U N I T E D N A T I O N S

SECRETARIAT
s t /e c l a /c o n f . 11 /L .13

15 December 1962

ORIGINAL* ENGLISH

SEMINAR ON INDUSTRIAL PROGRAMMING

Sponsored j o i n t l y by the Economic Commission

f o r L atin Am erica, th e Centre f o r I n d u s t r ia l
Development o f the United N ations and the
Bureau o f T e ch n ica l A s s is ta n c e O p era tion s,
w ith the c o -o p e r a t io n o f the E xecu tive Groups
o f th e B r a z ilia n In d u stry (GELA, GEIMAPE,
GEIMET, GEIN), o f the Confederação N acional
da In d u s tr ia and o f the Federação das
In d u s tr ia s do Estado de Sâo Paulo

Sao Paulo, B r a z il, 4 t o 15 March 1963

NITROGENOUS
FERTILIZERS BASED ON NATURAL GAS

r ’ -v.vPres’O nted' hy

The Research and E valu ation D iv is io n

Centre f o r I n d u s t r ia l Development
Department o f Economic and S o c ia l A f f a ir s

United N a tion s, New York

 ENGLISH ONLY

Provisional and Restricted

15 December 1962

NITROGENOUS

FERTILIZERS BASED ON NATURAL GAS

Prepared by

The Research and Evaluation Division

Centre for Industrial Development

63-3588?
 Nitrogenous fertilizers based on natural gas

Page

Introduction.......... 1
Section 1 Product description and processes. 2
Section 2 Production, consumption and trade.. 6
Section 3 Fixed investment and other inputs 12
Section 4 Production cost.....*,,................ 23
 NITROGENOUS FERTILIZERS BASED ON NATURAL GAS

Introduction

In countries where natural gas is at present being flared, efforts

have been focused at utilizing this wasted and unreplenished natural

resource. Products derived from natural gas are numberous although they

have been concentrated mainly in the field of nitrogenous fertilizers and

raw materials for plastics. The products discussed in this paper are

ammonia, ammonium nitrate, ammonium sulphate and urea.

Data on investment and other inputs as well as illustrative cost

structure are presented and analyzed for these industrias. These data

are basically derived from the United States' experience and are obtained

from engineering consultants. Some data incorporated in this part of

the study were also based on surveys made by experts and consultants for

establishing such industries in developing countries. Using these data

as a background, an attempt is made to point out differentials that may be

\encountered when applying these data in developing countries.

The data used here are based on a given technology for each of these

products. Alternative technologies, however, have been mentioned briefly

in Section 1 of this study. It should be noted that consideration of one

technology imposes a limitation on the scope of analysis when related to

developing countries, in which case raw material and other input require­

ments as well as local market conditions may dictate the use of

alternative technologies.
 Section 1 of the study is devoted to a brief description of producto»

their uses and production processes. Section 2 presents statistical

data covering Tecent trends on production, consumption and trade of these

products. Section 3 is devoted to an analysis of fixed investment,

labour and other inputs. In Section 4» an illustrative cost structure

depicting the United States1 experience is presented and analyzed.

Section 1

Product Description and Processes

Ammonia (NH^). Synthetic ammonia is a basic chemical which is

consumed mainly in the production of nitrogen fertilizers in addition to

several other industrial uses. It is utilized in the production of such

products as ammonium nitrate, ammonium sulphate and urea. In recent years

the direct application of anhydrous ammonia to the soil is also coming into

increasing use in the United States as will be shown later in this study.

The main reason for this rapid growth is that ammonia is the cheapest source

of nitrogen for agriculture, once the methods of utilizing it directly were

worked out. The fact that its direct application requires rather advanced

farming techniques and additional investment on the part of the fanners

would limit its use in the developing countries. Moreover, a solution of

ammonia in water may also be produced and is often mixed with other

nitrogenous solutions. These solutions may be injected directly into the

soil. However, the need for specialized equipment, although not as

expensive and technically advanced as for anhydrous ammonia, would still

impose Borne limitations on its use in under-developed countries. On the

other hand, in these' countries adding ammonia in the aqueous form to

irrigation water may prove to he highly successful provided that proper

care is used in its application.-

As regards other industrial uses, large quantities of anhydrous

ammonia are utilized for operating refrigeration machinery both in

storage and in transportation, especially in the United States and in

Europe. It is also vory useful in the engineering industries for

nitriding. Its chemical uses include the manufacture of soda ash by

the ammonia soda process, the production of hydrogen cyanide, acrylonitrile

and other products. . ,

Carbon dioxide is produced as a by-product in manufacturing synthetic

ammonia, and when highly purified from traces of oil, can be used for the

production of solid carbondioxide or "dry ice". This has considerable

application in the refrigeration industry, notably for, ice cream manu­

facture, as well as in atomic energy plants and in the engineering

industries. •

Ammonia can be synthetized by different routes, but all of them

imply the use of a large amount of- hydrogen for fixing the nitrogen

extracted from the atmosphere. The choice of processes for recovering

hydrogen depends essentially on availability of ravy material. .Most of

the recently built ammonia plants, however, have natural gas as raw

material.' Producing ammonia from, natural gas involves one o,r two

processes, the steam-methane reforming process or the partial oxidation

process; the former process is preferred, because, inter alia, it does

hot have as many operating problems as the partial oxidation process, and

for small and medium size plants it requires less amount of capital invest­

ment.
 Ammonium Nitrate (NH NO ). One of the most important nitrogen
Jt - —
fertilizers is ammonium nitrate. It has a high nitrogen content

(33*5 per c e n t ) ^ and is a quick-acting fertilizer for crops. Its

use as a fertilizer was limited because of its tendency to explode

and it had the tendency to coalesce in large blocks ("tombstones")

instead of remaining in a granulated form more suitable to feed crops.

