Document of The World Bank FOR OFFICIAL USE ONLY DC -H4 Public Disclosure Authorized ReportNo. 7142-CRA STAFF APPRAISAL REPORT CHINA Public Disclosure Authorized PHOSPHATE DEVELOPMENTPROJECT May 23, 1988 Public Disclosure Authorized Industry,Trade and Finance OperationsDivision Country DepartmentIII Public Disclosure Authorized Asia Regional Office This documenthas a resiticteddishibudon and may be used by recXut onlyin the peromaoce of their officld duties. Its contents may not otherwisebe disclosedwithout World Bank authoization. CURRENCYEOUIVALENTS (As of February 5, 1988) Currency name = Renminbi (RMB) Currency unit = Yuan (Y) = 100 Fen Y 1.00 = US$0.27 US$1.00 = Y 3.72 WEIGHTS AND MEASURES 1 hectare (ha) = 2.47 acres 1 metric ton (ton) = 1,000 kilograms (kg) 1 kilometer (km) = 0.621 miles 1 cubic meter (i 3 ) = 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 3! GLOSSARY OF ABBREVIATIONS AND ACRONYMS ABC - Afmonium Bicarbonate Mg0 - Magnesium Oxide AMPC - Agricultural Means of Production MAP - Monoammonium Phosphate Corporation MCI - Ministry of Chemical Industry CIB - China Investment Bank HOC - Ministry of Commerce CIF - Cost, Insurance and Freight MOF - Ministry of Finance CNCCC - China National Chemical Mtpy - Million Tons per Year Construction Corporation MWh - Megawatt Hour CMP - Calcium Magnesium Phosphate N - Nitrogen Content in Fertilizer CMRDI - Chinese Chemical Mines Research NPK - Complex Fertilizers of N,P2 05 and Design Institute and K20 CPI - Chemical Planning Institute p.a. - Per Annum DAP - Diammonium Phosphate PA - Phosphoric Acid FOB - Free on Board PCBC - People's Construction Bank of FAO - Food and Agricultural China Organization of the United P2 05 - Phosphorous Pentoxide Nations ppm - Parts per Million FY - Fiscal Year PRS - Production Responsibility System GDP - Gross Domestic Product ROM - Run of Mine GOC - Government of China SAA - State Audit Administration GPC - Guizhou Phosphate Company SINOPEC - China Petrochemical Corporation ha - Hectare SINOCHEM - China Chemical Export and Import ICB - International Competitive BiddiLg Corporation ICBC - Industrial and Commercial Bank oi SPB - State Pricing Bureau China SPC - State Planning Commission IDC - Interest During Construction SSP - Single Superphosphate R 0 - Potassium Oxide TSP - Triple Superphosphate kXh - Kilowatt Hour tpd - Tons per Day MAAF - Ministry of Agriculture, Animal tpyn - Tons per Year of Nutrients Husbandry and Fishery UNIDO - United Nations Industrial Development Organization FOR OMCIL USEONLY CHINA PHOSPHATEDEVELOPMENT PROJECT Loan and Project Summary Borrower: The People's Republic of China Beneficiaries: Guizhou PhosphateCompany (GPC); Ministry of Chemical Industry (MCI) Loan Amount: US$62.7 million equivalent Terms of Loan: 20-year repayment,including 5 years of grace, at the standard variable interestrate On-lendingTerms: The Governmentwill on-lend the loan proceeds to GPC at an on-lendingrate equal to 1051 of the IBiD variable rate, with a repaymentperiod of 20 years, including5 years of grace. The commitmentcharge and foreign exchange risks will be passed on to GPC. Project Objectives: The Project will assist China in achieving its priority for the fertilizersector under the Seventh and Eighth Five-YearPlans (1986-95),which is to reduce the nutrient imbalancein fertilizeruse by expanding the productioncapacity for phosphatefertilizers, particu- larly high-gradeproducts such as triple superphosphate (TSP) and monoaumoniumphosphate (MAP), based on domestic phosphateresources. More specificallythe Projectwill help GOC: (a) devise appropriate strategiesfor developingan efficient phosphate industry,including an optimal investmentprogram to meet phosphateneeds in the least-costmanner; (b) implf'mentthe first major mine developmentof the investmentprogram; and (c) strengthenMCI's capability to plan the developmentof the chemical eubsectors, includin-phosphates. Considerableprogress has already been made with objectives(a) and (c) during Project preparationthrough the PhosphateSubsector Study (the Study),which was carried out jointly by the Bank and MCI and which resulted in a phosphate subsector investmentprogran to the year 2000. The major invest- ment to be implementedunder the Project will provide a demonstrationmodel for the developmentof domestic phosphate1eposits using modern mining and beneficiation technologies. The Project will increase China's local supply of phosphaterock by about 251. Thisdocumenthas anstfcted distribution andmay be used byrecipients onlyin the perfornEnce| |oftheirofficial duties. tscontents maynot otherwis be disclosei withioutWorld Bank authorization.