Fertilizer Industry

Agri Fertilizer Industry Handbook
Agri Capital Markets Day December 3-5, 2003
List of contents
! Introduction to Agri ! Fertilizer industry overview ! Industry value drivers and trends
46477 11 2003 Hydro Media
The Agri Fertilizer Industry Handbook

To position Agri for further value creation, Norsk Hydro decided June 19, 2003 to establish Agri as a separate listed company. As the world leading supplier of plant nutrients, Agri will become an exciting investment opportunity. The purpose of this document is to give financial analysts, investors and other stakeholders a better insight into the fertilizer industry and in Agris view the most important value drivers. The goal is to provide a better platform to assess the attractiveness of the fertilizer industry and Agri. Agris intention is to update and publish this document annually. This handbook is divided into three main sections. The first section gives a snapshot of Agri. The second section gives a short introduction to what fertilizer is and what the global industry structure looks like. The third part describes the most import drivers of demand and supply of fertilizer products. Industrial products are not dealt with in this fact pack.
Agri at a glance (1)
! Global ! Balanced ! Added value
The global leader in plant nutrition

With sales in more than 120 countries Agri is the most global player in the fertilizer industry. The core business of Agri is production and marketing of nitrogen fertilizer such as urea and nitrates. Agri also produces and sells ammonia, the key raw material for all nitrogen fertilizers. To complement its nitrogen-based product offerings, Agri also markets third-party sourced phosphate and potash fertilizers containing the other two primary plant nutrients, phosphorus (P) and potassium (K). This enables Agri, through its global downstream network, to offer customers a balanced nutrient portfolio. In addition, Agri markets value-added specialty fertilizers, as well as certain industrial gases, nitrogen chemicals and technical nitrates that, in general, are coproducts of its fertilizer operations.
Agri at a glance (2)
! Low-cost ! Profitable ! Growth
Upper quartile profitability with a strong platform for growth

In response to the stiff competition within the fertilizer industry and other market forces, Agri has steadily strengthened its results by cutting costs and improving productivity, principally through completion of a three-year turnaround program from 1999-2001. The turnaround program enabled Agri to position itself as the lowestcost fertilizer producer in Europe. Since 2001, Agri has been within the top 25 percent of industry peers in terms of gross return on assets (defined as EBITDA, excluding non-recurring items, divided by total assets). Since 1999 Agri has also grown organically and through well-timed acquisitions in key growth markets. The combination of a strong financial position and a global network is expected to give Agri the opportunity to take an active part in the further development of the fertilizer industry.
Agri key facts

Carve-out figures 2002 ! Operating revenues ! EBITDA ! Operating income ! Net income ! Employees ! Sales volume NOK 33 477 million NOK 3 878 million NOK 2 143 million NOK 1 715 million 7 606 22.5 million tonnes
Solid performance in 2002

With good results and new market positions, Agri gained strength in 2002. The marketing network, with approximately 50 sales offices worldwide, sold more than 20 million tonnes of fertilizer in more than 120 countries. For the first time, Agri sold more plant nutrients overseas than in Europe. Our measure for return on capital, CROGI (Cash Return On Gross Investment), defined as EBITDA tax divided by Gross Investment ended at a solid 8.6% despite historically high energy prices.
Agris history and growth

1905:
World's first production of fertilizer at Notodden, Norway
1973:
Joint venture in Qatar QAFCO
1996:
Acquisition of Nutrite in Canada and Italian fertilizer operations
1979-86: 1979Acquisitions in Netherlands, Sweden, Denmark, U.K., Germany and France. Terminal in China
1928:
Porsgrunn Plant, Norway
1999-2001 1999Agri Turnaround
2003
Decision to list Agri as separate company
1946:
Market operations in North America
1991:
Acquisition of ammonia plants in Trinidad, and nitrate plant in Rostock, Germany
1972:
Market operations in Thailand
An exciting history creating a platform for further value creation

In 1905, Norsk Hydro was established to utilize Norways large hydroelectric energy resources for the industrial production of mineral fertilizer. Through organic growth and acquisitions Agri has become the largest and most global fertilizer company. To position Agri for further value creation, Norsk Hydro announced June 19, 2003 the decision to establish Agri as a separate, listed company. The successful turnaround in 1999-2001 has put Agri in a favorable position for further profitable growth. Increasing Agris financial flexibility through direct access to the capital markets provides attractive opportunities.
Agris global network
Major plant Office
On the ground in ~50 countries, sales to more than 120 countries

A global network
Agri is well-positioned in key growth markets with a presence in nearly 30 countries outside Europe. The distribution network consists of sales offices, chartered dry bulk ships, bulk blending plants, terminals and bagging operations. Through acquisitions and joint ventures Agri has access to cheap energy, like in Trinidad and Qatar. The global presence reduces the exposure to any particular region that may be characterized by adverse market conditions from time to time. It also mitigates the seasonality inherent in the fertilizer business and enables Agri to take advantage of arbitrage opportunities by shifting volumes from one region to another.
Agris European network
Major plant Office

A leading European low-cost producer

Agri is the leading fertilizer company in Europe in terms of profitability, sales volumes and cost position. After the listing, Agri will also be the only European listed company with nitrogen fertilizer as its core business.
Agri production capacity

