the period would be of the order of 4.3% per annum which is high. Another measure of possible impact is to take the average of the three previously mentioned forecasts of fertilizer to be used for bio-fuel production worldwide in approximately 2012 (2.4, 6.4, 13.5 million tons) which amounts to about 2.4% of total fertilizer use at that time. Caution and realism should thus be exercised when attributing future increased fertilizer demand to bio-fuel production. While the need for large amounts of feedstock is likely to fuel demand in the short term, no dramatic increase in fertilizer demand is expected in the period under review during which sustained application rates are anticipated. ADDITIONAL AGRICULTURAL LAND The European Union suspension of its 10% obligatory set aside requirement for the 2007/8 season could bring an estimated three million hectares of arable land under cultivation. Although

no official decision has been made regarding an early release of land from the Conservation Reserve Programmed (CRP) in the USA, contracts on some 800 000 hectares have expired and could thus be put back into production during the new season. Should all this land be cropped, it would increase fertilizer demand by approximately 0.86 million tones 1 or 0.5% of global nutrient consumption. In the longer term new land could be cultivated in Latin America, Sub-Saharan Africa, Southeast Asia and Eastern Europe. However, developing such land and placing output on domestic and international markets would require large investments into transport and other infrastructure, which could take decades. Increasing productivity on existing cropped land by inter alia using more fertilizer, remains the most likely path farmers will take to increase production.

TECHNOLOGY The scope for introducing higher yielding technologies including fertilizer lies mainly in developing countries where technology adoption is slowest. At the same time, concerns about the impact of nitrogen and phosphorous losses to the environment will call for increased recycling of organic nutrient sources. Here again, the scope for such improvements lies mainly in emerging economies and should improve nutrient use efficiency. The adoption of improved technology is thus likely to contribute to increased fertilizer consumption only marginally during the outlook period. (Assuming average nutrient use of 156 kgN, 36 kgP, 33.5 kgK per hectare.) ANIMAL DISEASE OUTBREAKS Outbreaks of highly infectious diseases such as Foot and Mouth disease (FMD), Porcine Reproductive and Respiratory Syndrome Virus (PRRSV) and Avian Influenza (AI) could affect meat trade and the agriculture sector of some countries during the outlook period In spite of the recurrence of AI in some countries and sharply higher food and energy costs, global poultry meat production in 2007 is expected to be 3% higher than last year. This is reflected in the FAO poultry price index which in 2007 reached the highest level observed in the last ten years. Global pig meat production in 2007 is forecast to fall by 1% principally due to a major contraction of output in China where the sector was affected by massive culling following an outbreak of PRRSV disease and by high feed prices.

3.4OUTLOOK FOR WORLD AGRICULTURE CEREALS FAOs November forecast for world cereal production in 2007 stands at 2109 million tones, about 5% up from the previous years harvest. The bulk of this increase comes from a record maize crop in the USA. Production will meet the forecast 2% increase in consumption leaving global stocks unchanged from the previous seasons low stock to utilization ratio which was the smallest since the mid 1990s. Prices for all major cereals remained high with some, especially wheat, registering considerable gains from the previous season. Wheat prices reached record levels-some 60% higher than in 2006-due to unfavorable production conditions in the EU, Canada, Australia and Morocco. Tight supplies and higher prices are expected to drive down feed utilization. Per caput consumption of wheat for food is also expected to decline slightly especially in low income countries and in Africa. Early prospects for production in 2008 are favorable. FAO forecasts that world coarse grain production in 2007 will be up by 9% from 2008; the bulk coming from increased maize production in the USA. International prices of coarse grains remained high mainly because of strong demand for maize2 as feedstock for ethanol production in the USA which had a knock-on effect on the demand and price of other coarse grains. This trend is expected to continue into 2008 in spite of expected increased maize production in the USA and Brazil, and of world stocks estimated to be 14% higher than in 2006. International rice prices increased relatively less than other agricultural commodities in 2007 essentially due to the depreciation of the USD in which prices are denominated. Production sufficed to meet the small increase in use of rice for food, feed and other purposes. The stock-to-use ratios for all major cereals are forecast to remain low and stable over the outlook period resulting in tight market conditions and volatile prices likely to react rapidly to any supply fluctuation. OILSEEDS Following many years of expansion, global oilseed production is forecast to decline by 3% from record levels in 2006. A decline of 6% in soybean (the worlds leading oil crop) and 10% in sunflower production explains this reduction which is unlikely to be offset by anticipated improved output of rapeseed, groundnut and palm kernel, and expected 6-7% increase in land planted to soybean in Latin America (mainly Brazil). The two main factors behind the anticipated drop in total output are firstly, increased competition

from grains for land notably in the USA, China and CIS countries. Secondly, unfavorable weather conditions have depressed oilseed production in several key growing areas or countries including Europe, Australia, Canada, China and the USA. Due to reduced oils/fats and oil meal supplies as well as expanding demand for food, feed and energy use, present short and medium term forecasts point towards continued firmness in prices for oilseeds and their products already at record highs. World stocks of both oil and meals are expected to fall to critical levels. SUGAR World sugar prices weakened after the highs experienced in 2006 mainly due to rising production in traditional importing countries which depressed import demand. Global production is forecast to increase by 6% over the next five years with developing countries, mainly Brazil and India, accounting for most of the growth. The greatest increase in demand is expected among developing countries with strong economic performance such as China and India. More cane will be diverted from sugar production to ethanol manufacturing particularly in Brazil and India. Consumption in developed countries is likely to remain relatively unchanged due to low population growth and dietary concerns. World prices are expected to remain weak and stable in the medium term. MEAT AND DAIRY PRODUCTS Global meat output, constrained by rising feed costs and massive culling of pigs in China, is expected to grow by only 1% in 2007. Increasing demand, particularly from developing countries, is underpinning production expansion worldwide. Reduced export restrictions are expected to facilitate global trade with supply likely to come mainly from developing countries. International prices of dairy products continued their unprecedented surge that began in late 2006 peaking at an all time high in September at more than double the previous year. This surge resulted from a number of production shocks in some major exporting countries3 , and strong demand especially from developing countries. Stocks held by key suppliers such as the EU and USA have fallen to record levels. High international prices and tight markets are expected to stimulate expansion of the sector. DEMAND Annexes 2, 3 and 4 present forecasts of regional and global fertilizer demand for the three major plant nutrients until 2011/12. World fertilizer consumption is to grow annually at about 1.7 % from 2007/2008 to 2011/2012, equivalent to an increment of about 15 million tones. About 69% of this growth will take place in Asia and 19% in America. The expected share of world nitrogen, phosphate and potash consumption and the annual growth of this consumption are shown in Table 1. A revealing dimension of anticipated demand is the expected relative contribution to change in world consumption which is a function of the preceding two parameters. Low share of consumption combined with high consumption growth leads to higher contribution to changed world consumption than the share of consumption may suggest (e.g. Africa and Oceania in the case of nitrogen). Likewise, a high share of world consumption associated with low consumption growth means lower than may be expected contribution to world consumption (e.g. North America and West Europe for nitrogen). Evidently, if both share of consumption and consumption growth are high, the relative contribution to increased global demand will be high (e.g. South Asia for nitrogen). A measure of

this expected relative contribution to changed consumption for nitrogen, phosphate and potash is given in Figures 1, 2, and 3 respectively.

NITROGEN The forecast is for world nitrogen fertilizer demand to increase at an annual rate of about 1.4% until 2011/2012, which is an overall increase of 7.3 million tons. About 69%t of this growth will take place in Asia (Table 1, Annex 2). The worlds largest consumers of nitrogen are East Asia, South Asia, North America and West Europe (Table 1, Annex 2). While their share of global consumption is modest, it is forecast that the relative contribution of Latin America and East Europe and Central Asia (EECA) to change in nitrogen use will be 10.4% and 5% respectively. The relative contribution to change in world nitrogen consumption by East Asia and South Asia is expected to be about 65% (Figure 1). North America is the largest importer followed by South Asia that still has a supply deficit of some 32%. East Asia will move from deficit to surplus during the outlook period (Annex 2).