This inconvenience was overcome by granulating ammonium nitrate and

coating the granules with clay or diatomacious earth. Ammonium nitrate

is also the starting point of several explosives. Another use of

ammonium nitrate is in the manufacture of nitrous oxide, which is also

used as an anesthetic.

The process to produce ammonium nitrate consists of two stages, the

first involves the oxidation of ammonia to nitric oxide (NO), further

oxidation of nitric oxide to nitric dioxide (NO^) which is absorbed in

water to form nitric acid. In the second stage, the nitric acid reacts

with the required quantity of ammonia to produce ammonium nitrate.

tjrea (NH CO HHg). It is a product of versatile use. Its major

use, however, is as a fertilizer where its advantage lies in high nitrogen

content, 46 per cent. It also has large application as raw material for

thermoplastic resins? urea-formaldehyde compounds are used in glue and

plywood manufacture.

There are many urea processes in operation. These include the I.G,

Farben process, DuPont, Imperial Chemical Industries, Montecatini, Dutch

State Mines, Pechiney — Grace, Chemico and Inventa-Vulcan. Ammonia and

carbon dioxide are combined under pressure to form ammonium carbamate.

l/ Pure ammonium nitrate has a content of 35«0% of nitrogen.

 - 5 -

This is dehydrated to form urea and water. Unreacted ammonia and

carbon dioxide are released, which are recycled or converted into

by-products such as ammonium nitrate or ammonium sulphate.

Ammonium Sulphate ((NH^^SO )'. It is a widely used fertilizer

and has been in use for many years. Ammonium sulphate presents some

advantages in respect to other nitrogenous fertilizers, it is easy to

handle and ship and does not set in bulk, as ammonium nitrate. In

preparing the conventional mixed fertilizers, ammonium sulphate is

required in order to give these fertilizers the proper physical conditions.

Until twenty years ago, ammonium sulphate was manufactured in the

United States almost entirely as a by-product of the coke-plants.of the

steel industry. When the demand for nitrogenous fertilizer began to

increase during the war at a steadily accelerating rate, new plants were

built in which synthetic ammonia was combined with concentrated sulphuric

acid to produce ammonium sulphate.

As it is well known, natural gas may contain sulphur. This may be

used as an alternative source to mined sulphur for use in production of

ammonium sulphate. Certain countries have natural gas rich in hydrogen

sulphide (the so-called "sour" gas), such as occurs in Arkansas, West

Texas and Wyoming in the United States. Methods have been developed for

removing hydrogen sulphide to purify the natural gas, and hydrogen

sulphide thus obtained is utilized to make sulphur or sulphuric acid.

Where sulphuric acid is not available but there are convenient

deposits of anhydrite or gypsum (calcium sulphate), ammonium sulphate can

be made using either of those minerals as a source of sulphur; this

 - 6 -

alternativo process is not used in the United States, but is employed on

a large scale in.Western Europe.

Section 2

Production, Consumption and Trade

The use of nitrogenous fertilizers has been increasing steadily

along with other synthetic fertilizers. Table 1-below indicates world

consumption of fertilizers for selected years in the last two decades.

The consumption of nitrogenous fertilizers since 1947/4-5 has been increasing

at an average of roughly 5 0 0 ,0 0 0 tons per year.

Table 1. World Fertilizer Consumption

(in thousand metric tons) &

Year Nitrogenous Phosphate Potash Total "

(N) (k 2°)
; . (p205 }

1937/38 2,485 3,678 2,960 9,123

1947/48 •3,109 5,017 3,104 11,230
I 95O/ 5I 4,191 6,208 4,514 . 14,913
1955/56 6,630 7,840 6,830 21,300
1959/60 9,220 9,530 8,380 ' 27,130

Source» Food and Agriculture Organization of the United Nations, Monthly

Bulletin of Agricultural and Economic Statistics, "Long-Term
Trends of World Fertilizer Consumption",(Rome, February 1962), p.l.

a/ In equivalents of plant nutrients (active components)

The rate of growth for the group of nitrogenous fertilizers, during

the post war period, has been faster than that of the other two groups,

namely 8.4 per cent per annum as compared to 7*6 per cent and 4*9 per cent

respectively for the potash and phosphate fertilizers. This resulted in

an increase in the share of nitrogen at the expense o f phosphate# Whereas

in 1947/48 nitrogen’s share was 28 per cent of total chemical fertilizers,

and that of phosphate 45 per cent, by I960 the consumption of the three

major groups of fertilizers was shared roughly equally by the three types

of fertilizers.

The various types of nitrogenous fertilizers are shown in Table 2

below. Ammonium sulphate and ammonium nitrate share between them over

half of the world total. Ammonium sulphate, however, has been losing its

predominant position and its share is being gradually equalized to that of

ammonium nitrate. Other fertilizers that have decreased their share in

-total consumption include ammonium sulphate nitrate, sodium nitra.te, calcium

nitrate and calcium cyanamide.

