Unmasking the Jordan Potash conundrum
In disclosures to the Jordan Securities Commission, the Arab Potash Company (APC) showed that rising production costs were the main factor for reduced profitability.
These disclosures, also published on the company website, indicated that the 26 per cent drop in profit came despite a 14 per cent rise in sales during the first half of this year.
APC maintained its sales revenues by raising the quantities sold during the first half of 2013 to 1.089 million tonnes compared to 931,000 tonnes during the same period in 2012.
Increased exports to India, Indonesia and Malaysia offset the drop in exports to China, but it coincided with a 14 per cent drop in the average sale price from $473 per tonne in the first half of 2012 to $405 per tonne in the first half of 2013. Consequently, sales revenues stabilised at about JD331 million.
Factors related to production costs, namely the huge rise in the cost of energy, water, and labour were the main factors behind the lower profit.
APC is the eighth potash producer in terms of quantities, but its production cost per tonne is among the highest worldwide.
Traditionally, APC’s competitive advantages were low cost of energy and labour, plus its location which allows easy access to India and China.
These advantages have all regressed. Firstly, because the cost of energy (fuel and electricity) rose to JD52.04 million in the first half of 2013, a rise of about 30 per cent over the corresponding period of 2012.
The electricity tariff shot up by 150 per cent since the middle of last year, and is expected to increase further in the second half of this year after the 15 per cent rise.
Secondly, the cost of labour increased by 9 per cent to JD31.3 million in the first half of 2013 resulting from agreements that raised unskilled labour wages by 20 per cent through formally employing day labourers, and also raised wages and benefits of the workforce, currently exceeding 2,300, without layoffs to counter competition.
Thirdly, the cost of water went up to JD3.69 million in the first half of 2013, a 9 per cent rise over the same period of 2012.
The advantage of the strategic location dimmed because Russia, one of the world’s largest producers, can deliver potash to China inexpensively by rail.
The APC administration studied several alternatives to enhance competitiveness by reducing production costs without labour cuts, in order to avoid exacerbating unemployment, particularly in the Kingdom’s poorest areas.
These alternatives included replacing heavy fuel with cheaper energy sources such as natural gas and solar power. The switch to natural gas could reduce production cost by about 30 per cent per tonne, depending on the adopted method.
APC also explored expanding production capacity to reduce the cost of production per tonne. Expansion scenarios were prepared that would attract to Jordan up to a billion dollars in direct investments, and create hundreds of job opportunities directly and indirectly. Moreover, these investments would revert to the Treasury once the concession period ends in 2058.
But the Jordan Investment Board’s decision to deny APC the exemptions requested for expansion risks to reduce the feasibility of such an expansion.
Within this context and for comparison purposes, the Israeli potash company ICL extracts about four million tonnes from the Dead Sea annually, compared to APC’s 2.35 — 2.45 million tonnes per year. Furthermore, ICL enjoys the competitive advantage of natural gas from the Mediterranean.
As a vital contributor to the Jordanian economy, APC paid the state Treasury a total of about JD1 billion between 2000-2012 (on average 70 per cent of net profits), in the form of income tax, mining fees, dividends and road, port and other fees.
If the company’s profits drop this would undoubtedly reduce this contribution.
- With 903 dead in six months, Turkey's job safety, or lack thereof, comes under fire again
- Bayt.com survey reveals the "Ramadan effect'" on the workplace
- Time for some basic labour rights? Why hiring Filipino housemaids just got almost impossible in the UAE
- Will Emirates' order cancellation mark a decisive blow to Airbus?
- To anyone buying gold in June: your patience shall be rewarded