PHOSPHATE With an increment of 4.2 million tons during the outlook period, the expected annual growth rate in world demand for phosphate fertilizers is about 2.0%. About 71% of this growth will take place in Asia and 21% in America (Table 1, Annex 3). The largest consumers will be East Asia, South Asia and North America and main importers will be South Asia, Latin America and West Europe (Table 1, Annex 3). The main contributors to increase in world consumption will be South Asia (35.8%), East Asia (33.8%) and Latin America (18.3%) (Figure 2). POTASH World demand forecast for potash fertilizers is to increase at an annual average rate of about 2.4%, equivalent to an increment of 3.6 million tons over the outlook period. About 68% of this growth will occur Asia and 26% in America (Table 1, Annex 4).

The largest consumers will be East Asia, North America and Latin America and main importers will be East Asia, Latin America and South Asia (Table 1, Annex 4). It is expected that the main contributors to increase in world consumption will be East Asia (48.1%), Latin America (21.0%) and South Asia (19.0%) (Figure 3). SUPPLY World fertilizer supply is expected to increase by some 30 million tons representing an annual growth rate of 3% which is comfortably ahead of demand for the outlook period (Annex 2, 3, 4). NITROGEN World nitrogen supply is forecast to rise by 23.1 million tons by 2011/2012 compared to 2007/2008. Projected supply capacity considerably exceeds total demand for the outlook period and is expected to increase towards its latter part with supply exceeding demand by about 10% in 2011/12.

East Asia, South Asia, North America and Europe are the largest producers of nitrogen but consume most of it. The largest exporter by far will be EECA (Annex 2). PHOSPHATE World phosphate fertilizer supply is forecast to increase by 6.3 million tons by 2011/2012 at a growth rate of 3.2% per annum. It is estimated that a surplus of some 0.4 million tons at the beginning of the period will increase to 2.9 million tons in 2011/2012. Areas with the largest production will be East Asia, North America and Africa, with Africa and North America having the largest surpluses for export (Annex 3). POTASH The supply forecast for potash is that it will increase by 4.9 million tons to 43.2 million tons during the overlook period at an annual growth rate of 2.4% per annum. The main producing areas will be North America, EECA and West Europe, with EECA, North America, West Asia and West Europe having the largest surpluses for export (Annex 4) 3.5SUPPLY AND DEMAND BALANCES Tables 2, 3, 4, and 5 show world fertilizer supply and demand balances respectively for total

nutrients, nitrogen, phosphate and potash. It is anticipated that world fertilizer supply and demand will increase by 3.1% and 1.9% respectively between 2007/08 and 2011/12. World surplus is consequently expected to increase annually by 21.2% over the same period to reach about 11% of total demand in 2011/12. NITROGEN Continuing high crop prices in 2007 led to sustained demand for nitrogen and tight market conditions in most regions and sub-regions though mainly in Asia, Latin America and North America. The market is, nevertheless, expected to loosen over the outlook period as global supply increases and is expected to remain ahead of total demand. Surplus is forecast to increase from 9.4 to 24.7 million tons growing annually by 36% over the period. Surplus in 2011/12 is expected to exceed demand by some 11%. Shortages, expected mainly in North America and South Asia, are likely to be met by surpluses mainly in EECA.

\ PHOSPHATE In response to increased crop production following higher prices, demand for phosphate fertilizers remained high and only marginally above supply. Global phosphate surpluses are forecast to increase from approximately 0.4 to 2.9 million tons, growing annually at 49% over the outlook period to exceed demand by approximately 7% in 2011/12. Traditional exporters-Africa and North America-are expected to meet the needs of deficit areas such as South Asia, Latin America and West Europe. POTASH Global potash supplies are expected to keep well ahead of total demand with the surplus increasing from 5.7 to 6.7 million tons at an annual growth rate of 3% over the outlook period. During this period the surplus will fluctuate little at about 18% of demand. This surplus will be provided mainly by EECA and North America for deficit areas such as East Asia and Latin America.

3.6THE REGIONAL FERTILIZER SITUATION

AFRICA Africa will account for marginally less than 3% of world fertilizer consumption during the outlook period. Nitrogen consumption is forecast to grow at 2.9%, and phosphate and potash by 1% and 2 % respectively (Table 1). The supply and demand forecast (Table 6) shows that the region will remain a major exporter of phosphate fertilizer and less so, though increasingly, of nitrogen. It will continue to import all its potash needs. Fertilizer consumption continues to be largely restricted to 10 countries. Nitrogen and phosphate production capacity exists in only 11 and 6 countries respectively. High transport costs in land locked countries contribute to prohibitively high fertilizer prices. An array of other factors which further limit input and output markets, severely constrain fertilizer use. The main consumers are Egypt, South Africa and Morocco. Steady demand growth is expected in Egypt due to increases in cultivated area and in yields. Growth in the Maghreb and South Africa, where largely rain fed production is tributary to weather fluctuations, is likely to be more erratic. In South Africa, maize production would respond to high prices, to increased demand by the emerging bioethanol industry and to greater demand from neighboring countries that could be affected by limited availability of USA exports and of food aid. Follow up to the 2006 Abuja Africa Fertilizer Summit attempts to address the regional policy picture and fertilizer policies are being prepared in some countries. The sustainability of policies applied in some countries including tariff adjustments and fertilizer subsidies, needs to be demonstrated at a larger scale. Overall, this contributes to a slow increase of regional fertilizer consumption. AMERICA It is forecast that America will consume 23.6% of global fertilizer supply during the outlook period. Consumption is expected to increase by 2.8 million tons, an annual growth rate of 1.4%. The region is likely to have a nitrogen deficit of about 27% of demand over the outlook period, but a considerable surplus of potash by 2011/12 (approximately 48% of demand). It is expected that the region will move into a phosphate deficit

NORTH AMERICA Fertilizer consumption in North America which represents 13.5% of global fertilizer nutrient consumption is forecast to grow by 0.4% between 2007/2008 and 2011/2012. Nitrogen, phosphate and potash consumption levels are to grow by 0.3%, 0.5% and 0.7% respectively. Significant gains in nitrogen use efficiency over the past two decades combined with greater recycling of organic nutrient sources, mitigate against increased fertilizer demand resulting from expanding bioethanol production. LATIN AMERICA Total fertilizer consumption in Latin America is forecast to increase by some 2.3 million tons at an annual rate of 2.7% during the outlook period. This growth in fertilizer demand is expected after strong recovery of crop production since 2006 mainly in Brazil and Argentina where there has been a rapid response to increased crop prices partly resulting from increased sugar cane plantings for ethanol production. Future production increases are expected to come from a combination of larger cultivated area and higher yields which will help Latin America further increase its share of global agricultural markets.

ASIA It is forecast that during the outlook period the region will use 58.6% of fertilizer consumed globally. Demand will increase by 10.4 million tons growing at 2.1% annually for all fertilizers, at 1.6% for nitrogen, at 2.4 % for phosphate and at 3.5% for potash (Annex 2,3,4). It is expected that the region will move from a small deficit to a considerable surplus of nitrogen; will reduce its dependency on imported phosphate; but will increase the volume of its potash imports (Table 8). WEST ASIA Sub regional fertilizer demand is estimated up by 1.6% annually for the outlook period with expected increases of 1.7% for nitrogen, 1.0% for phosphate and 2.4% for potash. Expected demand for potash is highest in view of the need to rebalance fertilizer application. Developing irrigation, improving water use efficiency, and adoption of modern varieties will remain the main drivers of regional agricultural development. In Turkey, wheat, maize and cotton production is likely to improve over the next five years. Large irrigation development in Anatolia is likely to contribute to mainly high-value crop production, but is expected to take at least ten years to phase in. In Iran, wheat output is forecast to increase as a result of area expansion

SOUTH ASIA India, Pakistan and Bangladesh remain the main fertilizer consuming countries in the sub region which is facing considerable population growth and has limited reserves of good agricultural land. Improving crop productivity and nitrogen use efficiency simultaneously is one of the greatest challenges facing the sub region. The need to increase food production to meet the requirements of a large and fast growing population, limited land and water resources, rising income and policies supporting food self-sufficiency, provide incentives for increasing productivity per land area. Grain production is anticipated to increase steadily over the next five years in India though more modestly in Pakistan and Bangladesh. Cotton output is also expected to rise in Pakistan and India, while sugar cane output in India should increase significantly in response to growing demand for sugar and ethanol. Fruit and vegetable production is also expanding quickly to supply both the domestic and international markets. Fertilizer prices stabilized by government subsidies, programs promoting balanced fertilizer use, and self sufficiency policies should contribute to strong sub regional fertilizer demand. Fertilizer use is forecast to grow annually at a high 2.8% over the outlook period with corresponding increases for nitrogen (2.2%), phosphate (3.5%) and potash (4.2%). The need to rebalance fertilizer application points to stronger growth rates for phosphate and potash than for nitrogen. EAST ASIA At 37.2% East Asia uses by far the largest share of fertilizer consumed globally. Small incremental consumption in the sub region will thus significantly increase global consumption. In spite of loss of arable land to rapid urbanization particularly in China, agricultural production is increasing due to productivity gains which are also manifest in countries with dynamic agricultural sectors such as Indonesia, Malaysia, Philippines Thailand and Viet Nam.