Table 2. World Production of Nitrogenous Fertilizers

by Products, 1954/55 - 1959/60
(Percentages of total output, unless otherwise specified)

Item 1954/55 1955/56 1956/57 1957/58 1958/59 1959/60

Ammonium Sulphate 31.2 31.6 30.0 28.7 28.5 26.0

Ammonium Nitrate 25.2 24*8 23.9 24.6 23.6 24.8
Urea 2.3 2.8 4-7 5.1 6.2 6.4
Combined Fertilizers 5.1 6.0 7.9 8.3 •8.7 9.5
Ammonium Sulphate )
Nitrate, Sodium ,
Nitrate, Calcium ;1 16.6 14.2 14.8 14.3 12.1 11.1
Nitrate, & Calcium)1
Cyanamide )1
Other 19.6 20.7 18.8 19 .I 21.0 22.3

Total 100.0 100.0 100.0 100.0 100.0 100.0

Total in Thousand
Metric Tons of (N.) 5 >600 5,932 6,469 7,030 7,6&9 8,007
Sourcet Food and Agriculture Organization of the United Nations, An 'Annual
Review of World Production, Consumption and Trade of Fertilizers,
T9597 I960. ------------------------------------------------
 Urea, the newcomer to the field, and combined f e r t i l i z e r s , have
% . . . » .

been increasing their share of the market. The share of "other”

fertilizers that include mainly anhydrous ammonia, aqua ammonia, ammonium

nitrate-water solution, and a combination of ammonia, ammonium nitrate and

urea dissolved in water, has also been increasing. Their use has been,

however, confined mainly to the United States.

The important consumers of nitrogenous fertilizers are the advanced

countries. Europe and Forth America (mainly the United States) shared

roughly 73 per cent of the total world consumption in the two years

I959-I 96O. In the same period, Asia followed with I4 per cent half of

which was consumed by Japan alone and the remaining by other countries of

the region. The Soviet Union accounted for 8 per cent of the balance and

the rest of the world 5 per cent.

The unbalanced pattern of world consumption may also be indicated by

the average consumption of nitrogen per hectare of arable land. Europe's

estimated consumption in 1958/59 was by far the highest amounting to

24 kilogrammes per hectare, followed by North and Central America 10 .5

kilogrammes, Asia 4.1‘kilogrammes, and USSR 3.1 kilogrammes} for the rest

of the world, consumption ranged between 1.2 and 1,9 kilogrammes.

International trade in nitrogenous fertilizers comprised an important

part of world output; export averaged 28 per cent of the total production

in the two years 1959-1960. Europe is predominant as the exporting region

accounting for 65 per cent of total export in the same period, followed by

North America I 5 per cent, South America (Chile) 6 per cent and Asia (japan)

13 per cent with the USSR handling the remaining 1 per cent. Europe
 - 9 -

imported in the same priod 38 per cent of the total followed hy North

America 23 per cent, Asia 25 per cent, Africa 9 per cent, with South

America, Oceania and the USSR sharing the remaining 5 per cent of the

market. Table 3 summarizes production, consumption and surpluses or

deficits for two selected years by major regions.

Table 3» Production, Consumption and Surplus or Deficit,

1955/56 and 1959/60
(in thousand metric tons (N) )

Region Production Consumption Surplus (+) or

Deficit (-)

195.5/56
Africa 38 203 ••• — 165 -
America, North and Central 2,246 1,959 - 45
America, South 227 112 t 109
Asia 813 1,075 - 311
Europe 3,359 2,780 + 440
Oceania 19 f 26 - 7
USSR 500 & 479 + 24

World Total 7,202 •6,634

1 959/6°,
Africa 59 230 - 169
America, North and Central 2,860 2,845 - 150
America, South 206 168 t 12
Asia 1,100 1,269 - 223
Europe 4,830 3,968 + 897
Oceania 25 33 - 8
ussW 74O 709 + 31
World Total
9,820 9,222

Sources Same as Table 2.

"sJ. Estimate
b/ Referring to July through December 1959
 - 10 -

An order of magnitude of possible future requirem ent for nitrogenous

fertilizers in the developing regions has been estimated at 30 million

2/
tons by 1980.-/ This compares with a low volume of 4 million tons

reported for these regions in I960. By I 98O the world total was estimated

at 70 million tons, assuming a moderate increase in the consumption of

fertilizers for the rest of the world. Estimates for the developing

regions were derived primarily as followss *

(i) Targets of food requirements were set at 174 to 219 P®r cent of

a base y e a r ^ A moderate rate of growth in fertilizer consumption was

assumed for countries that have already attained a high use of f ertilizers

such as- Japan and China (Taiwan).

(ii) Average relationship between the value index of crop production

and input of fertilizer used per arable hectare in 4I countries in the

years 1956-1958 was established. This average relationship was used as a

basis for calculating the quantity of fertilizers needed to attain the set

targets.

It should be emphasized that the figures given above are not

projections of effective demand for fertilizers. They are estimates of

requirements that may be needed to attain defined nutritional goals under

2/ F.W. Parker, "Fertilizers and Economic Development", paper delivered

at the Fertilizer Workshop, American Society of Soil Science, Purdue
University, February 1962. Estimates for developing countries
include 5*0 million tons for China (Mainland),

2/ Set Targets for 1980 (i960 = IOO)

Africa 17 4
Asia and Far East 219
Latin America 194
Near East I 9O
given assumptions. These goals assume, inter alia, a sustained rate of

growth in agricultural output, ranging between a rate of about 3 per cent

for Africa, and of 5 per cent for Asia and the Par East. To emphasize

the magnitude of such a task, one may refer to the fact that a sustained

5 per cent growth in agricultural output has not been attained in the past

by any of the world regionsj and only a few countries have succeeded in

attaining such high goals for a period extending over ten years. It may

be mentioned at this point that these production goals in agriculture

compare favourably with those incorporated in the development plans of

various developing countries.^

qJ Parker, op.cit.
 Section 3

Fixed investment and other inputs

Fixed investments? these include cost of processing equipment;

auxiliary facilities that include utilities, such as a power and steam

supply, and cooling water facilities,.etc., equipment for laboratories and

workshops; buildings and structures; erection cost for equipment, building

and structures; as well as miscellaneous costs that include design and

engineering fees and allowance for contingencies.

