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Document of The World Bank FOROFFICIAL USE ONLY Public Disclosure Authorized A/M 306v Report No. 7417-CHA Public Disclosure Authorized STAFF APPRAISAL REPORT CHINA HUBEI PHOSPHATEPROJECT APRIL 25, 1989 Public Disclosure Authorized Public Disclosure Authorized Industry, Trade and Finance Operations Division Country Department III Asia Regional Office This document has a restricted distribution and may be usedby recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (As of February 5, 1989) Currency name Renminbi (RMB) Currency unit - Yuan (Y) = 100 Fen Y lQon US$0.27 US$1.00 - Y 3.72 WEIGHTS AND MEASURES 1 hectare (ha) 2.47 acres 1 metric tcn (ton) 1,000 kilograms (kg) 1 kilometer (km) 0.621 miles 1 cuibicmeter (m3 ) 35.3147 cubic feet (cf) 1 kilocalories (kcal) 3,968 British thermal units (BTU) 1 kilowatt (kW) 1,000 watts 1 megawatt (MW) 1,000 kilowatts (kW) FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS AND ACRONYMS ABC - Ammonium Bicarbon'tte K2 0 - Potassium Oxide AMPC - Agricultural Means of Production kWh - Kilowatt Hour Corporation MA" - Ministry of Agriculture, Animal BICEM - Beijing Institute of Chemical Husbandry and Fishery Engineering and Management MgO - Magnesium Oxide CIB - China Investment Bank MAP Monoammonium Phosphate CIF - Cost, Insurance and Freight MCI - Ministry of Chemical Industry CNCCC - China National Chemical MOC - Ministry of Commerce Construction Corporation Mtpy - Million Tons per Year CMP - Calcium Magnesium Phosphate MWh - Megawatt Hour CMPDI - Chinese Chemical Mines Planning N - Nitrogen Content in Fertilizer and Design Institute NCDI - Nanjing Chemical Design CMRDI - Chinese Chemical Mines Research Institute and Dasign Institute NPK - Complex Fertilizers of N.P205 CPI - Chemical Planning Institute and K2 0 DAP - Diammonium Phosphate p.a. - Per Annum FOB - Free on Board PA - Phosphoric Acid FAO - Food and Agricultural PCBC - People's Construction Bank of Organization of the United China Nations P205 - Phosphorous Pentoxide FY - Fiscal Year ppm - Parts per Million GDP - Gross Domestic Product PRS - Production Responsibility System GOC - Government of Cnilna ROM Run of Mine ha - Hectare SAM State Audit Administration HAZOP - Hazard and Operability SINOCHEM - China Chemical Export and Import HMC - Huangmailing Mining Company Corporation HPCC - Huangmailing Phosphate Chemical SPB - State Pricing Bureau Company SPC - State Planning Commission HPG - Hubei Provincial Government SSP - Single Superphosphate ICB - International Competitive Bidding TSP - Triple Superphosphate ICBC - Industrial and Commercial Bank of tpd - Tons per Day China tpyn - Tons per Year of Nutrients IDC - Interest During Construction UNIDO - United Nations Industrial IFC - International Finance Corporat.on Development Organization JPCC - Jinxiang Phosphate Chemical WCEDI - Wuhan Chemical Engineering Company Design Institute FOR OFFICIAL USE3ONLY CHINA HUBEI PHOSPHATE PROJECT Table of Contents Page No. LOAN AND PROJECT SUMKARY..................................... i-iii I. INTRODUCTION................................................. 1 II. AN OVERIIEW OF THE CHINESE INDUSTRY.......................... 2 A. General Industry Background............................. 2 B. Government Objectives and Strategy for Industrial Development........................................... 3 C. Bank Support for Industry............................... 3 III. THE FERTILIZER SECTOR........................................ 5 A. Agricultural Background................................. 5 B. FertilizerUse in Agriculture........................... 6 C. FertilizerDemand and Supply............................ 6 D. Structure of the Fertilizer Industry.................... 9 E. FertilizerMarketing and Distribution................... 9 F. Fertilizer Pricing...................................... 10 G. Goveranent Strategy in the Fertilizer Sector............ 13 IV. THE PHOSPHATE SUBSECTOR...................................... 14 A. World Phosphate Market.---------------------------- 14 B. The Chinese Phosphate Industry......................... 15 C. Supply of Raw Materials ................................ 16 D. The Phosphate SubsectorStudy-.......................... 17 E. lnvestment Program for the Phosphate Subsector.18 F. Bank Role and Project Justification.18 V. PROJECT INSTITUTIONS.........................................- 19 A. Background........................ 20 B. The Jinxiang Phospb te Chemical Company (JPCC).......... 21 C. The Huangmailingehosphate Chemical Company (HPCC)....... 2 D. The Ministry of Chemical Industry (MCI)................. 