In a five-year perspective, Chinas maize and soybean harvests are projected to grow steadily to meet animal feed demand. With little additional land available in China, additional maize is likely to come from reducing areas planted to wheat and rice and from higher yields. Maize production in the sub region is seen as progressing faster than rice output in response to evolving diets. The rice-maize rotation is expanding and tends to replace rice monoculture in some areas. Declining rice production in Japan and the Republic of Korea will be tempered by sustained or marginally increased production in Viet Nam, Philippines, Thailand and particularly Indonesia. A strong driver of fertilizer demand is the fast expansion of palm oil production in Indonesia and Malaysia. Fruit and vegetable production is also increasing rapidly particularly in China where there is a large availability of cheap labor for labor intensive crops. The area planted to fruit and vegetables in China is currently equivalent to almost 40% of the area cropped to cereals. With average fertilizer application rates being about the double of those on cereals, fruits and vegetables are estimated to be responsible for about half of the increase in fertilizer demand. From a fertilizer demand point of view, the region is split between mature markets and developing markets. Mature markets are in Japan, the Republic of Korea, the Chinese Province of Taiwan and Thailand, all of which have declining or stable fertilizer demand trends. In these countries, recycling of organic sources and gains in fertilizer use efficiency are the main drivers of fertilizer demand. Fertilizer consumption is increasing quickly in all the other countries. In view of the large amounts of fertilizer applied, in particular in China, the efficiency with which fertilizers are used is an issue that deserves attention. Nitrogen use efficiency is declining as nitrogen fertilizer consumption increases faster than grain production. Yields and nitrogen use efficiency should be increased simultaneously. Fertilizer consumption in the sub region is forecast to increase by some 5.6 million tons growing by 1.7% annually over the outlook period. Estimated growth for specific nutrients is nitrogen (1.3%), phosphate (1.9%) and potash (3.3%) reflecting the need to move towards more balanced fertilizer use (Table 1). It is anticipated that fertilizer production in the sub region will increase to move from a deficit to a surplus situation For nitrogen and phosphate during the outlook period. The sub region will remain a net importer of potash (Annex 2,3,4). EUROPE Because its total fertilizer demand represents some 13% of global consumption, Europe remains an important region in the international fertilizer equation. However, total fertilizer consumption is expected to grow only fractionally at 0.6% per annum over the outlook period. Annual growth in consumption of nitrogen, phosphate and potash are forecast at 0.7%, 0.7% and 0.5% respectively. A predicted decrease in consumption in West Europe (-0.3%) will be offset by increases in Central Europe (1.6%) and in Eastern Europe and Central Asia (2.6%). The region will remain a major exporter of nitrogen and potash, but less so and decreasingly of phosphate (Table 9). WESTERN AND CENTRAL EUROPE On the policy side, the single farm payment (SFP) is now in force in all EU-15 states and is being

implemented progressively in the new member states. The reform of the sugar regime leads to a significant reduction of the sugar beet area, which will continue over the next three years. Strong support for bioenergy development should offset, at least partly, the

impact of the SFP and of the sugar reform. In response to current tight grain market conditions, the set-aside policy could possibly be abolished by the end of the outlook period. These policy changes are expected to influence the crop mix over the medium term. It is projected that the EU25 cereal area will remain fairly stable in the medium term. At the same time the area planted to oilseeds is likely to increase mainly in Western Europe to supply its biodiesel industry if current policy in this regard is maintained. Wheat and maize outputs are predicted to increase slightly in response to productivity gains. Environmental regulations on water, air and soil quality will probably have an increasing impact on farming practices. Farmers have been requested to further improve nitrogen use efficiency. This trend is likely to continue and to influence regional demand downwards in the medium term. Environmental regulations also mandate greater recycling of organic nutrient sources (e.g. animal manure and urban wastes) and implementation of nutrient budgeting which is likely to depress use of all nutrients particularly phosphate. Higher fertilizer prices, full implementation of the SFP and impact of environmental regulations are forecast to constrain fertilizer demand likely to increase slightly only because of demand growth in Central European countries. EASTERN EUROPE AND CENTRAL ASIA Over the medium term, the sub region is expected to moderately increase its cereal output and to strengthen its position as a regular net cereal exporter with Russia, Ukraine and, to a lesser extent, Kazakhstan being the main actors. The sub region should also improve its leading position as an exporter of sunflower. Rapeseed and sugar beet production is expected to increase significantly over the outlook period.

Fertilizer consumption is likely to be constrained by structural problems in the sub regions agricultural and wider economy. Ukraine has high agricultural potential but, the poor macroeconomic context and incomplete land reform hamper its development. Indebted farmers, low availability of credit, outdated machinery and weak infrastructure are some of the factors that limit regional agriculture and fertilizer use. The Russian government subsidizes the fertilizer price, interest rates on rural credit, cost of yield insurance, livestock and seed production among others. But, policy measures to develop agricultural production have had limited impact. Cereal and oilseed exports are handicapped by weak transport and port infrastructure. Significant investments in grain handling facilities have been made in Ukraine during recent years, offering good prospects for the future. With the prospect of commodity prices remaining high and with steady development of the sub regions potential to increase its market share of world grain and oil seed exports, regional fertilizer consumption is expected to increase by 0.6 million tons at 2.6% per annum over the outlook period; nitrogen 2.4%, phosphate 4.5%, potash 1.6% (Table 1). These needs will all be met from local sources as the sub region, essentially Russia, is a major producer and exporter of nitrogen, phosphate and potash. It is forecast that exports of nitrogen and potash will increase while those of phosphate will decrease during the outlook period. OCEANIA In recent years the Australian farming sector has experienced severe drought which more than halved domestic grain production. At the same time, Australian farmers faced poor terms of trade with low prices for animal products and high input costs. Agriculture in New Zealand is affected by a still unfavorable currency exchange rate, high input prices and high ocean freight rates. If dairy prices remain strong, a shift to dairy production should result in higher fertilizer application rates per hectare. Because farmers in Australia and New Zealand are not or little subsidized and because of environmental pressures, higher yields are likely to be achieved by using best management practices and improving nutrient use efficiency rather than through higher fertilizer application. Assuming improved weather, cereal and oilseed outputs are expected to recover progressively over the outlook period essentially due to higher yields. Dairy producers should benefit from high prices. During the outlook period total fertilizer consumption in the sub region is expected to increase by 0.5 million tons growing by 3.9% per year. Nitrogen, phosphate and potash consumption is forecast to grow by 4.9%, 1.7% and 2.1% respectively. Oceania depends on imports to meet deficits in its nitrogen and phosphate and all of its potash requirements (Table 10).