The major components of fixed investment for the fertilizer plants under

consideration are* process equipment sharing between 25 and 35 per cent of

total investment, erection of process equipment between 10 and 15 per cent,

utilities and auxiliaries between 10 and 20 per cent. Because most equipment

is installed outdoors, buildings for these plants include mainly facilities

for offices, control room, laboratory and workshop, and they share a small

part of total investment, roughly between 5 and 10 per cent. The rest of

fixed investment goes to design and engineering fees and investment overhead.

Table 4 indicates the fixed investment of new plants in the United States

for the several products discussed in this paper. These costs represent

plant investment s ^ a n d they refer to the supply and erection of process equip­

ment required to manufacture the products in given size plants. They refer to

small- to medium-size plants. The following are the additional costs that

have to be faced;

In the United States this investment is referred to as "batterylimits".

The investment figures given in the text are "turn key" and presented on
a United States Gulf Coast basis.
 - 13 -

(i) Purchase of land on which to erect the plant and its amenities.
(ii) Installation of foundations, drains, roads and fences.
(iii) Transportation of equipment from the place of purchase.
(iv) Installation of services such as power and steam supply.
(v) Provision of cooling wator facilities, including circulation
towers, if necessary.
(vi) Construction and equipment of laboratories and workshops.
(vii) Administration offices and medical services.
(vüi) Canteens and lavatories
(ix) Storage and packing facilities.

As a general guide, it can he taken that plant investment should he

ahout doubled to arrive at the total fixed investment of the factory^

If the site is in an isolated area, provision of housing and other

amenities is required for the staff and workers.

Investment in the plants under consideration obviously involves

economies of scalej that is total investment increases less than

proportionately .to plant capacity. The investment figures derived from

the capacity coefficient given in this paper indicate that quadrupling

the capacity of an ammonia plant would require tripling total investment.

There are several reasons for this well known behaviour of fixed

investment. Doubling the capacity of unit equipment such as converters,

heat exchangers and preheaters would require less than double the steel,

and labour requirements for producing larger units also increase less

than proportionately, with a consequent decrease in unit cost of producing

larger units of equipment. A substantial increase in plant capacity would

6/ In the engineering and trade circlos of the United States this is

deferred to as "grass roots investment".
 - 14 -

also require a ranaliei* expansion in some of the auxiliary facilities such as

..workshops and laboratories, and erection cost behaves in a simil r way*

Table 4 gives the capacity exponent for several products. It should

be emphasized that these exponents are at best a first approximation and

are in no way a substitute for a detailed investigation of any particular

size plant under consideration. They are applicable only within a certain

range of plant capacities.

Table 4. Plant investment in the United States

Total and per ton of annual capacity

Annual Plant investment Capacity

Product capacity Total Per ton coefficients/
(in thousand (in million of annual (in percentage)
tons) dollars) capacity
(in dollars)

Ammonia 66 4.1 62 0.88

Ammonium Nitrate 50 2.5 50 0.71
Urea 40 2.6 65 0.67
Sulphuric Acid 66 1.2 18 0.65
Ammonium Sulphate 50 2.4 • 48 0.65

Source? "Utilization of Natural Gas in Petrochemical and Other Industries"?

paper prepared by the Division of Industrial Development and the
Department of Economic and Social Affairs, United Nations and presented
at the Second Symposium on the Development of Petroleum Resources of
Asia and the Far East, Teheran 1-15 September 1962.

a/ The Ammonia plant is based on the steam-gas pressure reforming process,

and it is assumed that gas engine driven compressors would be used.
Thé major equipment required includes steam raising capacity, primary
reformer, socondary refermer, CO shift reactor, CO^ stripper,
CO absorber, CO stripper, compressors, circulators, heat exchangers,
NH^ convertor and ammonia storage facilities.

The Ammonium Nitrate unit includes a nitric-acid unit of high-pressure

type. Ammonium nitrate is produced as prills. Major equipment
included in the nitric acid plant are air compressors, ammonia con­
vertors, waste heat boilers, absorption and bleaching columns, pumps
and storage tanks. For the ammonium nitrate plant, a neutralizer,
evaporator, prilling tower, drier, cooler and bagging equipment are
required.
 (continued)

The Urea unit is of the "total recycle" type, and includes

facilities for prilling. Major equipment includes a reactor, first
and second stage condensers, prilling tower, crystallizer, CO^
compressor, condensator, dryor, BH, pre-heater, first and second
stage distillers, urea solution concentrator, filler press, centri­
fuge, separators, pumps and drums.

The Ammonium Sulphate plant consists of two parts. In the first,

sulphur is converted into sulphuric acid, which requires a sulphur
burner, gas cooler, heat exchanger, 3ulphur dioxide converter,
sulphur trioxide absorption system, acid storage tanks. The
second plant requires vacuum crystallizer, centrifuge, drying and
bagging equipment.

