Mineral fertilizer plant modernization

Modernization of production chains in the fertilizer industry is extremely expensive.

The total cost of replacing one fertilizer production line, including pelletizers, granulators, reactors, mills, dryers, coolers, feeders, conveyors and other equipment, can reach 15-20 million euros.

In many cases, this figure is much higher, since customszed engineering solutions for non-standard projects may require additional costs.

GCAM Investment Group offers financing for the modernization of mineral fertilizer plants and other industrial enterprises in Europe, the USA, Latin America, the Middle East, North Africa and Southeast Asia.

Our financial team is ready to accompany your investment project from A to Z, providing flexible long-term solutions.

General principles of modernization of mineral fertilizer plants

Effective modernization of mineral fertilizer plants is important for reducing costs, overcoming problems of low profitability, and also serves as a very powerful tool for survival in a competitive environment.

In a broad sense, the term "modernization" means improvement, change of technical parameters of certain equipment, machines and devices.

The role of modernization in fertilizer production often requires structural reorganization, redistribution of the resource base, introduction of modern production technologies and high-tech equipment. This is not least due to the high consumption of gas and electricity, which needs to be reduced in order to maintain business competitiveness.

Also, modernization can be considered as systematic introduction of innovations, which leads to gradual increasing the production potential. This will make it possible to regain lost and develop new markets by meeting their demand for innovative fertilizers. In today's realities, a business can feel confident only by ensuring efficient production through the use of the latest technologies and maintaining high competitiveness of key production assets.

The modernization of fertilizer plants is based on three key features:

• Potential sources of efficiency improvement, including reducing the use of resources and improving the quality of manufactured fertilizers.

• The main directions of production improvement and development, namely improvement of the technical level of the enterprise, introduction of innovations, introduction of innovative organizational management systems and improvement of the production structure.

• Increasing the level of production management, including the development of new types of fertilizers, production automation, reduction of energy costs, and other measures.

The process of evaluating production activity for the modernization of mineral fertilizer production is presented in the table below.

The listed stages have a key impact on the subsequent investment.

Stages	Brief description
Technical analysis	The technical analysis shows the validity of the engineering solutions included in the modernization project. Using this type of analysis, expert teams determine the current costs of production and total investment costs, revealing the dependence of the results of production activities on various financial, technical and organizational factors. The main tasks of the analysis are the determination of the operational and financial performance indicators of the enterprise as a whole and of each production unit separately. Experts must identify the causes that lead to underachievement of current tasks, identify the potential for modernization and obtain raw data for the development of a comprehensive modernization program.
Market analysis	The purpose of this stage is to evaluate investments from the point of view of market expansion. The main objects of study and influence are the consumer, competitors, market conditions, quality and consumer characteristics of manufactured fertilizers and measures to promote the product to the market. The key objective of the market analysis of the modernization project is to convince potential investors and creditors that the project has attractive market prospects, and therefore financial support is necessary to achieve the company's goals.
Financial analysis	The purpose of the financial analysis is to determine the profitability and efficiency of the modernization project from the perspective of the investors and the contractor implementing the project, as well as to assess the current and projected financial health of the company ordering the project. Financial analysis determines the current financial position of the firm, predicts changes in the medium and long term, and identifies financial risks. Financial analysis can be considered as a component of project analysis and financial management, therefore, the actions of the analyst depend on the overall goal set by the company. Financial management requires constant work to find and attract financial resources. Financial analysis involves evaluating, optimizing and comparing costs and benefits of the project.

Modernization of mineral fertilizer plant is a necessary impetus to increase competitiveness, introduction of innovative products, and transition to new technologies.

Based on the results of the assessment of current production activities, the company can create its own path to success through innovation. High-quality financial and organizational support from GCAM Investment Group will help the business to go through this path with the lowest costs.

Three stages of fertilizer plant modernization

Experts note that effective modernization should be carried out gradually, following certain stages and processes.

Below we will focus on the main stages for a better understanding of the practical implementation of these measures.