PART 4 Market dynamics Pakistan fertilizer

4.1 INTRODUCTION Pakistan has a total land area of 80 million ha. Of this, 22 million ha are used for crop production. About 18 million ha (80 percent) of the cultivated land is irrigated while the remainder is under dry farming. The range land, which covers over 50 percent of the total area of Pakistan, is a potential source of livestock development in the country. The total population is about 150 million. During the period from 1970/71 to 2002/03, the cultivated area increased from 16.62 million ha to 22.15 million ha, with an annual growth rate of 0.9 percent. During the same period, the population increased from 65 million to 150 million, registering a growth of 2.8 percent per annum. In consequence the per capita land availability decreased from 0.25 ha in 1970/71 to 0.15 ha in 2002/03. With a projected annual growth of 1.9 percent, the population will be around 190 million by the year 2015 Fertilizer consumption has increased threefold during the past 30 years. It reached one million nutrient tonnes in 1980/81, two million tonnes in 1992/93 and three million tonnes in 2002/03 (Figure 4). Nitrogen accounts for 78 percent of the total nutrients, phosphate for 21 percent and potash for less than one percent. The average N, P2O5, K2O nutrient ratio between 1999/2000 and 2001/02 was 1:0.28:0.01. 4.2 DEMAND-SUPPLY SITUATION The fertilizer industry in Pakistan has an oligopolistic structure. The product is differentiated and there are 9 firms in the industry. The entry or exit of a single player can affect pricing. There is no single dominant industry leader. The four largest firms are deemed to be price setters. However, government regulations and subsidies to farmers prevent these firms from exploiting their market power to arrange price setting agreements.

The current situation in the industry is one of excess demand. Currently, domestic supply capacity is 5.8mntpa (million tons per annum) and demand is 6.8mntpa. Overall industry capacity has shown a CAGR of 5.5% from CY90 to CY06 whereas sales have shown a

CAGR of 5.3% from CY90 to CY06 i.e. supply has grown faster than demand. Given the same pace, the situation is expected to reverse in the year 2010. The current excess demand is met by the Trade Corporation of Pakistan (TCP), which imports foreign fertilizer that it sells on to domestic producers and distributors at a subsidized rate. TCP only imports urea and local manufacturers sell it at low margins (between 2% and 3%) whereas DAP is imported by local manufacturers themselves and they earn good margins on it especially when international phosphate prices rise and local importers have significant amount of DAP inventory on hand. RAW MATERIAL GAS The fertilizer sector is the second largest consumer of gas after the power sector. Gas is used as fuel (fuel stock) and as the principal raw material (feed stock) in the production of fertilizers. Feedstock accounts for three-fourth of the total gas consumption. Progressive escalation of feedstock prices until June 06 led to a consistent rise in the cost of production. Due to relatively inelastic demand, supply shortage and high prices of imported products, the sector was able to transfer the impact of rising feedstock prices onto the end consumers. The prices for feedstock are set presently at PKR 91.52/mmbtu while the current prices for fuel stock are PKR 238.38/mmbtu at par with other industrial units. GoP, in the next fertilizer policy that is due shortly, is expected to continue with escalating prices of feedstock to achieve parity with the prices of fuelstock in a phased manner. GAS PRICING FOR THE FERTILIZER INDUSTRY 1. The government maintains the price of gas supplied as feedstock to the fertilizer sector66 at a level which is well below the value of natural gas to the economy.67 The intended objective of this subsidy is to maintain a low domestic price of fertilizer (and thereby reduce the input cost for agriculture), while mobilizing investments for fertilizer production. The price of gas for any fertilizer plant is set out in a contract between that plant and the gas supplier,68 which is signed at the time of approval of the project. For older plants (constructed in the 1960s and 1970s) the period for which the gas price was fixed was generally not defined in the contracts. More recently, the gas price was fixed in nominal terms for the first 10 years of operation of the planthowever, those contracts were inevitably extended upon expiry of the initial 10 years. Gas is, therefore, being provided at a substantially subsidized price, essentially for the entire life of the plant(s). 2. The government announced a new fertilizer policy in 2001, whereby an attempt was made to rationalize the price of gas for the fertilizer sector. Under this policy: (i) the price of gas for feedstock was to be raised (over 5 years) to the higher of US$1.10/MC For full parity with an international benchmark price; and (ii) a time path for adjustment of the feedstock price to achieve the intended parity was defined. However, the international price which is to be used as a benchmark (Middle East gas price, presently atUS$0.77/MCF) is not a widely known and independently published reference gas price; moreover, the intended upper limit for gas prices for fertilizer (US$ 1.10/MCF) remains significantly below the marginal cost of gas in Pakistan (about US$3/MCF). The proposed actions to rationalize the feedstock gas price are therefore not transparent, and it is not clear whether even the interim adjustments have been effected. 3. Furthermore, under the Policy, Mari gas field is largely dedicated for fertilizer production, with some allocation for power generation from Mari Deepthe existing field has an existing contract for gas supply to the Guddu power plant. Mari is the second largest gas field in Pakistan, its proven reserves are well in excess of the current and future requirements for fertilizer production, and the prospects for additional gas discoveries in deeper horizons appear to be high. Cumulative

production from this field over the last 30 years is about 2.3 TCF, and the balance recoverable reserves are about 5.4 TCFgas production from this field can therefore be significantly enhanced. However, 4.4 TCF are earmarked to the fertilizer industry (the value of these reserves Probably exceeds US$2 billion). The field is also close to a number of thermal power plants, which are using imported fuel oil, and could switch to natural gas at relatively low costs, with significant savings in foreign exchange and in power generation costs. The dedication of the Mari gas field for fertilizer production is therefore prima facie not justified on economic grounds. 4. Gas is sold to fertilizer plants at heavily subsidized prices at the expense of the power and industrial sector (whose gas tariffs are relatively high). It also deprives the government of additional GDS revenue which could be mobilized from the Mari Gas Company, and reduces the resources available to the T&Ds to expand their networks. At the same time, it is clear that other consumers are bearing the cost of the subsidy in the form of higher gas prices. Also, it cannot be demonstrated that the intended objectivelower fertilizer prices at the farm-levelis being achieved. Table 7.2.1 presents a comparison of the domestic retail price of fertilizer (urea) in Pakistan with the cost of imported fertilizer at the farm-gate. This table confirms that, for a number of years, the domestic retail price was higher than the cost of imports, and this high cost was borne by farmers. If the price of gas for feedstock had been at its economic level, the domestic retail price of fertilizer would have been substantially higher than the cost of imports. 5. The annual economic subsidy to the fertilizer industry has been estimated as follows: Estimated Subsidy to Fertilizer Industry

6. A substantial subsidy is thus being provided to the fertilizer industry (about Rs. 14 billion per annum), and the rationale for it remains to be established. Moreover, the gas sector is directly penalized by this policy, both in terms of revenue losses and through limits on the amounts of gas which can be produced from existing fields. Finally, the Policy does not appear to have resulted in a lower cost of fertilizer for farmers. The only beneficiaries of this Policy appear to be the fertilizer manufacturerswho not only provide very high returns to shareholders,69 but have also been able to expand (at times double) their production capacities within a period of 5-6 years. The economy (and the population in general) would thus be better served by importing more fertilizer, and allocating the gas for higher priority uses, such as for power generation and industry.

7. There is no doubt that phasing out the gas subsidies will have adverse consequences for the fertilizer industry. A number of steps could be taken by the government in this respect: Announce, at a fairly early stage, the policy decision to enhance the gas price to its full opportunity cost levelto allow sufficient advance notice to the industry; Adopt a phased program for discontinuing the subsidy, taking into account the life of the facilities and their efficiency; and Explore, jointly with the industry, avenues for rationalizing the cost structure of the industry, which could enable the industry to compete with imports. 8. The industry will also need to take strong actions to enhance its competitiveness, vis vis imports. These would have to include: Short-term measuresreducing costs and improve operational efficiency, and Medium- to longterm measuresincluding balancing and modernization of existing plants. 9. Given sufficient advance notice of the change in the policy, it is likely that some plants will have to shut down and others, located in the hinterland, might be able to remain competitive with respect to imports given the transportation advantage. The costs of these reforms should be measured against the benefits to the economy, particularly through the mobilization of additional resources as a result of subsidy phase down. DEMAND & SUPPLY In 2006 the urea demand, after witnessing consistently higher growth during the last few years, increased by a marginal 1% to 5.2mln tons. This was on account of higher base effect of last year and subsidy available on DAP during the later part of the year and onwards leading to a shift toward DAP. This is in line with the GoPs clearly articulated plan of balanced use of different fertilizers. The local demand of urea continued to remain in excess of local production even though local production was 2.3% higher on YoY despite shutdowns by some producers. The shortage in supply was met through higher cost imports. PRICES Urea prices have been relatively stable since June 06. Since most of the local consumption of DAP is fed by imports, its prices have been changing in line with the international market dynamics. Although the GoP has recently increased the subsidy on DAP from PKR400 to PKR470 per 50 Kg bag, this has only acted as a buffer against increasing price trend of the international market. Nonetheless, given the fixed subsidy on DAP, the local demand pattern remains exposed to the price dynamics of international market. Therefore, a hike in prices beyond a certain level is expected to dampen the local demand of DAP. International urea prices averaged around twice as high as local prices. With rising imports, the government has to bear the major cost of the imported product, which is procured at international market prices and sold to the final consumer at subsidized rates. The current import urea price is around $ 320, whereas current domestic urea price is ~ $ 160/Ton. International urea prices, though currently on the rise, are projected to decrease in the long run the World Banks forecast reveals that urea prices are likely to remain around $ 200/Ton while British Sulphur projections suggests that average urea prices (2010-2023) could slide to $ 168/Ton. The prices of local urea are, therefore, expected to remain firm and margins are likely to remain stable.