23 This report has been prepared by Messrs. K. Song (AS3IF), K. Constant (ASTIF), H. Hendriks (ASTEG), and D. Lilaoonwala (CTRMI). Messrs. W. Sheldrick (Consultant)and B. Stone (Consultant)contributed to the fertilizer sector and phosphate subsector chapters. Ms. G. Mohadjer-Niederreiterand Mr. K. Hur (AS3IF) contributed to the financial and economic analysis chapters. Ms. D. Christmas provided secretarialsupport in the preparation of this report. This document has a restricted distribution and may be used by recipients only in the ptrformance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Page No. VI. THE PROJECT ......... ... 23 A. Objectivesb.. .. ................... 23 B. Dayukou Phosphate Mine and Fertilizer Development Component ... ....... 24 C. Huangmailing Phosphate Mine and Fertilizer Development Component ... 24 D. Technical Assistance Component . 24 VII. PROJECT MANAGEMENT AND ENVIRONMENTAL PROTECTION... 25 A. Engineering Arrangements..... 25 B. Project Management..... 26 C. Implementation Schedule..... 26 D. Training. .. 27 E. Environmental Aspects. ...... 27 VIII. CAPITAL COSTS, FINANCING PLAN, PROCUREMENTAND DISBURSEMENT.. 28 A. Capital Cost Estimates ......... 28 B. Financing Plan ......... 29 C. Procurement ......... 31 D. Allocation and Disbursementof the Bank Loan . ...... 32 IX. FINANCIAL ANNALJSIYSIS......... 35 A. Financial Management Practices in China. 35 B. Financial Performance and Projections . .36 C. Financial Rate of Return and SensitivityAnalysis 38 D. Financial Covenants. 39 E. Auditing and Reporting Requirements .. .39 X. ECONOMIC ANALYSIS .40 A. Economic Costs and Benefits.40 B. Economic Rate of Return and SensitivityAnalyss .40 C. Other Benefits.41 D. Project Risks .42 XI. AGREEMENTS REACHED DURING LOAN NEGOTIATIONS AND RECOMMENDATION.42 ANNkXES 3.1 Fertilizer Application Rates for Various Countries, 1985 3.2 Consumption, Production and Imports of Chemical Fertilizers,1972-87 3.3 Comparison of Domestic and internationalPrices of Fertilizers,Main Energy Inputs, and Main Agricultural Products, December 1988 - iii - 4.i Trends in Domest.icIroduction of Phosphate Fertilizers,by Product, 1970-86 4.2 Domestic Production of Phosphate Fertilizers by Produictand Province, 1985 4.3 Consumption of Chemical Fertilizersby Province, 1985 4.4 Major Phosphate Deposits in China 4.5 Major Pyrite Eiepositsand Mines in China 4.6 An Outline of the Phosphate Subsector Investment OptimizationModel 4.7 Planned Phosphate Investment Projects to the lear 2000 5.1 Production Performance of JPCC and HPCC 5.2 OrganizationChart of JPCC 5.3 OrganizationChart of HPCC 6.1 Summary of the Dayukou Mine and Fertilizer Development Component 6.2 Summary of the HuangmailingMine and Fertilizer Development Component 6.3 Summary of the Terms of Reference for Consulting Services to Support Project ImplementationUnder the Technical Assistance Componient 6.4 Outline for Training on Hazard and Operability (HAZOP) Analysis 7.1 Organizat' _hart of MCI's Project CoordinationUnit 7.2 Organization Chart of Project Management Teams for JPCC and HPCC 7.3 Project ImplementationSchedule and Key Milestones 7.4 Environmental Protectiun and Standards 8.1 Capital Cost Estimates 8.2 Estimated Disbursement Schedule for Bank Loan 9.1 Assumptions Underlying the Financial Analysis 9.2 JFCC - Summary of Historical and Projected Financial Statements 9.3 HPCC - Summary of Historical and Projected Financial Statements 9.4 Incremental Cost and Revenue Streams for FRR Calculations 10.1 Assumptions Underlying the Economic Analysis 10.2 IncrementalCost and Benefit Streams for ERR Calculations 10.3 Net Savings of Foreign Exchange over Project Life MAP IBRD 20919R: China - Phosphate Reserves and Production Facilities IBRD 20504R: Dayukou PhosphateMine and Fertilizer Development Component IBRD 20505R: Huangmailing Phosphate Mine and Fertilizer Development Component DOCUMENTS AVAILABLE IN PROJECT FILES Reference 1. Feasibility Studies for the Two Development Components 2. Terms of Reference for Consulting Services to Support Project Implementation 3. A Blackbook Explaining the Economic and Financial Analyses - i - CHINA HUBEI PHOSPHATE PROJECT Loan and Project Summary Borrower: The People's Republic of China Beneficiaries: Jinxiang Phosphate Chemical Company (JPCC, Hubei Province); Huangmailing Phosphate Chemical Company (HPCC, Hubei Prov- ince); Ministry of Chemical Industry (MCI) Loan Amount: US$137.0 million equivalent Terms of Loan: 20-year repayment, including 5 years of grace, at the stan- dard variable interest rate On-lending Terms: The Government will on-lend the loan proceeds, through the Hubei provincial government,to the two Project companies at an on-lending rate equal to 105% of the IBRD variable rate, with a repayment period of 20 years, including 5 years of grace.