At the first stage, reorganization of logistics and modernization of transport infrastructure are carried out. Logistical issues during the development of concepts for the modernization of the mineral fertilizer plant should be solved in parallel with the main technological issues.

At the second stage, a new production technology is selected or an existing one is modernized, economic calculations are carried out at the enterprise to make a final decision, costs and benefits are compared for the next few years.

Periodic modernization of existing technology is carried out on an ongoing basis to maintain competitiveness, safety and environmental standards. Deep technological changes are expected every 15-20 years, and in some subsectors more often.

The third stage of modernization involves more practical measures, such as the organization of the production process and logistics, the selection of equipment and the customization of certain types of equipment.

This stage consists of the following tasks:

1. Selection and adoption of a general decision on the placement of existing and purchased equipment in a single chain, taking into account technical and economic considerations.

2. Selection of new equipment in the scope of the entire production process.

3. Design and selection of unique equipment that contributes to the achievement of the general goals of modernization in special ways, taking into account the specifics of the enterprise.

During the assessment of the need for modernization of technologies and equipment, it is necessary to determine the ways of achieving the goals:

• Partial modernization of equipment without a significant change in basic processes.
• Extensive modernization within the existing technology and production processes.
• Deep modernization of the fertilizer plant with a fundamental change in production.

Depending on the goals and the ways to achieve them, one of the two decisions below must be made.

First, it is necessary to assess production needs for partial improvements in technology, which includes the following types of activities:

• Detection of areas with technological problems.
• Evaluation of the operational reliability of the equipment.
• Assessment of the current level of losses from technical obsolescence.
• Determination of the nature of failures and their impact on the entire process.
• Comparison of costs for partial improvements and benefits.

If the effect of a partial improvement is considered insufficient to achieve the company's goals, the issue of deep modernization within the framework of the existing technology should be worked out.



To determine the need for modernization within the existing technology, experts recommend the following steps:

1. Identify weaknesses in existing technology.

2. Determine the impact of weak points of new technologies on adjacent areas of the fertilizer production process and the environment.

3. Draw up diagrams of a new production process, as well as diagrams of system elements that can be improved and that need to be replaced with similar ones.

4. Compare costs for modernization and replacement of equipment with forecasting of economic parameters of fertilizer production for 5-10 years ahead.

5. Evaluate the cost of modernization, its pros and cons compared to alternatives.

At the last stage, the feasibility of modernizing a certain part of the production chain is analyzed.

This includes the analysis of the stages of engineering design, manufacture or purchase of special devices that will contribute to the achievement of the company's goals. Depending on the design, special devices can be both small units (dust collectors, belt conveyors,) and large production equipment, such as dryer machines, granulators, mixers, chain crushers and others.

Long-term loans for modernization of mineral fertilizer plants

A long-term investment loan is an agreement under which a financial institution provides a plant with certain money, which must be repaid with interest and commission in accordance with agreed terms, usually over 5 years.

Loans for the modernization of mineral fertilizer plants are earmarked for agreed-upon programs for the replacement of equipment, buildings and infrastructure.

The interest rate on the modernization loan can be fixed or variable, although the latter is more commonly used. A fixed interest rate means that it remains the same from the start of the loan agreement until maturity. The client knows exactly the interest that he is going to pay for the financing received, and this will not affect him if interest rates rise. However, for the same reason, he will not be able to take advantage of a possible reduction in rates if they tend to decrease.

Interest is variable when, starting from a known and defined rate over a period, a differential or margin is added or subtracted to give a new applicable rate.

This margin is set by linking to some market benchmark.

Unlike what happens with a fixed interest rate, with a variable interest rate, the borrower does not know exactly what the interest on capital will cost, because we do not know the rates that will apply in future periods.

Everything will depend on the evolution of the base rate. The most common reference rates are obtained by applying the average of the interest rates of specific interbank market. For example, EURIBOR (European Inter-bank Offered Rate), MIBOR (Madrid Inter-bank Offered Rate), LIBOR (London Inter-bank Offered Rate) and other.

