5 The importance of phosphates

• Globally, phosphate fertilizer production recovered in 2010 after an especially challenging year in 2009, increasing 7.9% to an estimated 39.0 MMT of nutrient (P₂O₅)
• The combination of globally low phosphate fertilizer inventory levels, strong global demand, and encouraging farm economics helped prices recover to above historical averages in the second half of 2010, averaging USD 523/tonne for DAP (FOB Baltic), compared to USD 461/tonne and USD 312/tonne in the second half of 2007 and the second half of 2009 respectively
• Environmental issues surrounding phosphate mining in Florida forced Mosaic to import expensive Moroccan phosphates
• Significant capacity additions: Ma’aden in Saudi Arabia and OCP in Morocco
  • Ma’aden is not expected to be felt on the market prior to 2012
  • OCP announced its significant expansion of phosphate mining (from 30 to 50 MMT) and processing capacities (building new 4 MMT DAP/ MAP capacities) between 2013 and 2015 to meet growing demand. We believe that OCP, as a market-maker, will continue to manage the supply/ demand balance to prevent over supply
• Agrifos (Pasadena, USA) will close its MAP/DAP production (about 0.5 MMT of MAP/DAP) in Spring 2011 citing environmental concerns. Fertiberia (Spain) permanently closed its phosphoric acid production as a result of environmental pressure and is expected to buy phosphoric acid from OCP

Strengths

• Own supply of apatite accessible through open-pit mining, with high P₂O₅ content
• Plants are located close to seaports and close to their target markets (Europe and Russia/CIS)
• Lifosa is an EU-based plant hence no import tariffs in Europe
• Absence of ecologically harmful substances in apatite (cadmium), which is particularly important for exports to Europe
• Lifosa is recognised for its high-quality products, allowing for premium pricing

Weaknesses

• Transportation costs for Kovdor apatite are relatively high for Lifosa and EuroChem-BMU
• Relatively high maintenance costs and restrictions on maximum efficiency improvements due to age of equipment

Opportunities

• Securing access to phosphate ore in Kazakhstan would remove limitation on growing fertilizer production capacity
• Further efficiency improvements are still possible, mostly at EuroChem-BMU and Phosphorit
• Large-scale project: construction of phosphate and compound fertilizer plant in Kazakhstan
• Integration of NPK production once own potash mining starts will significantly help increase scale and margins, especially at EuroChem-BMU

Threats

• New capacity coming on line (e.g. Ma’aden project in Saudi Arabia, announced expansion at OCP in Morocco) could unfavorably alter the supply/demand balance in the sector and/or compress the normally higher margins enjoyed by integrated producers like EuroChem