4 The importance of nitrogen

• Globally, nitrogen fertilizer sales increased by 2.0%, from 101.9 MMT in 2009 to a preliminary estimate of 103.9 MMT in 2010. It is expected that global consumption in 2011 will grow by 2.4% to 106.4 MMT
• The industry continues to consolidate, with CF Industries and Terra merging in March 2010, OCI completing its acquisition of DSM Agro, while other potential transactions remain a possibility. In Ukraine, Dmitry Firtash continued to lead the consolidation of the fertilizer industry and similar trends can also be expected with nitrogen assets in Russia. All the while, several European fertilizer companies remain on the market
• Prices showed signs of a sustainable recovery in the second half of 2010, averaging USD 316/tonne for prilled urea (FOB Black Sea), vs. USD 320/tonne and USD 245/tonne in the second half of 2007 and in the second half of 2009 respectively
• The main new urea export-oriented projects coming on stream in 2011 are Sorfert (Algeria) 1.2 MMT and Qafco V (Qatar) 1.27 MMT. Both are expected to come on line in the second half of 2011.The import-substituting 1.27 MMT Engro project (Pakistan) is also expected in that period
• The Chinese government extended its higher export tax period by another two months in 2010-2011 in a bid to increase domestic supply, prevent price increases and curb export trade. These actions resulted in a tightening of Chinese urea supply on the global markets
• As the lion’s share of Chinese urea is made from coal, rising global coal prices will lead to increased production cost for Chinese urea producers and worsening positions on the global curve
• As emissions and energy controls become tighter in China, the world’s largest nitrogen fertilizer producer, local authorities have temporarily shut down several coal-based urea production facilities due to the significant negative environmental impact. This prompts local producers to increase investment expenditures in clean and energy-efficient technologies
• EuroChem’s Novomoskovskiy Azot became the largest granular urea production facility in Europe with the launch of its urea-4 shop in August 2010, bringing total plant capacity to 4,350 tonnes/day

Strengths

• Diversified customer base, including solid foothold in home markets
• Economies of scale
• Low-cost production mainly due to relatively low natural gas prices
• Production flexibility helps adapt to demand and maximise margins
• Convenient logistics and proximity to own transhipment terminal (for Nevinnomysskiy Azot)
• Secure, long-term supply of gas

Weaknesses

• Age of equipment leads to relatively high maintenance costs and restricts maximum efficiency improvements
• Transportation costs are relatively high at Novomoskovskiy Azot due to location

Opportunities

• Develop own natural gas reserves in Russia to partially supply production plants
• Build or buy significant new ammonia capacity in a region with access to low-cost natural gas
• New value-added and premium product initiatives to add flexibility, lower gas content
• Further incremental efficiency improvements are still possible at both plants
• Domestic Russian and CIS market holds significant growth potential
• Reduction/elimination of import tariff barriers in key target markets

Threats

• Import trade barriers exist in several target markets
• Falling/low natural gas prices increase relative competitiveness of previously marginal and unprofitable producers (increase in competitive supply)
• Gradual domestic increase in gas and energy costs
• New ammonia capacity in low-cost gas regions (e.g. the Middle East, North Africa) may unfavorably alter the supply/demand balance in the sector