The term of the loan repayment is determined in the agreement and serves to establish the beginning and end of the term of the concluded agreement. Whenever the term granted increases, the amount payable at each maturity decreases. On the contrary, the amount of interest will increase as the term increases. The company must find the optimal ratio between the term and the interest paid.

Below we will discuss the advantages and disadvantages of a bank loan for mineral fertilizer plants.

Advantages:

• High financial flexibility. By using a properly designed pool of loans, the company will be able to solve possible liquidity shortages at the moment they arise. This ensures that there is a reserve of money to purchase suitable equipment or services provided by a particular contractor, or to cover unexpected expenses.

• Time advantage. With readily available financial resources, the company will be able to improve its business by acquiring high-tech equipment ahead of its competitors. Also, this type of loan has very favorable interest rates for large industrial customers.

• Building a credit history. In international business, having an excellent credit history is critical. The experience of implementing large projects based on credit mechanisms will create a positive business story over time.

• Obtaining a bank loan for the introduction of new technology provides a huge advantage when buying an old fertilizer plant that needs modernization. This allows the business to grow rapidly in exchange for very low interest rates.

• When modernizing an existing enterprise with a successful operating history, the borrower can expect low interest rates, since banks consider lending to such companies low-risk.

Cons of loans:

• Complicated processing procedure. It is necessary to approve the operation by the commission of the financial institution, as well as the provision of reliable guarantees (collateral) in most cases.

• High additional costs. Processing and other costs, which are of particular importance in cases where loans are secured by buildings or other assets of the borrower's company.

A syndicated loan is a loan attracted by one borrower from several sources and structured, organized and managed by one or more banks.

This banking tool is used when the borrower requests too large loan amounts, and such concentration of risk is undesirable for one bank.

Syndicated lending, as a way to attract external resources, has recently become more relevant for the European industry. These mechanisms are accumulating the necessary financial resources to make large long-term investments, including those related to the modernization and expansion of large fertilizer plants. Such projects make sense for loans in the hundreds of millions of euros.

Using leasing: advantages and disadvantages

Large manufacturers of mineral fertilizers are faced with the need to attract large resources to modernize the technical base and maintain their competitiveness.

The shortage of capital for equipment renewal is caused, among other things, by the rapid pace of implementation of innovative technologies in the industry.

To solve this problem, mineral fertilizer plants have the opportunity to attract medium- and long-term bank loans, issue securities on the stock market, cooperate with venture funds and leasing companies, as well as actively mobilize internal financial resources and even attract government and municipal funds to some projects.

Experts note the growing role of leasing in large projects aimed at the modernization of production equipment.

Leasing is a multifaceted financial tool that combines purchase and sale, rental, lending and investment operations. Leasing of expensive production equipment is a quick and easy opportunity to update the outdated technical base and, as a result, restore or increase the production potential of the fertilizer plant and improve product quality in accordance with consumer expectations.

Leasing can be seen as a compromise between an enterprise that does not have enough funds to modernize equipment, and a financial institution that is reluctant to provide enterprises with large loans without sufficient guarantees of repayment.

One party receives long-term capital, which is paid back in stages over a long period of time, but at the same time can use the equipment immediately. The other party has a reliable guarantee of loan repayment in the form of highly liquid assets. Leasing can give a powerful impetus to the processes of modernization and expansion of enterprises in the fertilizer industry, optimize the use of existing assets, and obtain state-of-the-art equipment from the leading manufacturers on favorable terms.

Leasing is considered an advanced type of industry financing, which is facilitated by the intensifying competition in the global fertilizer market and the need to optimize investments.

Leasing tools are widely supported by authorities and financial business circles, which stimulates the growth of investment activity in this area.