4.3INDUSTRY OUTLOOK Presently, industry capacity stands at 5.8mntpa. Domestic demand is 6.8mntpa. Fertilizer demand is expected to grow at a CAGR of 5.25% from 2007 to 2012. As for capacity, the three major players have planned following capacity expansion plans. These, as well as others, will take overall industry capacity to 7.5mntpa in the year 2010, at which time Pakistans fertilizer industry will face excess supply situation. Exports may become possible if such a situation arises, which will have special implications for the fertilizer policy as we shall discuss later.

Seasonal variation:
Rabi : consumption and production(across years) Kharif : consumption and production

There are two seasons of crops in Pakistan Rabi and Kharif. Rabi refers to the crops for which seeds are sown in September-October and harvested in March-April, whereas, kharif seeds are sown in March-April and harvested in September-October. Urea is needed in the middle of these crops, therefore, in the months that fall between sowing and harvesting urea off take increases. DAP fertilizer is mainly used at the time of sowing the seeds. As far as the production of fertilizer in Kharif and Rabi is concerned it is more or less independent. However, in terms of consumption Rabi needs a lot of fertilizer as major crops of Pakistan (Rice, Wheat and Sugarcane) grow in Rabi season and the weather conditions are more suitable to use fertilizer due to minimum rainfall. In the Kharif season only cotton is grown and that does not require much fertilizer as compared to other crops.

4.4Market players The tables below show industry concentration measures. The 4-firm concentration ratio, which is the sum of the market shares of the four largest producers, is 94.5%. The market is dominated by the four largest firms. Entry by a new firm is unlikely to significantly decrease concentration. The Herfindahl Index (HI) is 3,247. The HI is the sum of squared market shares in the industry. Values of HI between 1,000 and 1,800 are considered to be moderately concentrated. An HI of 3,247 indicates that the market is very highly concentrated. Hence, both measures indicate a high level of concentration in the industry, with the majority of the market belonging to the four largest firms. Also mergers and acquisitions are unlikely in the industry, therefore, it is expected that manufacturers will grow through expansions.

Fauji Fertilizer Company (FFC) is currently undergoing an expansion to improve capacity at its urea Plant II by 330 ttpa or 16% by the end of 2007. Fauji Fertilizer Bin Qasims (FFBL) 2007 expansion increased capacity at its ammonia plant by 99 ttpa by 24th June 2007. This entailed a 60 day shutdown of the Urea plant in 2Q07 and a planned 60 day shutdown of the DAP plant in 4Q07 and 1Q08. Engro Chemicals Limited (ENGRO) intends to install a 1.3mntpa urea plant by CY09. Fatima Group is also in the process of entering the industry, by building a plant with a capacity of 1.4 mtpa by CY09. FFBL is the only domestic producer of DAP, a fertilizer which is required in the planting of new crop. This is a significant advantage for FFBL. Currently FFBLs share of the DAP market is 30%, with 70% of the market being supplied with imports.

Fertilizer industry is expected to face an over capacity situation in the next few years after new plants of Fatima and Engro will come online, therefore, other companies are diversifying in order to grow. Fauji Fertilizer Company Limited (FCC) has recently approved a 50MW wind power project and is evaluating the feasibility of a US$500mn LNG project. Recently, FFBL has invested PRs1.5bn in a 175MW thermal energy firm. Engro is in the process of setting up a 220MW power plant which is expected to come online in 2010.

4.5PRODUCT LINE OF FERTILIZER IN PAKISTAN

Nitrogen 46% (Urea) Calcium Ammonium Nitrate (26% Nitrogen) (CAN) Nitrophas (23% Nitrogen and 23% Phosphorus) (NP) Single Super Phosphate, (18% Phosphorus) (SSP) Di-Ammonium Phosphate (18% Nitrogen and 46% Phosphorus) (DAP) Sulphate of Potash (SOP) - (Potash fertilizer) CALCIUM AMMONIUM NITRATE calcium ammonium nitrate are the most commonly used straight nitrogen fertilisers in Europe, accounting for 43% of the total nitrogen used for fertilisers. They are both produced in a similar way; carbonate can be added as a last step to produce calcium ammonium nitrate. The environmental impact, fossil energy input and land use from using gasified biomass (cereal straw and short rotation willow (Salix) coppice) as feedstock in ammonium nitrate production were studied in a cradle-to-gate evaluation using life cycle assessment methodology. The global warming potential in the biomass systems was only 2230% of the impact from conventional production using natural gas. The eutrophication potential was higher for the biomass systems due to nutrient leaching during cultivation, while the acidification was about the same in all systems. The primary fossil energy use was calculated to be 1.45 and 1.37 MJ/kg nitrogen for Salix and straw, respectively, compared to 35.14 MJ for natural gas. The biomass production was assumed to be self-supporting with nutrients by returning part of the ammonium nitrate produced together with the ash from the gasification. For the production of nitrogen from Salix, it was calculated that 3914 kg of nitrogen can be produced every year from 1 ha, after that 1.6% of the produced

nitrogen has been returned to the Salix production. From wheat straw, 1615 kg of nitrogen can be produced annually from 1 ha, after that 0.6% of the nitrogen has been returned.

NITROGEN UREA 46 A nonmetallic element that constitutes nearly four-fifths of the air by volume, occurring as a colorless, odorless, almost inert diatomic gas, N2, in various minerals and in all proteins and used in a wide variety of important manufactures, including ammonia, nitric acid, TNT, and fertilizers. Fertilizer is a substance added to soil to improve plants' growth and yield. First used by ancient farmers, fertilizer technology developed significantly as the chemical needs of growing plants were discovered. Modern synthetic fertilizers are composed mainly of nitrogen, phosphorous, and potassium compounds with secondary nutrients added. The use of synthetic fertilizers has significantly improved the quality and quantity of the food available today, although their longterm use is debated by environmentalists. Like all living organisms, plants are made up of cells. Within these cells occur numerous metabolic chemical reactions that are responsible for growth and reproduction. Since plants do not eat food like animals, they depend on nutrients in the soil to provide the basic chemicals for these metabolic reactions. The supply of these components in soil is limited, however, and as plants are harvested, it dwindles, causing a reduction in the quality and yield of plants. Fertilizers replace the chemical components that are taken from the soil by growing plants. However, they are also designed to improve the growing potential of soil, and fertilizers can create a better growing environment than natural soil. They can also be tailored to suit the type of crop that is being grown. Typically, fertilizers are composed of nitrogen, phosphorus, and potassium compounds. They also contain trace elements that improve the growth of plants. The primary components in fertilizers are nutrients which are vital for plant growth. Plants use nitrogen in the synthesis of proteins, nucleic acids, and hormones. When plants are nitrogen deficient, they are marked by reduced growth and yellowing of leaves. Plants also need phosphorus, a component of nucleic acids, phospholipids, and several proteins. It is also necessary to provide the energy to drive metabolic chemical reactions. Without enough phosphorus, plant growth is reduced. Potassium is another major substance that plants get from the soil. It is used in protein synthesis and other key plant processes. Yellowing, spots of dead tissue, and weak stems and roots are all indicative of plants that lack enough potassium. Calcium, magnesium, and sulfur are also important materials in plant growth. They are only included in fertilizers in small amounts, however, since most soils naturally contain enough of these components. Other materials are needed in relatively small amounts for plant growth. These micronutrients include iron, chlorine, copper, manganese, zinc, molybdenum, and boron, which primarily function as cofactors in enzymatic reactions. While they may be present in small amounts, these compounds are no less important to growth, and without them plants can die. Many different substances are used to provide the essential nutrients needed for an effective fertilizer. These compounds can be mined or isolated from naturally occurring sources. Examples include sodium nitrate, seaweed, bones, guano, potash, and phosphate rock. Compounds can also be chemically synthesized from basic raw materials. These would include such things as ammonia, urea, nitric acid, and ammonium phosphate. Since these compounds exist in a number of physical states, fertilizers can be sold as solids, liquids, or slurries.