Annual production capacity*
Million tonnes
NPK complex fertilizer Nitrates (CAN, AN) Urea Calcium Nitrate solids (CN) Total Ammonia European production Trinidad production Tringen (JV, 49%) Qafco, (JV, 25%) Total ammonia capacity
4.0 4.6 2.2 0.9 11.7
4.0 0.3 0.5 0.4 5.2
* Excluding UAN, CN liquids and bulk blends. Including Agris ownership of Joint Venture Companies
Production capacity to serve customer needs

The total production capacity for fertilizers is approximately 12 million tonnes, with NPK and nitrates as main products. NPK is a combination of the most important nutrients; nitrogen (N), phosphorus (P) and potassium (K). Nitrate is the most important type of fertilizer in Europe as it typically gives better yields in a European climate. Urea is the most important nitrogen fertilizer globally with its high nitrogen content and good properties in warm climates. Calcium nitrate is a specialty fertilizer improving the quality of both grain and cash crops. The bulk of Agris ammonia production is in Europe, but there is also significant capacity in Trinidad and Qatar.
Agri production and sales 2002

Production source for sold products 16.7 million tonnes* Operating revenues NOK 33.5 billion
Other Europe North America South America UK Netherlands Italy Asia* Germany France Germany France Africa
JV Other Africa Latin America Sweden Italy
Norway
* Including bulk blends. Including total volumes bought from JV companies

Leading European producer with global presence

Most of the production is located in Europe and most of our own produced products are sold in the European market. However, the largest plants export a significant share to overseas markets. Agri also has production capacity in emerging markets and in areas with access to cheap energy. Where Agri does not have production assets, products are sourced through third parties. Agri today sells more than half of its fertilizer outside Europe.
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Three business segments

2002 carve-out financials Agri
Upstream
Sales: NOK 11.1 bn EBITDA: NOK 1.3 bn
Downstream
Industrial
! Global ammonia production, trade & shipping ! Urea production ! Nitrate and NPK production with global reach
! Sales and marketing units ! Nitrate and NPK production for local markets ! Specialty fertilizers
! Production and marketing of industrial gases and CO2 ! Nitrogen chemicals for industrial applications
Customer-focused organization
The new organization of Agri reflects the way Agri operates its business, with major ammonia-integrated production facilities and the ammonia trade and shipping in Upstream, all fertilizer sales and marketing and local plants in Downstream and all industrial sales and marketing and dedicated industrial plants in Industrial. While the Upstream segment is comparable to a typical nitrogen fertilizer company exposed to cyclical swings, the Downstream and Industrial segments are essentially margin businesses with relatively stable cashflows across the cycle.
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Agri Value Chain

2002 volumes in million tonnes
Production source*
Agri Production Europe Agri Production Outside Europe
12.3
Global optimization
Marketing and sales
2.3
q q
Purchased from JV companies
2.1
Sourcing Allocation Logistics
22.5
Business Units & Front Offices
Key Accounts
Smaller customers
Purchased from Third Parties
5.8
* Including bulk blends

Asset light production structure to meet global demand

Including bulk blends Agri had production of 14.6 million tonnes at 100% owned facilities in 2002. The rest of the total 22.5 million tonnes of sales originated from part-owned joint venture companies and other producers in order to optimize capital tied up in production facilities. All volumes are allocated to the market organizations through a global optimization performed by the Downstream segment. Sales and marketing is done through business units and front offices working with a mix of large key account customers providing a stable product off-take and smaller customers providing flexibility and arbitrage opportunities.
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List of contents
! Introduction to Agri ! Fertilizer industry overview
" " "
What is fertilizer? The global industry The European industry
! Industry value drivers and trends
What is fertilizer?
Fertilizers are essential plant nutrients that are applied to a crop to achieve optimal yield and quality. The following slides describe the value and characteristics of fertilizers in modern food production.
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Healthy food for plants
... yields healthy food for people
The value of fertilizers in modern food production is clear

The quality of the food we eat is a natural concern for consumers. Mineral fertilizers are based on natural nutrients that plants need to realize their growth potential. Balanced nutrition, supplying the right nutrients in the right amounts, is essential for plants. Balanced nutrition is also essential for human beings. For this reason balanced fertilization of the crop plays an important role in supplying a healthy human diet. World food production depends upon supplementing plant nutrients obtained from the soil with mineral fertilizers. Fertilizers are now indispensable for ensuring sufficient food production and preventing decline in soil productivity through nutrient depletion. The rapid increase in the world population and the corresponding rise in consumption have rendered fertilizers an integral part of the food chain.
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Plants need three main nutrients: Nitrogen, Phosphorus and Potassium
YIELD AND QUALITY
Nitrogen the main driver of yield

Three main nutrients: Nitrogen, Phosphorus and Potassium

Nitrogen (N), the main constituent of protein is essential for growth and development in plants. As nitrogen is one of the single most common nutrients that limits agricultural productivity, its value in modern food production is unquestionable. Supply of nitrogen determines a plants growth, vigour, colour and yield. Phosphorus (P) is vital for adequate root development and helps the plant resist drought. Phosphorus is also important plant growth and development, such as the ripening of seed and fruit. Potassium (K) is central to the translocation of photosynthates within plants, and for high yielding crops. Potassium helps improve crop resistance to lodging, disease and drought. In addition to the three primary nutrients, the secondary nutrients sulphur, magnesium and calcium are required for optimum crop growth. Calcium is particularly essential for yield, quality and storage capacity of high value crops such as fruit and vegetables.
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Plants need nutrients to grow

m Sodiu
Warmth Light Water Nitrogen
Phosphorus
Potassium
Calcium
Oxygen
Soil conditions and other growth factors
Boron
YIELD
The law of minimum

