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

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

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

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

This margin is set by linking to some market benchmark.

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

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

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

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

Advantages:

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

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

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

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

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

Cons of loans:

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

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

A syndicated loans for modernization of mineral fertilizer plants is a loan attracted by one borrower from several sources and structured, organized and managed by one or more banks.

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

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

Development of the modernization program for the mineral fertilizer plants

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

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

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

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

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

The investment program requires full answers to the following questions:

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

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

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

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

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

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

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

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

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

General principles of expansion of mineral fertilizer plant

Effective modernization of mineral fertilizer plants is important for reducing costs, overcoming problems of low profitability.

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

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

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

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

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

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

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

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

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

Three stages of fertilizer plant modernization

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

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

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

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

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

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

This stage consists of the following tasks:

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

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

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

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

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

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

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

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

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

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

1. Identify weaknesses in existing technology.

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

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

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

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

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

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

Mineral fertilizer plant modernization

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

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

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

GATE LINK CAPITAL LP offers financing for the modernization of mineral fertilizer plants and other industrial enterprises in Europe, the USA, Latin America, the Middle East, North Africa and Southeast Asia.

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