SINGLE SUPER PHOSPHATE

Single Super Phosphate (SSP) Fertilizer industry is the pioneering fertilizer industry in the country and the first SSP plant is said to have been established by EID Parry in the year 1906. Manufacturing of SSP is based on perhaps the simplest chemical reaction amongst chemical fertilizer industry. The main raw materials required are rock phosphate and sulphuric acid. SSP is a straight phosphatic multi-nutrient fertilizer which contains 16% water soluble P2O5, 12% sulphur, 21% calcium and some other essential micro nutrients in small proportions. SSP, which is a poor farmer's fertilizer (price-wise), is an option to optimise the use of phosphatic fertilizers. It also helps to treat sulphur deficiency in soils (40% Indian soil sulphur deficient) as well for further enhancement of yields at the least cost. In various crops, which require more of sulphur and phosphate like oilseeds, pulses, sugarcane, fruits and vegetables, tea etc, SSP is an essential fertilizer. Advantages of SSP Fertilizer: Provides 15% of total phosphate requirement of the country. Lowest price per kg, preferred by small and marginal farmers. Multi-nutrient fertilizer containing P2O5 as primary nutrient and Sulphur and Calcium as secondary nutrients. It is the cheapest source of Sulphur for the soil. Only phosphatic fertilizer which can utilize Indian rock phosphate deposits. Least foreign exchange per unit of P2O5. Utilizes acid effluent from other chemical industry and thus reduces nation's cost of effluent disposal. After decontrol of fertilizers in August 1992, the Government of India has been implementing Concession Scheme for decontrolled phosphatic and potassic (P&K) fertilizers. SSP is one the decontrolled fertilizers covered under the Scheme. The administration of the Concession Scheme was transferred from Department of Agriculture and Co-operation (DAC) to Department of Fertilizers (DOF) with effect from 1.10. 2000. During the period of administration of the Scheme by DAC, 106 SSP units were listed under the Scheme. In addition, requests from 10 units were under consideration of DAC for induction under the Scheme. The DOF, with a view to ensuring availability of quality SSP to farmers and in order to minimize possibility of sale of non-standard SSP to farmers, modified the guidelines for the Scheme so as to promote use of specified grades of rock phosphate purchased from notified sources for manufacture of SSP. The Technical Audit and Inspection Cell (TAC) constituted under the Scheme is required to conduct first time and six-monthly inspections of SSP manufacturers for ensuring usage of specified grades of rock phosphate from sources notified by the DOF from time to time. For achieving the underlying objective, the Scheme initially provided for the facility of 80% `On-account' payment to those manufacturers of SSP who used specified grades of rock phosphate. For a more effective control on outgo of concession on sales of SSP as well as availability of quality SSP, under the guidelines issued on 5.8.2002 for being eligible to claim concession on sales of SSP the inspections by Technical Audit and Inspection Cell (TAC) and use grades of rock phosphate notified by the Department of Fertilizers has been made mandatory. As on 1.1.03, total 66 SSP units with an annual installed capacity of around 62.0 lakh MT are eligible to avail of the facility of claiming concession under the Scheme on sales of SSP.

SULPHATE OF POTASH Potassium Sulphate or Sulphate of Potash (SOP) is a two-nutrient fertilizer containing 50% K2O equivalent, and 18% Sulphur. Potassium Sulphate is a water-soluble, neutral salt, and has no effect on soil acidity or alkalinity (pH). Potassium and Sulphur are essential elements vital to many functions within the plant. Potassium is an immobile nutrient in the soil, moving slowly and for only short distance (by diffusion) through moisture films on soil particle surfaces. It can leach in very sandy or organic soils, but seldom leaches out of the crop root zones. Nearly every aspect of plant growth is dependent upon an adequate supply of Potassium (K). Potassium helps to improve plants' disease resistance, tolerance to water stress, winter hardiness, tolerance to crop pests, and increased efficiency of (N) use. Providing adequate amounts of Potassium in fertilizer to meet current crop needs and to build soil (K) levels is critical to sustain profitable crop production. This essential nutrient is required in greater amounts than any other nutrient except (N) and some crops take up more (K) than (N). Only when the soil is adequately supplied with (K) can optimum crop production be sustained. Sulphur fulfils several important functions in the plant. There can be no protein without (S). This nutrient is needed to make chlorophyll, enzymes, vitamins and other essential compounds in the plant. Sulphur deficient plants are often uniformly chlorotic, stunted, thin-stemmed, and spindly. Sulphur is present in SOP in the sulphate ion (SO 4) form. The sulphate is metabolized by the plant, and the (S) becomes an integral part of plant compounds, vital to plant metabolism.

4.6 Fertilizer Policy

PURPOSE: Pakistans yield per hectare is very low as compared to other countries. This is a concern for policy makers as Pakistans GDP is heavily dependent upon agricultural output. Further-more, a large part of industrial production is also dependent upon agriculture (such as cotton ginning, weaving, sugar, fertilizers etc.). Therefore, in order to continue with the economic expansion; the government is committed to a long term policy of supporting farmers in improving agriculture output. Several measures have been taken to increase the countrys agriculture productivity. Such as: Construction of dams Irrigation plans Gas subsidy on fertilizer 4.7 FUTURE The government is likely to extend its subsidy on feedstock gas in its next policy. However, the crucial question is what will happen when the industry experiences excess supply situation. In such a situation manufacturers will no doubt seek to export the surplus fertilizer production. In such a case, the government is likely to enforce a condition which will not allow manufacturers to gain undue competitive advantage internationally because of their low feedstock costs. This is because the spirit of the Fertilizer Policy is the welfare of farmers and not fertilizer producers. It is possible that the government may impose duties which will in effect nullify the effect of feedstock subsidy only on fertilizer which is exported.

INTRODUCTION Engro Chemical Pakistan Limited (ENGRO) urea plant is located at Daharki in the Sindh province. It produces 975,000tn of urea per annum which is marketed under brand name of Engro. The principal activity of the Company is manufacturing and marketing of fertilizers. The company was incorporated in 1965 as Exxon Chemical Pakistan Limited and formerly part of the global giant Exxon. In 1991 the Employees of Engro, in partnership with leading international and local financial institutions bought 75% of Exxons equity in 1991 and the company was renamed as Engro Chemical Pakistan Limited. All the subsidiaries and joint ventures of ENGRO are not separately listed on the stock exchange. Major share holder of ENGRO is the Dawood Group which holds 42% shares of the company. Other share holders are local and foreign institutions and the general public. The employees, their family members and the Employees Trust of the Company collectively hold approximately 12% shares of the company. ENGRO has a market share of 19% in the local fertilizer industry.

ENGROs production capacity of urea was 270,000tn in 1991 which rose to 970,000tn by the end of CY06 which is its highest production ever, however, capacity utilization decreased from 107% in 2005 to 99% in 2006. ENGRO VOPAK TERMINAL LIMITED As part of Engros growth and diversification plans, Engro established a US$60mn 50:50 Joint Venture company named Engro Vopak Terminal Limited (EVTL) in 1995, between Engro and Royal Vopak (formerly Royal Pakhoed), a Netherland based company and is amongst the largest terminal storage companies in the world. The total cost outlay of the company is US$60mn and it owns liquid chemical and LPG terminals at Port Qasim near Karachi with a total capacity of 69,000 cubic feet. EVTL deals in handling and storage of bulk chemicals. The company has a market share of about 75% in the imported chemicals market. ENGRO ASAHI POLYMER & CHEMICALS LTD

A joint venture of 50:30:20 was made between Engro Chemical, Asahi Glass Company (Japan) and Mitsubishi Corporation named Engro Asahi Polymer & Chemicals Ltd. to develop a Polyvinyl Chloride (PVC) resin project at Port Qasim, Karachi, with an initial capacity of 100,000tn per year based on imported Vinyl Chloride Monomer. The project has successfully been completed and commenced production in November 1999. However, Asahi Glass exited the company in end-2006 and ENGRO bought its 30% stake, which increased ENGROs holding in the company to 80%. Production for the year was 97,000 tons as compared to 91,000tn last year.