The law of minimum is often illustrated with a water barrel, with staves of different lengths. The barrel`s capacity to hold water (or the plants capacity to reach maximum yield) is determined by the shortest stave. The yield of plants is frequently limited by shortage of nutrients or water. Once the limiting factor (constraint) has been corrected, yield will increase until the next limiting factor is encountered. Yield responses to nitrogen are frequently observed, as nitrogen is often a limiting factor to crop production, but not the only factor. Balanced nutrition is used to obtain maximum yield and avoid shortages of nutrients.
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Nitrates vs. urea

! Nitrogen in ammonium and nitrates forms is readily available to plants, while urea needs to be transformed
Plant uptake
Urea
Ammonium
Nitrate
Hydrolysis
Nitrification
Nitrate is the most important fertilizer in Europe

Nitrate is a fertilizer particularly suited for European climate

Ammonia is the basis for all nitrogen fertilizer. Ammonia can be applied directly to the soil, but for several reasons, including environmental, its more common to further process ammonia into, e.g., urea or nitrates. While ammonium and nitrate are readily available to plants, urea first needs to be transformed to ammonium (not the same as ammonia) and then to nitrate. The transformation process is dependent on many environmental and biological factors. E.g., with low temperatures and low pH the transformation is slow and difficult to predict with resulting nitrogen and efficiency losses. As a consequence, nitrate is in general a higher quality nitrogen fertilizer with a particularly large market share in Europe.
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Fertilizer characteristics Organic compared to Mineral fertilizer

Characteristics ! Nutrient source Organic fertilizer ! Crop residues and animal manures Mineral fertilizer ! Nitrogen from the air and minerals from the soil ! High concentration ! Immediately available for the crop ! Traceable and consistent
! Nutrient ! Low concentration concentration ! Nutrient availability ! Quality control ! Variable
! Often inconsistent
Organic fertilizer contains the same inorganic molecules as mineral fertilizer

Crops can be fed with mineral or organic fertilizers, and in both cases the crop will utilize the same inorganic molecules. A complete nutrient program must take into account soil reserves, use of organic manure or fertilizers, and accurately supplement with mineral fertilizers. Organic manures or fertilizers are often bulky making them difficult to handle, they have an unpredictable release pattern of nutrients, and are often inconsistent in their nutrient content. In contrast, mineral fertilizers offer concentrated, immediately available nutrients, with a consistent nutrient content.
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The basis for mineral fertilizer: Energy, ammonia and natural minerals
Nitrogen (N) from air Ammonia Natural gas Natural minerals:

s
s
Finished products:
s
s s s s
Urea Nitrates NPK Specialty fertilizers Industrial products
Phosphorus (P) Potassium (K)

Utilizing the Earths natural ingredients

The basis for the production of nitrogen fertilizer is fixing nitrogen from the air by combining it with hydrogen from natural gas to form ammonia. Phosphorus and potassium are extracted from mines and sometimes combined with ammonia or nitric acid to form fertilizers with different ratios of each nutrient. Side streams of the main fertilizer production are upgraded and sold as specialty fertilizer or industrial products.
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List of contents
" " "
The global industry

This section focuses on the fertilizer industry structure and the difference in characteristics between the nitrogen and the phosphorus and potassium industry. The most important challenges and opportunities are also presented.
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Global fertilizer consumption of Nitrogen, Phosphorus and Potassium

138.7 mill. tonnes*
Potassium (K) 16%
Phosphorus(P) 24%
Nitrogen (N) 60%
* Nutrient tonnes Source: IFA statistics season 2001/2002

Nitrogen is the most important plant nutrient

The global market for the three nutrients N, P and K was approximately 140 million metric tonnes in the 2001/2002 season. Nitrogen dominates the consumption with a share of 60% measured in nutrient tonnes as this is the most important of the three primary nutrients. According to industry convention, when measuring concentrations of the primary nutrients, nitrogen is measured as such, while phosphorus content is measured as P2O5 equivalents and potassium as K2O equivalents. When fertilizer is measured in nutrient tonnes, it is the weight of these equivalents which is given. Nutrient weight for a fertilizer is always less than product weight as a product typically contains additional substances like calcium, oxygen, hydrogen etc.
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Global nitrogen fertilizer consumption by product

82 million tonnes
NPK
10%
Other
29%
49% Urea
12%
* Nutrient tonnes Source: IFA statistics season 2000/2001
Nitrates (AN/CAN)
Urea the largest nitrogen product in global volumes

Urea is the main nitrogen product and is also the driver of the price for nitrogen. Prices of other nitrogen products correlate with the movement in the urea price. Nitrates is a particularly popular nitrogen source in Europe and to some extent in North America. NPK is primarily bought due to the additional requirement for P and K.
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Fertilizer market by application

Wheat 18% Other 32%
Rice 17% Cotton 3% Fruit&Vegetable 6% Other cereals 7%

Source: FAO
Corn 17%
The three large grain crops consume about half of all fertilizer
Wheat, rice and corn are the largest fertilizer-consuming crops. This is not surprising as these crops constitute the staple foods of the worlds population. However, there are several other crops like fruits and vegetables, cotton and others with high value per kilo that are important for global fertilizer consumption. Typically, different crops prefer different combinations of the three primary nutrients and other trace elements leading to demand for numerous differentiated fertilizer products.
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Nutrient and industry characteristics