From a financial point of view, the leasing operation is in many ways similar to long-term lending for the purchase of equipment. All leasing operations are divided into two main groups, namely operational leasing and financial leasing. Financial leasing is characterized by the fact that the lease term of assets is close to the service life of the equipment. The main advantage of using leasing is that it enables companies to purchase critical equipment without large one-time expenditures.

The disadvantages of leasing that deserve the most attention include the following:

• Complicated organization, due to which the preparation of a financial leasing agreement may take much longer than a contract for the purchase of production equipment.

• Administrative costs are relatively high, so it is believed that the financial advantage of leasing can be significant for the enterprise only if there are certain tax benefits.

• The conclusion of the agreement usually requires compliance with certain requirements for the regulation of financial services markets, which is difficult for some manufacturers.

• Rapid scientific progress makes the leasing object obsolete during the period of payment of the cost of the equipment, which imposes certain restrictions on the enterprise.

Finally, leasing operations are quite risky.

Among the potential threats, financial risks, the risk of non-payment of lease payments, general project risks, loss or damage of equipment and the risk of non-return to the owner deserve special attention.

These risks are embedded in the cost of specific financial products offered to mineral fertilizer plants on the world market.

Despite this, leasing, given the lack of internal financial resources and limited access to credit funds, is one of the effective forms of financing innovative activities of fertilizer plants. With the right approach to the application of this method, enterprises will be able to use modernized equipment promptly, which will contribute to their innovative development in the future.

Development of the modernization program for the mineral fertilizer plant

When planning the budget for the modernization of the mineral fertilizer plant, experts suggest providing financial resources for the following measures:

1. Modernization and replacement of outdated and worn equipment.
2. Implementation of the latest production technologies.
3. Increasing the reliability and safety of production equipment.
4. Wide implementation of resource-saving technologies.
5. Reducing the negative impact of the enterprise on the environment.

It is necessary to ensure the rational use of investments aimed at the modernization of the enterprise.

The main task is to determine the priority areas of development and create conditions under which the concentration of investments in these areas would be economically beneficial.

Successful modernization largely depends on the company's ability to develop the acquired capabilities of innovative management and production in order to prevent further technological lag behind competitors. This is especially noticeable in the globalized and highly competitive world of mineral fertilizers, where new products appear every year, and large manufacturers from dozens of countries are fighting hard to preserve and expand sales markets.

The investment program requires full answers to the following questions:

• The purpose of the modernization program (project).
• Expected effectiveness of investment project implementation.
• Assessment of the risks of an innovative project.
• Key indicators of the life cycle of the object of modernization.
• The potential for upgrading a technology or specifiс product.

The investment program for the modernization of the mineral fertilizer plant should be consistent with the main directions of the company's strategic development.

At the same time, this plan should be flexible, allowing management to make timely adjustments.

A comprehensive model of enterprise modernization should contain the following management features to control the results of transformations and the efficiency of investment use:

• Determination of the list of proposed projects for the modernization of the enterprise.
• Identification of optimal sources of financing modernization projects.
• Analysis of the need for debt capital, including the choice of a loan or leasing scheme.
• Analysis of costs and efficiency for each of the modernization projects.
• Determination of the sequence of implementation of investment projects.

Technological re-equipment of the fertilizer plant should be based on the results of a comparative analysis of existing technologies and their alternatives.

For comparative analysis of modernization investment programs, it is advisable to apply basic indicators in the following areas:

• Ensuring the achievement of economic, environmental and other goals.
• Indicators of the efficiency of using investment potential.
• Consistency criteria of tactical and strategic investment management.
• Prospects of obtaining the expected benefits for the owner company.
• Minimization of negative consequences for the enterprise.

In general, the modernization investment program should be viable and flexible, allow for timely adjustments taking into account changes in external environment (market, legal, technological and others). The tasks and methods of the modernization investment program should be reviewed and adjusted depending on the phase of the enterprise's development.

GCAM Investment Group is ready to find optimal solutions for mineral fertilizer plants, including financing (long-term loans, project finance), engineering and consulting.

Contact us for details.