SALES ENGRO CHEMICALS PAKISTAN LIMITED Engro sales revenue for the year 2006 declined by 3.68% to PRs17,602mn as compared to 2005 which was PRs18,276mn.

\ EXPANSION PLANS Engro Chemicals Pakistan limited Urea Expansion Project: Urea plant is being expanded and the planned expansion is expected to be Worlds largest single train Urea Plant with a capacity of 1.3mntn per annum and also the largest capital investment by a private sector Pakistani Company in the corporate history of Pakistan. The new plant is expected to commence operations in first half 2010. Engro market share for Urea is expected to increase from 19% to 35% in 2011 when new plant will be operational for full year. Expansion is expected to cost around US$1bn which will be financed with a mix of debt/equity financing.

In 1QCY07, 15% right shares were announced amounting to PRs31bn.

ENGRO ASAHI POLYMER & CHEMICALS LTD EAPCL is going to expand its plant which involves expanding PVC (poly vinyl chloride) resin production capacity by 50,000 tons to a total of 150,000 tons and back integration by setting up an EDC/VCM plant and a Chlor alkali plant. ENGRO VOPAK TERMINAL LIMITED Engro Vopak is in the process of expansion at a cost of US$30mn which involves building Ethylene storage facility for Engro Asahi and is a part of Engro Asahis expansion of PVC and backward integration.

The largest milk production center in Pakistan. This plant will have a UHT milk processing capacity of 300k liters per day. EFL is also diversifying its product portfolio from 3 to 5 brands by the end of this year and is planning to increase the number of products to 9 by CY11. TERMINAL GROWTH RATE Engro is expected to be one of the best growth stories in the coming times in the Pakistan market. It is not only expanding their urea manufacturing capacity from 0.9mntpa to 2.2mntpa but they are also exploiting the other unexplored markets like Vopak terminal and Asahi Polymer. On the other hand its food business is also a star business line. Therefore, our growth rate assumption for ENGRO is the highest in the sector. SHAREHOLDING STRUCTURE The total outstanding shares of ENGRO are 168,234,000. The free float of the company is 28.45%. GROSS SHARE HOLDINGS Dawood Hercules Chemical Limited (DHCL) owns 42% share in ENGRO. DHCL is one of the four major fertilizer companies in Pakistan

Introduction FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The initial authorized capital of the company was 813.9 Million Rupees. Additionally, FFC has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited). FFC commenced commercial production of urea in 1982 with annual capacity of 570,000 metric tons. Through De-Bottle Necking (DBN) program, the production capacity of the existing plant increased to 695,000 metric tons per year. Production capacity was enhanced by establishing a second plant in 1993 with annual capacity of 635,000 metric tons of urea. FFC participated as major shareholders in a new DAP/Urea manufacturing complex with participation of major international/national institutions. The new company Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited) commenced commercial production with effect from January 01, 2000. The facility is designed to produce 551,000 metric tons of urea and 445,500 metric tons of DAP. In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated at Mirpur Mathelo. This acquisition at Rs. 8,151 million represents one of the largest industrial sector transactions in Pakistan Fauji Fertilizer Company was incorporated as a private limited company in 1978 by the joint venture of Fauji Foundation and Harldor Topsoe A/S of Denmark. Its share capital is PRs3bn along with a PRs1bn stake (50.88%) in the Fauji Fertilizer Bin Qasim Limited (FFBL).

Plant and Production Plants I & II (Goth Machhi): The Plants delivered stellar performance during the year with aggregate "Sona" urea output of 1,570 thousand tonnes despite maintenance turnarounds of both plants. Plant I delivered 809 thousand tonnes operating at 116%of design while Plant II produced 761 thousand tonnes of urea at 120% of designed capacity. BMR of Plant I and II at Goth Machi was being prepared. Unit 1 at Goth Machi was contributing 37 per cent and Unit II was making 32 per cent contribution to the total capacity. Energy revamp project at Plant-I was successfully and safely implemented during Turnaround 2006 resulting in energy conservation estimated at over Rs 50 million per annum. Plant II Debottlenecking study report on aMDEA section has been finalized with licensor, BASF, for 115% and 120% plant load and contract is under review especially for performance guarantees & liabilities. Plant III (Mirpur Mathelo): Highest ever daily urea production of 2.2 thousand tones was achieved in January 2006 through technical excellence, dedication and coordinated team work. Total output by the plant was recorded at 726 thousand tonnes, the highest ever, which represented 126% of design and improved by 2 % over last years production. Basic Engineering Design Package of Plant III Debottlenecking project has been approved in consultation with the licensor M/s Snamprogetti, Italy. Work on detailed engineering and ordering of equipment/ material is in progress to improve plant profitability through capacity enhancement and reliability improvement. The total production capacity of FFC (plant I, II and III) is 1.89mntpa which may be broken down as follows:

Sale FFC is the market leader in sales of local and imported urea. Its total sales in 2006 were recorded at PRs29.95bn, which was the highest level ever and 18% higher than in 2005. FFC sales of imported urea were recorded at 73,000tn in 2006.

FFC will conduct De-Bottlenecking in April 2008 that will increase its urea capacity. In view of the current excess demand situation, this will allow the company sales to boost up in near future. Current sales price of urea is PRs540 per bag of 50kg

Cost Reduction Both of FFCs plants at Goth Machhi are fully depreciated, thus implying a very low depreciation charge. It will conduct De-Bottlenecking at Plant III in April 2008 and the process will take one month. Through De-Bottlenecking the company will reduce wastage and cut cost of production. Plant I and II are also producing more than their designed capacity. FFC acquired Pak Saudi in 2002. Before acquisition the plant used straight line depreciation at 10% rate for 10 years. FFC revalued the plant after acquisition, and revised depreciation charge at 5% for 20 years using straight line depreciation. At Plant II and Plant III FFC is using digital control system to control the over all process of urea production which reduces the production cost and wastages. At Plant I analog control system is being used, and conversion to digital control system is in process.

FFC CAPACITY EXPANSION PROJECT Fertiliser companies are pursuing plans to expand capacity in order to benefit from higher urea demand. FFC is currently conducting de-bottlenecking of its existing plant III (situated at Mirpur Mathelo), which, analyst estimate would add between 60,000 to 75,000 tons to its total urea capacity. Analysts reports suggest that the exercise would be completed by the end of 2007. Unit 3 Mirpur Mathelo contributes 574,000 tons, representing 30 per cent to the capacity. Estimated cost of the project amounts to somewhere around Rs2bn. With the completion of this expansion, total capacity of the company would increase to 1,964,000 tons. Market share FFC is the largest market shareholder with a share of 50% in urea sales. Moreover, the combined market share of FFC and FFBL is 63% in urea. FFC does not produce any other

Correlation between FFC and FFBL As per our valuation, 33% of FFCs target price represents the value of its investment in FFBL. Hence, FFBLs performance impacts one third of FFCs performance. Therefore, overa period of time we have witnessed that the two companies share price is highly correlated .