Characteristic Application Nitrogen (N) Must be applied every year resulting in stable volumes Phosphorus (P)/ Potassium (K) Annual application not necessary as nutrients can be stored in soil Few suppliers
Industry structure
Industry not consolidated, input cost swings Chemical process industry
Production classification
Mining industry
Nitrogen industry has different characteristics compared to phosphate and potash

Due to different nutrient and industry characteristics, nitrogen fertilizer companies are not always directly comparable to fertilizer companies focused on phosphate or potash. Nitrogen volumes are typically more stable as nitrogen must be applied every year. However, the price of nitrogen (ammonia and urea) tends to fluctuate more than, in particular, potash as the nitrogen industry is less consolidated and more affected by energy costs. This represents both a challenge and an opportunity for the nitrogen industry. Finally, the nitrogen industry is classified as chemical process industry while phosphate and potash are mining industries. However, the production processes for phosphoric acid and DAP are also classified as chemical production. As a consequence, different capabilities are required for top performance in the different parts of the fertilizer industry.
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Nitrogen fertilizer industry dynamics: Challenges and opportunities

Substitutes: Low ! Organic fertilizers only relevant where land or wealth surplus
Buyer power: Moderate ! National/regional distributors/coops ! Need security of supply Supplier power: Low ! Raw materials readily available
Attractive cashflow through the cycle for industry leaders
Competition: Moderate to high ! Regional fragmentation (consolidation in progress) ! Limited differentiation ! Separate regional dynamics
Entry barriers: Moderate to Low ! Capital intensive ! Economies of scale ! Low cost energy only in some regions ! Transportation costs ! Basic technology availabl
The key forces in the nitrogen fertilizer market

Substitutes: the risk from substitution through organic fertilizers is considered low for the global fertilizer industry. This is only relevant in areas where there is a surplus of land or purchasing power. Competition: the global fertilizer market is generally fragmented, with limited product differentiation. Strong regional presence and closeness to customers in the different markets are key success factors, requiring an extensive distribution and sales network. The entry barriers are considered moderate to low. The production technology for commodity nitrogen fertilizers is readily available, but the production process is highly capital intensive. There has a trend away from government financing of fertilizer capacity which has moved the industry to be more market driven than in the past. Economies of scale are important in reducing fixed costs per tonne and achieving general cost competitiveness. Another key element is access to low cost gas, which is only available in certain regions of the world. In terms of purchasing strength of the customer, this is considered moderate. The national/regional cooperatives have critical mass and can exercise a certain price pressure as nitrogen fertilizers are readily available, but they are also dependent on security of supply.
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List of contents
" " "
The European industry

This section describes the European industry structure, challenges and opportunities.
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Nitrogen fertilizer consumption in West Europe 2001/02

9.4 million tonnes N
Urea NPK
23%
15%
Other
21%
41%
Nitrates (AN/CAN)
Source: EFMA
Nitrate is the most important nitrogen fertilizer in Europe

For agronomic reasons, nitrate is the preferred nitrogen source in West Europe, and hence commands a price premium above urea. NPK is the second most popular nitrogen fertilizer as it makes balanced fertilization easy. Urea is used to a lesser extent and primarily in the southern parts of Europe.
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West European market shares for N fertilizer 2001/02

Imports 26% Hydro Agri 24%
Other WE
Agri is the largest fertilizer company in Europe

Agri has approximately 25% market share for fertilizers in Europe. Imports have approximately the same market share, and could be regarded as the main competitive supply. Other important European suppliers are Fertiva (K+S), Kemira, Grande Paroisse (Atofina/Total), Fertiberia, Terra, DSM and smaller players. None of Agris competitors have European market shares above 15%.
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European market developments

! EU enlargement ! EU Common Agricultural Policy (CAP) ! Russian WTO entry ! Positive supply/demand outlook for grain
European market development poses some challenges, but also opportunities

Lower labor costs and probable increased agricultural subventions in new EU member states are likely to lead to a moderate shift in agricultural products towards the eastern parts of EU. A change can also occur due to subsidies moving away from production volumes and towards quality and other factors (CAP). In the short term, EU anti-dumping measures and other import restrictions on all products except AN, are expected to have little effect as market prices currently are above the defined Minimum Import Price. If market prices go down, the implemented anti-dumping measures will have a positive effect for EU producers. Recently global and European grain production have been below consumption reducing stocks and leading to a limited overall downside. In general, European competitiveness relative to imports has been more important than European overall consumption level.
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Net import to Western Europe

2500
2000
kt nitrogen
1500
1000
500
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: EFMA
European imports stabilized

The restructuring of the West European nitrogen industry has opened up for increased imports, even in the slightly declining market. However, since 2000 imports have been reduced and seem to have stabilized. The long term success of the European industry is mainly dependent on competitiveness versus imports, and less on the supply/demand balance in Europe itself.
2002
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Nitrate capacity and nitrate fertilizer consumption in West Europe

7000 6000
Capacity
5000
kt nitrogen
4000 3000 2000 1000 0

1989 1990 1991 1992 1993 1994 1995 1996
Consumption
1997
1998
1999
2000
2001
Source: EFMA
Improved market balance in Europe

The recent restructuring in the European nitrate industry has resulted in a significant reduction in nitrate capacity. The decline in capacity is stronger than the decline in consumption, leading to additional need for imports. As there is only a small number of fertilizer companies with a long-term focus on the European market, there are several plants of other players which are poorly maintained and could be closure candidates in the years to come. This could create interesting opportunities for dedicated companies to increase their market share in a market with a potentially attractive supply-demand balance.
2002
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List of contents
" " " "
Drivers of demand Drivers of supply Price relations Production economics
Industry value drivers and trends