This is an engineering coefficient. It is the same as elasticity

of investment which implies a constant rate of growth for total
investment in response to changes in capacity. The following
“ formula definos the relationship with (a) as the constant —
elasticity, (C) as capacity and (i) total investment?

This functional relationship when plotted on a logarithmic chart

shows itsolf as a straight line.
 - 16 -

S evera l points may be e x p lo re d at t h is s ta g e . It is well known that

the increase in plant capacity that yields returns to scale cannot be

expected indefinitely. There is a maximum capacity beyond which no return

to scale is possible and a further increase in production can be achieved

only by adding new units of production. The maxima plant capacity involved

vary from industry to industry and change of course with the technology.

The economically acceptable plant sises impose a limit on the other extreme,

since because of a steep rise in unit cost of equipment with decreasing

capacity, there is a minimum below which it is not economically feasible to

operate. Several capacities are illustrated for most products under con­

sideration elsewhere in the paper, and they include both small and large

scale operations based on United States experience. These, however, are

not necessarily identical with the minimum or maximum scales in the United

States. It will be kept in mind that these maxima and minima, particularly

the latter, would vary from country to country, depending on the techno­

logical feasibilities as well as the economic and market conditions in each

country and plant location.

To illustrate this, in the United States, unless under exceptional

conditions, it would be extremely unlikely if a new ammonia plant were to be

installed with a capacity of less than 180 tons per day, and this would apply

to most Western European countries as well. Under different economic para­

meters such as exist in developing countries, a minimum capacity as low as

30 tons per day may prove to be economical.

Capital saving may be derived from the integration of several fertilizer

plants on the same site. Such saving is attained as a result of the

 - 17 -

utilization of (several common auxiliary facilities as well as of reduced

installation cost. Fertilizer complexes may include facilities for

production of ammonia, ammonium nitrate, ammonium sulphate, and urea. The

factory would produce ammonia, part of which would he converted into

ammonium nitrate, part into uroa and part into ammonium sulphate, thus

giving a complete range of nitrogenous fertilizers.

Two hypothetical examples of a large and a small complex of nitrogenous

fertilizers grouped in one factory may he as follows?

a/ 1 11
Product-7 Daily Capacity Daily Capacity

Ammonia 140 S. tons 520 S. tons

Ammonium Nitrate 150 " " 500 " "

Urea 60 " " 3OO " "

Ammonium Sulphate I 5O " " 5OO " "

a/ Ammonia required per ton of output? O.46O tons for Ammonium Nitrate,
O .575 tons for Urea, and 0.258 tons for Ammonium Sulphate.

A United States consultant firm, that supplied the above information on

these complexes estimated fixed investment at between 20 and 30 per cent less

than when individual plants of the stated capacities are built on different

sites.

So faryinvestment has been analyzed for an advanced country, namely the

United States. A differential in investment will arise in under-developed

countries because of added ocean freight and insurance on imported equipment

and materials, import profits and difference in cost of erection. As

regards the latter, it is likely that the lower wage rates in under-developed
 - 18 -

countries may be offset at least in part by the low factor performance.

Furthermore, high cost of specialized engineers and technicians,as well

as skilled labour,generally have to be imported for that purpose? the

cost of services of these specialists is higher than in their own

countries.

An indication of the order of magnitude of the differential in fixed

investment may be taken from a survey prepared by a German consultant for

the utilization of natural gas of an under-developed country in the Middle

East. The survey was based on the experience of the Federal Republic

of Germany with adjustment to the conditions of the Middle Eastern country.

Assuming the purchase prices of equipment are the same in both cases, the

cost of ocean froight and insurance (between 13 and 15 per cent of equipment

cost) was added to the cost of equipment in the Federal Republic to arrive

at the equivalent cost in the Middle Eastern country. Whereas local wages

were lower than in the Federal Republic, they were more than offset by the

additional labour required because of lower labour performance. Cost of

German personnel required for erection of these plants was more than twice

that in the Federal Republic, Furthermore, it was estimated that building

and construction unit cost for practically all components of construction

was between 130 and 300 per cent higher in this under-developed country?

the only exception was the cost of asphalted roads which was estimated at

half the German cost.

The cost of investment for the Federal Republic of Germany was recomputed

by adjusting for the ocean freight and insurance on equipment, labour and
 - 19 -

construction costs. The resulting figures showed that the cost of

investment for the Federal Republic was between 10 and 15 per cent

lower than that suggested for the under—developed country. The investment

cost differential would be still higher than that suggested by these

figures but for the fact that in computing the investment cost for the

Federal Republic some items were left unadjusted; such as the cost of

additional buildings required for equipment on account of the difference in

climatic conditions in both countries.

Fixed investment discussed so far refers to direct investment in the

plant proper; in developing countries additional investment may have to

be incurred in economic and social infrastructure, such as housing and

other social amenities for the labour force, transportation, power generating

and water supply facilities. This type of investment would vary from one

country or location to another and in some cases, it may he rather substantial

Such investments, however, have been treated independently of direct invest­

ment elsewhere in this study, since it affects production cost through

factors of production other than direct investment, i.e. cost o'f labour,

power, transportation, water, etc.

Operating capital may also be mentioned at this stage. In developed

countries this may amount to about between 25 and 30 per cent of fixed

capital. High operating capital is needed because of the seasonal

characteristic of demand for fertilizers. It is expected that this type

of capital would he much higher in developing countries because of higher

inventories and costs of such items as spare parts, raw materials, etc.