| - ii - Description: The Project has two components: (a) Wengfu mine development- start-up of an open pit mine at Wengfu in Guizhou with a capacity of 2.5 million tons per year (Mtpy) run of mine (ROM) rock and constructionof a modern beneficiationplant to produce phosphate concen- trate at the mine site and an associatedslurry pipeline; and (b) technicalassistance - consultancyservices for Projectmanagement and mine workshop maintenance,and provision of financialand technicalassistance for the computer-basedsector investmentoptimization model, developedunder the Study by the Bank with CPI's assist- ance with the data, to be installed,maintained and further developedat MCI to strengthenits subsector planning capability. Project Risk: Virtuallyno commercialrisks are foreseen because markets for Project output are assured. The entire output of phosphateconcentrate from the Wengfu mine will be supplied to several downstreamhigh-grade fertilizerplants currentlyunder constructionand another fertilizerplant to be establishedat the mine site. The main technicalrisks lie in the coordination of the implementationand commissioningof the mine and the associatedfertilizer plants. In the past, poor coordinationin implementingmine and fertilizer investments,executed by separate entities under separate budgets,haa been a common cause of under- utilizationof new mines in China, resulting in a significantloss of economic benefits. This risk is mitigatedby involvinginternationally experienced consultantsin the technicalassistance component; they will help MCI and GPC with Project implementationand staff training. The Governmenthas assured the timely completionof all downstreamplants, including the Wengfu TSP plant to be establishedat the project mine site. The Governmentwill coordinateall construction work and report semi-annuallyon the progress of all downstreamplants. This risk will be further reduced because a new 800,OGO tpy TSP plant to be establishedat Wengfu, which would consume about 60X of the Project output, will be implementedby the Project company. This plant will be constructedand ready for operation in accordancewith the scope and timeframeagreed with the Bank. Assuranceshave been obtained from the Governmentand GPC to the same effect. - iii - Project Cost: Local Foreijn Total --- (US$million)… W.ngfu mine development Engineering& license fee 3.8 0.2 4.0 Equipment,materials & spares 22.8 50.1 72.9 Civils & erection 70.8 - 70.8 Others 12.5 1.3 13.8 Sub-Total 109.9 51.6 161.5 Technicalassistance - 0.6 0.6 Base cost (January 1988 prices) 109.9 52.2 162.1 Physicalcontingencies 11.0 5.2 16.2 Price contingencies 12.8 5.7 18.5 Installedcost 133.7 63.1 196.8 Incrementalworking capital 4.6 0.0 4.6 Interestduring construction 9.4 11.0 20.4 Total FinancingRequired /a 147.7 74.1 221.8 FinancingPlan: Local Foreign Total -: (US$ million)- IBRD loan - 62.7 62.7 Governmentloan 143.1 11.0 154.1 Industrialand CommercialBank loan 4.6 - 4.6 Governmentfunds /b - 0.4 0.4 Total Financing 147.7 74.1 221.8 EstimatedDisbursements: IBRD FY 1989 1990 1991 1992 1993 --TUS$ million)- - Annual 1.2 8.2 25.1 23.8 4.4 Cumulative 1.2 9.4 34.5 58.3 62.7 Economic Rate of Return: 261 /a The total cost net of sales taxes on locally purchasedequipment and materials(US$2.0 million) is US$219.8million. /b GOC plans to cover the CPI program to be implementedunder the technical assistancecomponent from the proceeds of the Second Technical Cooperation Credit (Credit No. 1664-CHA). CHINA PHOSPHATEDEVELOPNENT PROJECT Table of Contents Page No. LOAN AND PROJECT SUMM ARY.......................................iiii I INTRODUION........................................................... 1 II. AN OVERVIEW OF THE CHINESE INDUSTRY............................ 3 A. General Industry Background............ ..... * ..............e 3 B. The GovernmentObjectives and Strategy for Industrial Development...s..............o......o.............o. .o... ...3 C. Bank Support for the Industry...............................4 III. THEFERTILIZER SECTOR .......................................... 5 A. AgriculturalBackground.. 0000000..001.0. ......... *..*..***** 5 B. FertilizerUse in griculture............................... 6 C. FertilizerDemand and Supplye................................6 D. Structureof the FertilizerIndustry........................ 9 E. FertilizerMarketing and Distribution.......................10 F. FertilizerPricing and Prices...............................11 C. GovernmentStrategy in the FertilizerSector ................13 IV* THE PHOSPHATESUBSECTORo..............................0........ 14 A. World PhosphateMarket Background...........................14 B. The PhosphateIndustry ............. 15 C. Supply of Raw Materials .................................... 16 D.