This part describes what Agri believes are the most important value drivers in the fertilizer industry.
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Industry value drivers Revenue drivers
Drivers
Grain prices Gas price USA Ammonia price European market balance Market segmentation Urea price
Effect on
Ammonia price Urea price Nitrate margin Value added margins
Industry value drivers determine potential for cash generation

Grain price is one of the main drivers for fertilizer demand. There is approximately 50% common variation between global grain prices and the urea price. The production costs of the marginal or so called swing producers, which over the last 4 years have been the US producers, establish the floor price for ammonia, and also indirectly for urea. The main driver of the US producers costs is the US gas price. Nitrate prices in Europe are based on the urea price plus a margin where the latter is determined by the European supply/demand balance. Finally, a companys innovation and marketing skills determines its opportunities to fetch margins beyond industry average.
33
List of contents
" " " "
Drivers of demand
This section describes what Agri belives are the most important drivers of demand of fertilizer products.
34
Population and arable land drives grain consumption

Hectares/person 0.5 Population(billion) 10
0.4 0.3 0.2 0.1 0.0
8 6 4 2 0
1960
1970
1980
1990
2000
2010E
Hectares/person
Source: IFA,Worldmarkets.com, Hydro
Population
Fundamental forces drive growth

Land per person is decreasing as a result of population growth and reduced land availability. In order to produce enough food, productivity or yield per hectare has to be improved. The main challenges are Increasing the area of productive land Increasing the yield per unit area of land Maintaining soil productivity and reversing the nutrient mining of soil Improving agriculture sustainability through better resource management (e.g. erosion control, improved water-use efficiency) Breeding new crop varieties with higher yield potential and improved tolerance to pests, diseases, drought and other stress factors Promoting and expanding agriculture research and advisory services to help improve farmers practices
2020E
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Nutrient sources of productivity boost

3.0 2.5 2.0 1.5
Nutrient source
Tonnes of wheat per hectare
Mineral fertilizer
1.0 0.5 0.0
1960 1970 1980 1990 2000 2010E 2020E
Manure Soil fertility
2.4% average annual fertilizer volume growth 1970-2000

Source: IFA,Worldmarkets.com, Hydro
Mineral fertilizer is the only sustainable large scale nutrient source

In a world with declining arable land, and an increasing population with a requirement for improved diet, history has shown that increased food production is dependent upon increased fertilizer application. Improved crop varieties have strengthened the plants ability to extract nutrients from the soil, but has not by far been as important as mineral fertilizer. The 30 years historical annual growth rate has been 2.4%. Future long-term average growth rate is expected to be less although external estimates vary.
36
Grain consumption and production

2000 Consumption 1950
million tonnes
1900 1850 Production 1800 1750 1700 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E
Source: FAO
Grain consumption higher than production last four years

For the last four years grain consumption has exceeded grain production which is clearly an unsustainable situation in the long-term. Sooner or later grain production has to be increased as stocks are being depleted. An increase in grain production typically leads to an increase in fertilizer consumption.
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Grain inventory relative to corn price

USD/bu 800 750 700 4
Grain inventory
3
Million tonnes
650 600 550 500 450 400 350 300 1994 1996 1998 2000 2002
Corn price
Source: FAO
Record low inventory

Grain stocks are historically low, and forecast to decline further in the short term. The situation is particularly tight outside China, where stocks are only 13% of yearly consumption. China has almost 50% of the global stocks, and can probably continue to draw down stocks for a while yet. Grain production will have to start closing the gap to consumption, which would normally lead to increased fertilizer consumption.
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Calorie consumption per capita per day

3400 3200 Developed countries 3000
Calories
2800 2600 Developing countries 2400 2200 2000 1985 1987 1989 1991 1993 1995 1997 1999 2001
Source: FAO
Improved standard of living following economic growth increases demand for food and fertilizer
Economic growth improves the diet in developing countries. More calories will be consumed, and also more proteins in the form of meat. Meat production is intensive, as it requires a lot of grain and (hence also fertilizer) to produce meat.
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Meat consumption per capita

Kilograms meat per capita per year
90 80 70 60 50 40 30 20 10 0 1992
Source: UNFAO, Roma
Developed countries
Developing countries
1994
1996
1998
2000
Fertilizer consumption is linked to change in diet towards more protein

Especially in developing countries the increased proportion of meat in the diet drives increased fertilizer demand. This represents a significant growth potential in the years to come. Typically, the production of one kilo of meat requires between 2 and 7 kilograms of grain: - 1 kg of poultry requires 2 kg of grain - 1 kg of pork requires 4 kg of grain - 1 kg of beef requires 7 kg of grain Total food consumption is expected to increase in the developing world based on increased population and improved diet.
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Consumption per nutrient

100 90 80
1.9%/year
million tonnes nutrient
70 60 50 40 30 20 10 0 1970 1975 1980 1985 1990 1995 2000 2005E
2.7%/year
2.0%/year
Source: IFA
IFA forecasts nitrogen consumption to grow by approximately 2% per year for the next five years
Most external sources estimate medium term growth rates close to 2%/year, although FAO, in their long term forecast(20 years), believes growth rates will be around 1%/year. A tight, and tightening, supply/demand balance for grain supports the argument that medium term consumption growth could exceed the long term average.
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Nitrogen consumption by continent