The magnitude of the differential between developed and under-developed

countries is not possible to ascertain and research into this aspect is needed
 - 20 -

Other inputs; Owing to the large degree of mechanization included in the

design of such plants, the labour required for the actual operation of the

plant itself is small. Table 5 indicates operating labour required for

the various products under consideration. T o arrive at total labour

requirement one should add maintenance labour as well as labour needed in

operating and maintaining the auxiliary activities. Total labour require-

t
ment is at least twico that of operating labour.

Another important feature of labour input is the economies of scale

obtained with the increase in scale of operation. The number of operators

varies only slightly v/ith the capacity of the installation. Furthermore,

supporting labour in the auxiliary activities, such as maintenance labour,

increases less than proportionately to capacity.

Table 5. Operating labour requirement in nitrogenous fertilizer plants,

United States

Annual Number of Man-hour per tor

Plant capacity workers capacity
(in tons) per 3 shift
à .day

Ammonia 66,000 12 0.36

Ammonium nitrate 82,500 12 0.29

Urea 40,000 9 0.45

Ammonium sulphate 50,000 12 0.48

Sourcei Same as Table 4*

a/ Assuming 2,000 working hours per man per year.

It will also be noted that the possibilities of labour—capital substi­

tution in these industries are not very great. The ’'core” operations in
 - 21 -

these plants require a highly specialized and automated equipment

sp e cifica lly designed fo r the chemical reactions needed. It is not

possible to modify the equipment sp ecification s, without impairing the

technical process or the quality of product, so as to accommodate fo r more

intensive u tiliz a tio n o f labour at the expense of equipment. In the

auxiliary a ctiv itie s , however (such as internal transport, maintenance)

limited labour capital substitution may be possible. On the other hand,

integration of several plants into a complex which leads to sharing of

labour in the common auxiliary a ctiv itie s would reduce labour requirement.

So far as labour requirements in developing countries are concerned,

i t is unlikely that direct operating labour in the plant proper would

d iffe r sign ifican tly from what prevails in developed countries. Such

plants are highly mechanized and the few men required should be as qualified

as their counterparts in the industrialized countries, which is a question

of training. Contractors supplying such plants are experienced in arranging

training classes fo r operating and maintenance menf some of them would be

trained on the job in similar plants to become fam iliar with the operations.

Labour requirements in auxiliary a c tiv itie s , on the other hand, may be higher

in developing countries because of generally lower levels of performance and

of the p o ssib ility o f some capital-labour substitution.

Other inputs include natural gas, u t ilit ie s , water, catalysts, chemicals,

and sulphur. In Table 6 below inputs required fo r these industries are given

in physical units per ton o f product. So fa r as these inputs are concerned,

there are no economies o f scale, such inputs being correlated d irectly with

the increase in output.

 - 22 -

Table 6. Consumption of certain major inputs per ton of output

of indicated nitrogenous products

Natural gas
feed a/ Electricity Water Steam Sulphur
Product (in standard (in Kwh) (in gallons) (in tons) (in tons)
cubic feet)

Ammonia 23,1-00 ^ 90.75 5,1.70 . - sJ -

Ammonium Nitrate - 49.5 1,980 2.8 -

Urea •- 33.0 3,850 1.5 -

Ammonium Sulphate ■- 27.5 1 ,ICaj - 0.263

Sources Same as Table 4.

a/ • Natural gas with ca loric value of 1,050 BTU per cubic fo o t.

b/ I t is assumed that water used is recirculatedj these figures

then refer only to water lost in the operation (make-up water).

c/ An additional volume of 17,60o cubic feet of natural gas is used

fo r fuel per ton .of output.
 Section 4

Production cost

Estimated costs of production have heen constructed fo r the several

products under consideration. These calculations are based on rough

approximations and engineering coefficien ts taken from United States’

experience. They do not r e fle ct actual performance of any particular

plant and are used here for illu stra tion purposes.

It is intended to use these data as benchmarks to explore the

differences in cost components that may arise in an under-developed as

compared to a developed country, namely, the United States, Table 7

summarizes the share of the major cost components in production cost.

This table indicates that in the United States depreciation cost

ranges between 23 and 28 per cent of production cost. As mentioned

ea rlier, investment is lik e ly to be higher in under-developed countries

as compared to developed countries fo r the reasons enumerated above. If

one assumes the same rate of depreciation and the same size of plants,

then fo r a developing country, an additional cost of fixed capital of the

order of 10 to 20 per cent would imply a rise in the cost of production

of about 2 to 6 per cent.

Because o f inadequate maintenance - due to lack of s k ills and

organization - there w ill be a faster physical depreciation of equipment

which w ill have to be reflected in a higher rate o f accounting depreciation

in the under-developed countries, and hence a higher production cost would

ensue. On the other hand, in the longer run, an under-developed country

 «

- 24 -

that has a supply o f labour at relatively low cost should be in a position

by proper training of labour and organization and more intensive maintenance

practices actually to lengthen the physical l i f e expectancy of equipment and

machinery. In the longer run, i t may thus be expected that depreciation

would be spread over a longer period with possible reduction in production

co s t.-^

Another important aspect that may be mentioned is the possible low

performance in production in under-developed countries as compared to

production standards in advanced countries. This may be attributed mainly

to poor management and labour practices. Such cases would result in an

appreciable rise in unit production cost because fixed capital charges have

to be allocated over a relativ ely small output.