INTRODUCTION Fauji Fertilizer Bin Qasim (FFBL) was established on November 17, 1993 and was initially named FFCJordan. The major shareholders were Fauji Fertilizer Company (FFC), Fauji Foundation (FF) and Jordan Phosphate Mines Co. (JPMC) with share holdings of 30%, 10% and 10% respectively. The Company was listed at the Karachi Stock Exchange in May 1996 and started its production in January 2000; however, due to some technical, financial and managerial problems, the company reported a loss of PRs6.5bn and ceased operations. In the year 2003 JPMC sold all its equity in the company and resultantly, raw material supply agreements with Jordan also ceased. FFC Jordan was then renamed as Fauji Fertilizer Bin Qasim (FFBL). Presently, FFBL has total share capital of PRs9.341bn. Major shareholders of FFBL are Fauji Fertilizer Company (FFC) and Fauji Foundation (FF) with 50.88% and 17.29% of total shares respectively. FFBL announced its first dividend in the year 2004 and achieved ISO certification in March 2006. CAPACITY AND PRODUCTION FFBL deals in Granular Urea and Di Ammonium Phosphate (DAP). It is the only producer of DAP in the country. For DAP, FFBL imports phosphorous from Morocco. Granular Urea is available as Sona Urea and DAP as Sona DAP in the market. It has manufacturing facilities at the Eastern Zone of Bin Qasim, Karachi which is beneficial in terms of freight charges for raw material imported from Morocco for manufacturing DAP. The total capacity of FFBLs plant at Bin Qasim is 1,670tpd for Granular Urea and 1,350tpd for DAP. However, FFBL usually produces in excess of its installed capacity. MARKET SHARE The total production capacity of Pakistan is 5.655mntpa. While FFBL production capacity is 0.627mntn for Urea and 0.495mntn for DAP. This translates into 13% market share of Urea and 31% market share of DAP for FFBL.

PAKISTAN MARCO PHOSPHOR S.A (PMP), MOROCCO A group of Morocco, Office des Cherifienes Phosphates (OCP), with US$95mn entered in a joint venture agreement with Fauji Foundation (FF), Fauji Fertilizer Company Limited (FFCL) and Fauji Fertilizer Bin Qasim Limited (FFBL). The agreement was made in September 2004 to form Pakistan Marco Phosphor S.A (PMP) in Morocco. This project will be able to produce 0.375mntn of phosphoric acid yearly. It will consume 1.3mntpa phosphate rock and 3.70mntpa Granular Sulphur. PMP project is expected to cost around 2,030 Moroccon Dirhams (i.e.US$240mn) and is expected to come online by the end of the year 2007. Through this arrangement FFBL will be able to get phosphate, which is the main raw material for the production of phosphate. FOUNDATION POWER COMPANY (DHARKI) LIMITED (FPCDL) FPCDL is a power plant of 175 MW. It is an associated company that has been established by Fauji Foundation. The project cost will be US$196.472mn. FFBL would invest PRs1.5bn in the project. This has been approved by National Electric Power Regulatory Authority (NEPRA). Contracts with Engineering, Procurement and Construction (EPC) and Power Purchase

Agreement have been finalized. The project will be completed by the mid of 2009.

INVESTMENT IN FAUJI CEMENT COMPANY LIMITED (FCCL) EXPANSION PROJECT FFCL is an associated company of FFBL and it is in the process of expansion. FFBL has decided to invest PRs300mn in expansion project and this will allow it to become 2.8% share holder in FCCL. Fauji Cements expansion of 2.1mntn brown field plant is expected to come . Online in FY10. Currently FCCL has 1.1mntn capacity and a market share of 3% in terms of capacity and 4% in terms of sales. However, its decision to expand in the over capacity situation prevailing in the cement industry is questionable. More details of the investment and its returns are expected to become public once FCCL formally announces their target capital structure and mode of funding for the expansion. FUTURE PLANS FFBL has plans to conduct BMRE on their existing DAP plant to increase its capacity by 50%. Apart from that they also have plans to invest in a grains terminal. TERMINAL GROWTH RATE Due to the expected BMRE in the DAP plant expected in the 4QCY07 and the rising trend in the international DAP prices we expect FFBL to post a good terminal growth rate. It is also expected that if their recent investment PMP starts operations, they may announce another expansion of a new DAP plant and FF, FFC and FFBL might increase their share holding in the PMP project. SHAREHOLDINGS Total outstanding shares of FFBL are 934,110,000 out of them 20.27% is free float. The major shareholder of FFBL is Fauji Fertilizer Company (FFC) with 50.88% shares and Fauji Foundation (FF) has 17.29% shares. Introduction Fauji Fertilizer Company was incorporated as a private limited company in 1978 by the joint venture of Fauji Foundation and Harldor Topsoe A/S of Denmark. Its share capital is PRs3bn along with a PRs1bn stake (50.88%) in the Fauji Fertilizer Bin Qasim Limited (FFBL). Plant and Production The total production capacity of FFC (plant I, II and III) is 1.89mntpa which may be broken down as follows

Sectors Agriculture Major Minor Livestock Fishing Forestry total fertilizer use note

1999-00 923,609 342,200 125,679 417,120 15,163 23,447

4578.6
3,562,018 295,815 31,724 3,826,109 -47,956 3,514,062 0.985686 12 0.984134 778 0.978570 736 0.142844 022

2000200120022003200420052006200701 02 03 04 05 06 07 08 903,49 904,43 941,94 964,85 1,027,4 1,092,0 1,132,0 1,148,8 9 3 2 3 03 98 41 71 308,47 300,91 321,50 327,05 385,05 370,00 400,79 388,90 4 1 5 7 8 5 8 4 121,67 117,21 119,44 124,12 125,99 126,45 124,85 130,96 3 7 6 1 3 7 7 7 433,06 448,96 460,49 473,77 484,87 561,50 577,37 599,21 6 8 5 1 6 0 8 7 14,715 12,901 13,346 13,611 13,691 16,540 16,606 18,431 25,571 24,436 27,150 26,293 17,785 17,596 12,402 11,352 4821.6 5055.7 5189.3 5313.2 5438.3 5665.9 5538 4259 3,632,0 91 301,92 0 32,050 3,901,9 61 -47,285 3,584,8 06 3,745,1 18 312,88 6 30,227 4,027,7 77 22,594 3,767,7 12 3,922,1 04 355,32 3 54,451 4,222,9 76 127,05 0 4,049,1 54 4,215,6 08 372,02 9 53,488 4,534,1 49 90,721 4,306,3 29 4,593,2 30 358,45 5 69,889 4,881,7 96 88,766 4,681,9 96 4,860,4 76 395,44 0 72,545 5,183,3 71 84,343 4,944,8 19 5,192,4 50 400,97 7 98,300 5,495,1 27 82,878 5,275,3 28 5,492,7 88 413,71 7 84,377 5,822,1 28 103,96 1 5,596,7 49

GDP(fc) Indirect Taxes Subsidies GDP(mp) income from adrod GNP(fc)

correlation gbp /(fc) mp fc correlation b/w auricular & fertilizer

0.132105 159

Annex 2 Explanatory note on supply and Demand balances New Protocol In October 2006, the FAO/Industry Working Group adopted anew protocol for the preparation of its fertilizer nutrient supply/demand balances. The work was developed by the IFA Production and International Trade Committee in 2005/06. The main objective of this revision was to take into account the resilient surplus between production and consumption and update the parameters used in the computation of supply and losses. The new definitions and their criteria are defined as follows: Supply : - Total supply capacity (or just capacity) is defined as the maximum production achievable and is computed from the capacity ,multiplied by the highest operating rate achieved over the previous five years. For new plants, a ramp-up of the operating rates was defined for the first three years of operation, using the following levels: 85%, 90% and 100%. - Supply refers to the projected amount actually made available. Demand : - Fertilizer demand is provided on a calendar year basis. Demand and consumption are used interchangeably. - Net non-fertilizer demand excludes the use of products which are recovered as by-products from industrial processes and then used as fertilizers. - Losses occur at both the production and consumption points; their magnitudes have been estimated at between 2.5% (nitrogen and phosphate) and 5% (potash) of total fertilizer and non-fertilizer demand. - Unspecified usages account for the historical residual tonnage from the production/consumption balances. This tonnage could be used either in fertilizers or in non-fertilizer products and would equate to about 4% of the other uses (nitrogen). - Total demand includes consumption plus non-fertilizer demand and others. - For phosphate, total demand includes H3PO4 fertilizer demand plus nonfertilizer H3PO4 demand. There is a difference between consumption expressed as P2O5 and total demand expressed as H3P04 because consumption includes phosphate fertilizers manufactured from non-H3PO4 sources. The relative shares of non-H3PO4 phosphate fertilizers in total supply vary among regions and subregions and are expected to decline over time. P2O5 consumption is considered to be a suitable proxy for fertilizer actually applied by farmers.