60 50
2.8%/year Asia
million tons nutrient
40 30 20
Europe
10 0
North America Latin America

2003E 2004E 2005E 2006E 2007E 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0.2%/year 0.2%/year 2.3%/year
Source: IFA
Stable consumption expected in mature markets while significant growth in Asia and Latin America
Measured in tonnes of product, growth will continue to be highest by far in Asia, but consumption is also forecast to grow strongly in Latin America. Mature markets like Europe and North America are not expected to experience significant growth.
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List of contents
" " " "
Drivers of supply
This section describes what Agri belives are the most important drivers of supply of fertilizer products.
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Nitrogen value chain
Raw Raw Material Material
Intermediate Intermediate product product
Finished Finished products products
Natural Natural
gas gas
Ammonia Ammonia
Fertilizer Fertilizer Industrial Industrial

products products
Natural gas major nitrogen cost driver

At current gas prices in the US, natural gas constitutes about 85% of ammonia production costs. Ammonia is an intermediate product for all nitrogen fertilizer, while nitric acid is a second intermediate product for the production of, e.g., nitrates. Finished fertilizer products are urea, nitrates (CAN, AN), NPK and others. Industrial products range from high purity carbon dioxide, basic nitrogen chemicals to industrial applications of upgraded fertilizer products.
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World gas prices USD/mmbtu, 2003 estimate
Alaska
1.5 1.5
Russia Netherlands
3.7 0.7 1.5
Ukraine Middle East
US Henry Hub
5.4
Trinidad
1.6
0.5
0.5-0.75
Algeria
Indonesia
1.7
Source: Fertecon. For US gas price: CERA

New ammonia capacity will be focused in areas with cheap gas

Favorable locations for new ammonia capacity are pockets of stranded gas mostly located around the equator with the main exceptions being Russia, Ukraine and Alaska.
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Cost structure for ammonia
Gas costs
Other
2003E price*
350 300 250

USD / mt
200 150 100 50 0 3 4 5 6 7 8

USD / mmbtu
* Ammonia price: NOLA barge fob Source: Blue Johnson & Associates.
Natural gas cost creates ammonia price floor

Due to the upward shift in natural gas prices in the USA in recent years, US producers have become the swing producers of ammonia. Therefore, the US gas price is one of the key factors determining ammonia prices as long as prices are supply-driven rather than demand-driven.
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Cost structure for urea

Ammonia cost Other cash production cost Process gas costs 2003E Urea price*
300 250
USD / mt
200 150 100 50 0 3 4 5 6 7 8

USD / mmbtu
* Urea price: NOLA granular fob Source: Blue Johnson & Associates.
Ammonia cost creates urea price floor

Ammonia prices also create a floor for the urea prices in a supply-driven market balance. Urea prices normally never go below this floor as a sufficiently large number of producers would then rather sell the ammonia at ammonia market prices.
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Global nitrogen capacity utilization

Urea capacity utilization
92% 90% 88% 86% 84% 82% 80% 78% 76% 74% 72% 70%
CRU (British Sulphur)
Fertecon
2003E
2004F
2005F
External industry analysts range from neutral to positive regarding capacity utilization in the next three years
Source: CRU, Fertecon
Capacity utilization - neutral to positive expectations among industry analysts

Industry analysts range from neutral to positive regarding the capacity utilization in the next three years. While Fertecon is on the conservative side, CRU (British Sulphur) is quite positive predicting a return to the cyclical highs of 1995 and 1996. While most analysts agree about the amount of new capacity expected in places like China, Iran, Oman, Saudi-Arabia, Qatar, Egypt, Trinidad and Australia, the uncertainty is related to the magnitude of closures and general consumption growth.
2006F
1995
1996
1997
1998
1999
2000
2001
2002
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List of contents
" " " "
Price relations
This section describes the price relations in the fertilizer industry
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Fertilizer and grain prices

USD/bushel corn
6 5 4 3 2
USD/tonne urea
300 250 200 150 100
Corn Chicago cash

1 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Urea fob ME
50 0
Source: Blue-Johnson
Correlation between long-term grain and fertilizer prices

Variations in grain price (corn or wheat) explain approximately 50% of the variations in the urea price, making grain prices one of the most important factors driving fertilizer prices. Some of the correlation may of course be spurious, like GDP growth, Chinese imports, strength of the USD etc. The price increase for urea in 2003 is to a great extent caused by the increased US gas price, although consumption growth has been strong as well.
50
Ammonia price and US production cost

300 250
Ammonia fob US Gulf

USD/tonne
200 150
US Gulf cash cost
100 50 0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source: Blue-Johnson
High US gas prices set ammonia price floor at attractive level

Over the last four years, US natural gas prices have established the prices of ammonia. Using the forward market for natural gas at Nymex on September 29 2003, forward US natural gas prices were at 4.9, 4.7 and 4.5 for 2004, 2005 and 2006 respectively. This makes it likely that there will be a high ammonia price floor set by the natural gas price during the next few years.
2003E
51
Ammonia prices when US Gulf is swing producer

Example assumptions:
US gas price: 4.0/mmbtu US cash cost: 36 * 4.0 + 26 = 170/mt US terminal cost for import: 12/mt cfr US Gulf: 158/mt Rounding: 160/mt 155 Fr.+duty: 40 115 Freight: 45 160 Freight: 30 130
The marginal producers determine global ammonia price floor