Table 7* Distribution o f major cost components and total

production cost in the United States

(per cent o f tota l)

Super­ Total
Product Depre- In­ Natur­ Utili­ Operat­ vision Mainte­ Others Total (in
. ciation terest al GaS ties ing and Plant nance dollars
Labour General per ton)

Ammonia 23.5 15.0 2 9 . 5 ^ 3.6 5.1 6.9 8.5 7.9 100.0 34.63
Ammonium . 23.9 15.3 12.5^/ 15.5 6.1 8.7 9.7 8.3 100.0 37.44
nitrate -2/
Urea^/ 27.5 17.6 1 1.(M 7.7 6.6 9.4 11.4 8.2 100.0 5O.O 9
Ammoniuim / 23.3 14.7 6.8^ 1.8 7.7 10.4 9.7 25 .6^ 100.0 38.29
sulphate-'

jJ For a further treatment of depreciation in developing countries, see

United Nations, Bulletin on Industrialization and Productivity, "Use
of Industrial Equipments in Under-developed Countries", No. 4 (Sales
No. : 60 II.B.2).
 - 25 -

Sources Data on fixed investment, labour and other input requirements

used in the calculation are obtained from Tables 4-6 and their
source. Calculations of production unit cost were made as
follow s;

1. The capacities used are; Ammonia 66,000 metric tons,

Ammonium Nitrate 82,500, Urea 40?000, and Ammonium Sulphate
50, 000.
J
2. Computations were based on 90 per cent of fu ll capacity,
except fo r Ammonia, 95 per cent.
t 3. Total fixed investment (grassroots investment) assumed at
double the plant investment (battery lim its).

4. Maintenance at four per cent of plant investment except

fo r Ammonia, three per cent,» For the remaining investment,
i t was assumed at one-and-one-half per cent.

5. Supervision and plant general 80 per cent of total labour.

6. Depreciation at 10 per cent of plant investment and two-

and-one-half per cent o f other investment.

7. Interest, insurance and taxes have been calculated at four

per cent fo r interest, one por cent fo r insurance and one per
cent fo r taxes for plant investmentf the same percentages
were applied fo r other investment, except fo r insurance fo r
which 0.5 per cent was used.

8. Production cost includes neither packages nor packing.

9. Price of natural gas 25 cents per 1,000 cubic fe e t.

10. Price of e le c tr ic ity 0.8 cents per Kwh.

11. Price of water 10 cents per 1,000gallons.

12. Price of ammonia $34*63 per ton.

13 . Price of steam $1,65 per ton.

14. Price of sulphur $27*50 per ton.
15 . Wages for operating labour assumed at $3.15 Per man-hour and
this includes fringe benefits.

a/ This includes natural gas used as feed stock and fu e l. The percentages
fo r fuel alone ares fo r Ammonia 12.7 per cent, Ammonium nitrate 5*4 per
cent, Urea 5 .O per cent, and Ammonium sulphate, 2.9 per cent.
b/ Composite cost was calculated to introduce the capital, natural gas and
other inputs carried over from the ammonia stage.
ç/ Includes I 8.9 per cent fo r sulphur.
 The other important capital charge, namely in terest, accounts for

15 to 18 per cent of production cost. The interest rate in the United

States was assumed at four per cent; in a developing country this rate

would he.much higher, possibly double i f not trip le that rates this

represents an increase in cost of the order of between 25 and 40 per cent.

As indiaated in Table 6, a large volume of natural gas is used only

in the production o f ammonia. For the purpose of this study, the share

of natural gas in the production cost o f the other nitrogenous products

was computed in directly through their ammonia content. In the United

States, the share o f natural gas both as raw material and fu el, constitutes

a large proportion of production costj 30 per cent fo r ammonia, about

12 per cent for ammonium nitrate and urea and seven per cent fo r ammonium

sulphate. In a number of developing countries with abundant supplies of

natural gas, as a petroleum by-product, the cost of gas may be very low,

particularly when the alternative cost concept is used. In each case, the
cost
cost o f natural gas tends to pull production/down. This would affect the

production cost of ammonia rather sign ifican tly, although as fa r as the

remaining products are concerned, the effect may be lim ited.

With regard to labour input in these products, i t was mentioned earlier

that wages in developing countries are, in general, lower than in advanced

countries. However, during the early years of operation, i t may be

necessary to recruit foreign technicians, including some sk illed labour at

relatively higher, salaries to operate the plants. Lower labour performance

is another offsettin g factor which w ill tend to result in a higher labour

unit cost.-^

In the longer run, through a programme o f labour training and better

management, the labour cost may be expected to be lower.
 As Table 7 shows, plant maintenance may roughly amount to between

9 and 11 per cent o f production cost. Proper plant maintenance in under­

developed countries is an extremely Important fa ctor. Most of the plants

that have been described in this paper should have an operating rate of

u tiliza tio n of 90 to 95 per cent at fu ll capacity! any decline in this

figure w ill result in a steep rise of production cost because of the high

share of fixed cost.

In the longer rim, i f programmes of regular planned maintenance are

organized and enforced, the. wage cost of maintenance of the plant should

actually be less than in developed countries once the s k ills have been

acquired, because o f the lower wage rates. An offsettin g effect is the

magnitude of the inventories of spare parts that must be carried to guard

against an expensive shutdown! these are lik e ly to be much higher in a

9/
developing country which is far from the sources of supply of equipment.

The share of u t ilit ie s in production cost varies with the products.