In a supply driven pricing environment, the region with the marginal producers determines the global ammonia prices. During the last four years the marginal or swing producers have been the producers in the US Gulf. Freight and duty costs between net import and export regions then determine prices in other geographies.
52
Ammonia and urea price

250
200
Urea (fob Black Sea)
USD/tonne
150
100
0.6 * Amm + 15
50
0
jan-93 jan-94 jan-95 jan-96 jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03
Source: Average of international publications
Ammonia prices determine the urea price floor

While energy costs for the ammonia swing producers set a price floor for ammonia, the ammonia price sets a floor for the urea price. If the urea price drops below this floor, more ammonia will be offered for sale, less urea will be sold, and the relationship will be restored. In a tight supply/demand scenario for nitrogen, the correlation is less, as urea plants run flat out. The supply/demand balance for excess ammonia (industrial, DAP/NPK and nitrates mainly) will determine the ammonia price, like during the mid 1990s. Calculation in graph is a rough approximation, see also production economics chapter.
53
Nitrate price in Europe and global urea price
700 600
USD per tonne nitrogen
500
CAN cfr Germany

400 300 200 100 0
Urea fob Middle East

Juil./93 Juil./94 Juil./95 Juil./96 Juil./97 Juil./98 Jul-99 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jul-00 01-Jan 02-Jan 03-Jan 01-Jul 02-Jul 03-Jul
Source: Average of international publications
Urea prices determine the price range for nitrates

There is a strong correlation between urea and nitrate prices, as they to some extent are substitutes for the farmers. For agronomic reasons, farmers are willing to pay a higher price per unit nitrogen for nitrates than for urea. The correlation is stronger in the medium to long term than within a season. The nitrate margin above urea is to some extent also influenced by the market balance in European nitrate industry.
54
10 years fertilizer prices

Ammonia Fob Trinidad
USD/tonnes 250 200 150 100 50 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
CAN Germany Bulk delivered warehouse

USD/tonnes 250 200 150 100 50 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Urea Bulk fob Middle East

USD/tonnes 300 250 200 150 100 50 0 19931994199519971997199819992000200120022003
DAP Bulk fob US Gulf

USD/tonnes 300 250 200 150 100 50 0 19931994199519961997199819992000200120022003
Average prices 1993 - 2002 Source: Fertilizer Week, The Market for CAN
Nitrogen fertilizer prices are currently higher than average

While urea and CAN prices are still only slightly above the historical average, ammonia prices are at historically high levels. This is partly linked to the high prices of oil and gas, but also related to strong demand. Taking into account the high energy prices, nitrogen fertilizer margins are close to a mid-cycle average.
55
Potential global industry concerns

! Increased exports from China ! Lower US gas prices ! Over-investment in capacity following todays higher than average fertilizer prices
Potential concerns should always be kept in mind

As in many industries, China represents a factor of uncertainty. China has demonstrated an ability to grow production in many industries and with WTO membership there are opportunities for increased exports. However, there are now also opportunities for increased imports to China. Lower gas prices in the US could lead to plant restarts of idled capacity. As US producers are the marginal producers today, this could lower the price floor when demand is weak. The global nitrogen industry (ammonia and urea) is cyclical. The most important long-term threat to an attractive price level is over-investment in capacity when prices are high. However, the construction of new capacity has become more market-driven in recent years. One could therefore expect current fertilizer investors to require a higher return than some of the historical state investors.
56
Global fertilizer industry trends

! Low grain stocks leading to increased fertilizer demand ! Improved global economic growth ! Limited new production capacity until 2005 ! US natural gas prices expected to stay quite high ! Further plant closures expected
Positive medium term outlook

The outlook for the supply/demand balance looks promising in the short to medium term. Fertilizer demand should benefit from historically low grain stocks and improved global economic growth. In addition, there is limited new capacity expected on-stream until 2005. With US gas prices expected to stay high next few years, the downside ammonia price risk is limited. Another potential upside is future plant closures due to limited investments in upgrading and new capacity during the last years.
57
List of contents
" " " "
Production economics
This section shows examples of the cost structure for ammonia, urea and CAN. The costs are not Agri figures, but typical industry costs.
58
Ammonia cash cost build-up example

Gas price: x Gas consumption: = Gas cost: + Other prod. costs: = Total cash cost 4 USD/mmbtu 36 mmbtu/mt NH3 144 USD/mt NH3 26 170 USD/mt NH3 36 mill. BTU natural gas/tonne ammonia Ammonia (NH3) (82% N)
Source: Blue Johnson & Associates.

Natural gas costs the most important cost component

With a natural gas price of USD 4/mmbtu gas cost represents around 85% of the ammonia production cash costs. In this example, one dollar increase in gas cost gives USD 36 higher gas costs. With the consulting firm CERAs US gas price estimate of USD 5.4/mmbtu for 2003 (Henry Hub), the gas cost increases by USD 50 , to USD 220 per tonne ammonia. Most of the other production costs are fixed costs and therefore subject to scale advantages. All cost estimates are fob plant cash costs excluding depreciation, corporate overhead and debt service for a US proxy plant located in Louisiana ( 1,300 metric tonnes per day capacity).
59
Urea cash cost build up example

Ammonia use: x Ammonia price: = Ammonia cost + Process gas costs + Other prod. costs: = Total cash cost 0.58 USD/mt urea 170 USD/mt NH3 99 USD/mt urea 21 20 (incl. loading) 140 USD/mt urea 36 mill. BTU natural gas/tonne ammonia Ammonia (NH3) (82% N) CO2 0.58 ammonia per tonne Urea Urea (46% N)
Source: Blue Johnson & Associates.

Ammonia the main input in urea

Typically, it takes 0,58 tonne ammonia for each tonne urea. If we add the gas cost in ammonia (USD 144) and the additional process gas costs needed for the production of urea (5.2 mmbtu x USD 4 = USD 21) , natural gas represents around 75% of the total production cash cost. All cost estimates are fob plant cash costs excluding depreciation, corporate overhead and debt service for a US proxy plant located in Louisiana (1400 mt per day capacity).
60
Theoretical consumption factors
Ammonia (82% N)
P and K
0.56 Urea (46% N)
0.41 AN (33.5% N)
0.33 CAN (27% N)
0.18 NPK (15-15-15)*
* There are several NPK formulas. 15-15-15 is just an example

Consumption factors to compare price movements

As shown in the costing examples for urea and CAN, the real ammonia consumption factors are above the theoretical consumption factors, which are based on N content. The difference varies between plants according to their energy efficiency. Using the theoretical consumption factors is easier when making calculations. If the N content for a product is known (46% N in urea), the ammonia consumption factor can easily be calculated by dividing the figure with the N content in ammonia (0.46/0.82 = 0.56). Based on this illustration, it is possible to follow relative variation in the various nitrogen prices. As an example, if ammonia becomes USD10/mt more expensive, the production cost of urea increases by 10 * 0.56 (0,46/0,82) = 5.6USD/mt. Similarly, if the urea price increases by USD10/mt, a price increase of 10 * (0.27/0,46) = USD5.9/mt of CAN would keep the relative pricing at the same level.
61
Useful sources of market information

! News, price references and short term developments ( 1 - 2 months )
" "
The Market Fertilizer Week " Fertecon " FMB " Green Markets (USA)
"
www.decyfer.com www.britishsulphur.com www.fertecon.com www.fmb-group.co.uk http://greenmarkets.pf.com
! Medium term ( 1 year ) supply/demand and price analysis

Outlook, from The Market. Monthly publications for ammonia, urea and DAP Fertecon British sulphur
! Longer term
" "
! Grain supply/demand and price

" "
International Grain Council Chicago Board of Trade
www.igc.org.uk www.cbot.com
62
Forward-Looking Statements/ Use of Non-GAAP Financial Measures

In order to utilize the safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995, Hydro is providing the following cautionary statement: This presentation contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company and certain of the plans and objectives of the Company with respect to these items. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. The actual results and developments may differ materially from those expressed or implied in the forward-looking statements due to any number of different factors. These factors include, but are not limited to, changes in costs and prices, changes in economic conditions, and changes in demand for the Company's products. Additional information, including information on factors which may affect Hydro's business, is contained in the Company's 2002 Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission. With respect to each non-GAAP financial measure Hydro uses in connection with its financial reporting and other public communications, Hydro provides a presentation of what Hydro believes to be the most directly comparable GAAP financial measure and a reconciliation between the non-GAAP and GAAP measures. This information can be found in Hydros earnings press releases, quarterly reports and other written communications, all of which have been posted to Hydros website (www.hydro.com).
63

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Agri Fertilizer Industry Handbook

Agri Capital Markets Day December 3-5, 2003

46477 11 2003 Hydro Media

The Agri Fertilizer Industry Handbook

Agri at a glance (1)

! Global ! Balanced ! Added value

46477 11 2003 Hydro Media

The global leader in plant nutrition

Agri at a glance (2)

! Low-cost ! Profitable ! Growth

46477 11 2003 Hydro Media

Upper quartile profitability with a strong platform for growth

Agri key facts

46477 11 2003 Hydro Media

Solid performance in 2002

Agris history and growth

1999-2001 1999Agri Turnaround

46477 11 2003 Hydro Media

An exciting history creating a platform for further value creation

Agris global network

Major plant Office

On the ground in ~50 countries, sales to more than 120 countries

Agris European network

Major plant Office

A leading European low-cost producer

Agri production capacity

4.0 4.6 2.2 0.9 11.7

4.0 0.3 0.5 0.4 5.2

Production capacity to serve customer needs

Agri production and sales 2002

JV Other Africa Latin America Sweden Italy

* Including bulk blends. Including total volumes bought from JV companies

Leading European producer with global presence

Three business segments

46477 11 2003 Hydro Media

Agri Value Chain

Marketing and sales

Purchased from JV companies

Sourcing Allocation Logistics

Business Units & Front Offices

Purchased from Third Parties

* Including bulk blends

Asset light production structure to meet global demand

What is fertilizer? The global industry The European industry

! Industry value drivers and trends

46477 11 2003 Hydro Media

Healthy food for plants

... yields healthy food for people

46477 11 2003 Hydro Media

The value of fertilizers in modern food production is clear

Plants need three main nutrients: Nitrogen, Phosphorus and Potassium

YIELD AND QUALITY

Nitrogen the main driver of yield

Three main nutrients: Nitrogen, Phosphorus and Potassium

Plants need nutrients to grow

Warmth Light Water Nitrogen

Soil conditions and other growth factors

The law of minimum

Nitrates vs. urea

Nitrate is the most important fertilizer in Europe

Nitrate is a fertilizer particularly suited for European climate

Fertilizer characteristics Organic compared to Mineral fertilizer

! Nutrient ! Low concentration concentration ! Nutrient availability ! Quality control ! Variable