I t is relatively high in ammonium nitrate, 16 per cent, and to a lesser

extent in urea, 8 per cent. In ammonium sulphate and ammonia, it is rather

low, two per cent- and four per cent, respectively. The items included

under u t ilit ie s in this study are fu el, power and water. Cost d ifferen tia l

w ill vary greatly with each country. Countries having access to cheap fuel

supply would obviously have a cost advantage! likewise countries endowed

with hydropower potential would have a cost advantage in power provided

that they have the advantage of economies of scale by operating moderately

For a further elaboration on problems relating to maintenance in develop­

ing countries, see Bulletin on Industrialization and Productivity, op.
c it.
large-scale power f a c i l i t i e s . On the other hand, in certain countries

where economic overhead, including power, w ill have to he supplied by the

plants themselves, the cost of power and other u t ilit ie s w ill he relatively

high because of the expected smaller scale of operation.

A "brief mention o f another type o f input, namely transportation, is in

order because i t a ffects the cost of raw materials and finished goods.

Certain plants may have to provide for their own transportation f a c i l i t i e s .

In such cases, tho capital charge o f infrastructures and the possible under­

u tiliza tio n of transport f a c ili t i e s may result in higher costs.

Other costs that are probably higher in developing countries as ,

compared to advanced countries are catalysts and chemicals^ particularly when

imported. Their share in production cost, however, constitutes a fraction

of a per cent fo r most o f these products, and only a small per cent in the

case of ammonium nitrate, roughly two per cent.

It is possible to obtain savings in production cost when related plants

are integrated on the same s it e . Such savings are obtained through reduction

o f capital charges because o f the lower fixed investment required for the

fe r tiliz e r s complex mentioned above, as well as reduced overhead per ton of

product. Furthermore, transportation cost w ill be reduced substantially fo r

raw materials when produced and used on the same s ite .

It may be concluded that economies o f scale, in the form o f returns to

scale in many components of production cost, namely, fixed investment, labour,

maintenance, supervision and general plant expenses are a'predominant

characteristic in fe r t iliz e r production.

' The importance of the scale of operation on cost in the developing

countries cannot be over-emphasized, since the generally limited lo ca l demand

 - 29 -

tends to impose limits upon the scale of production. Table 8 below

indicates that the cost of production may vary by as much as between 20

and 30 per cent.

Table 8 . Variation in Average Production Cost,

Small versus Large Capacity Plants,
United States aj

(Unit Coefficient assigned to smallest capacity)

Capacity Ammonia Ammonium Urea

Factor Nitrate

1*/ 1.00 1.00 1.00

2 .87 .89 .89

3 .81 .83 .82

4 .76 .79 .79

5 .71 - .75

6 .68 - -

a/ For methods of computation and source, see Table 7»

b/ Small capacities in tons per year? 30,000 for Ammonia, 50,000 for
Ammonium nitrate and 20,0Q0 for Urea.

This cost differential, due to scale, may very well offset any advantages

that may ensue from lower cost of natural gas, even if one considers its

alternative cost as zero. It is important to select large enough capacity

plants so that with a relative advantage in raw material costs, it would be

possible for such projects to compete more effectively on the international

market. It is very likely that local markets may not be large enough to
 - 30 -

sustain a moderately large scale plant fo r a particular country, "but i t

may be possible to create big enough markets through pooling regional

demand.

The economics of investing in a plant, the capacity o f which fo r some

years may be too large fo r the immediate demand fo r it s products, present

a number of problems, most importantly high production cost due to under­

u tiliz a tio n of capacity. The selection of the optimum size of plant under

conditions of growing demand is considered elsewhere.-^/

High transportation cost and, s t i l l more, inadequate distribution

f a c ili t i e s fo r fe r t iliz e r s , may impose a serious lim itation on the size of

plant and hence lim it the cost advantages obtainable from economies o f scale.

On the basis o f unpublished material in the United Nations, transportation

cost fo r nitrogenous fe r t iliz e r s by railway averaged between fiv e to ten

per cent of the price in a developing Asian country. But the inadequate

services such as irregular deliveries posed a serious transport problem for

the distribution of the product. This arose from the fact that fe r tiliz e r s

were to be delivered in bulk at an appropriate season. Several proposals

to a lleviate this problem were discussed among which were, f i r s t , use of

motor transport, second in sta llation of relatively small-scale plants, and,

third, establishing transit stores at appropriate locations, to replace the

companies' storage, to be f ill e d during the relatively slack periods of

transportation

10/ United Nations, Bulletin on Industrialization and Productivity,

"Problems of Size of Plant in Industry in Under-developed Countries",
No. 2 (Sales No.s 59 I I .B .l ) .
 - 31 -

In order to retain the production cost advantages obtained from relativ ely

large-scale operations, the proposal of transit stores was preferred.

F ertilizers shipped and stored during the slack transportation periods were

to be sold to farmers during the proper season.

In conclusion, i t may be stated that production cost in developing

countries is lik e ly to be higher than in advanced countries. The combined

capital charges are high, roughly 50 per cent of production cost and they

are expected to be higher in developing countries. Further, the likelihood

of operating at relatively low capacities tends also to extenuate, the high

production cost in the developing countries. An offsettin g fa ctor is the

natural gas, the cost o f which may be lower in some developing countries?

the higher capital charges and the scale factor, however, may very well

offset such an advantage.

In the longer run, however, as the developing countries gain more

experience in production techniques and management, the d ifferen tia l in

production cost may be ^randually narrowed. Further, in developing countries

where gas is being flared and large demand is obtaining either lo c a lly or

through pooling regional demand, competitive production cost may ensue.