Focal Viewpoints

1. The prosperity index of the fertilizer industry was 47.3 in 2008, falling to 33.8 in Q4, hitting the bottom of 29.4 in Q1 2009, and 30.7 is expected for the whole year of 2009 and a rally to 39 in 2010.

2. Factors Conducive to Development of the Fertilizer Industry (Opportunities):

• The Government raised comprehensive subsidy from 63.8 billion yuan in 2008 to 71.6 billion yuan in 2009for agricultural raw materials in order to support agricultural development;

• Fertilizer price fell significantly from same period last year, and the substantial growth of the ratio between grain and fertilizer is conducive to mobilize farmers to purchase more fertilizer;

• As the largest producer of coal in the world, China has abundant supply of coal and natural gas, and global surplus of sulphur provides affluent raw material for domestic fertilizer production.

3. Negative Factors to the Development of the Fertilizer Industry (Threats):

• The growth of grain production in 2008 was faster than previous estimate, and the slowing down of the growth of grain production in 2009 would result to slowing down of the growth of fertilizer demand;

• The growth of fertilizer production is faster than the growth of consumption, hence there is threat from climbing stock;

• Threat of insufficient raw material supply due to reduction of production of pyrite and phosphorus ore;
  Threat of resource waste and abandoning of outdated capacity due to surplus production capacity of fertilizer;

• Decline of growth of fertilizer sales revenue from same period last year;

• Falling of gross profit margin due to decline of fertilizer price and slowing down of growth of total profit.

4. Potash fertilizer among the fertilizers enjoys the best prosperity index, and as the domestic largest producer of potash fertilizer, Qinghai Salt Lake Potash Co., Ltd. witnesses around 70% of gross profit and enjoys a bright prospect

Focal Viewpoints  1

I. Prosperity Index of Fertilizer Industry. 2

1. Prosperity Index of Fertilizer Industry: bottom hitting in Q1 of 2009, stabilization and rally expected in Q2 .    2

2. Research on Fertilizer Demand . 4

Drivers of Fertilizer Demand: acreage, ratio between grain and fertilizer, and fertilizer export  4

Grain Production Level: 5.4% growth of grain production in 2008, and production in 2009 is projected to be similar as in 2008  4

Ratio between Grain and Fertilizer: the rising of the ratio in Q1 of 2009 was conducive to mobilize farmers to buy more fertilizer   4

Fertilizer export: export in Q1 2009 fell sharply from Q1 2008 except for DAP  5

3. Research on Fertilizer Supply  5

Drivers of fertilizer supply: abundance of raw material supply, stock and import volume 6

Abundant supply of coal and natural gas, 5.7% growth and 7.5% growth respectively in Q1 2009    6

Sulphur Production: 2.4 million tons production in 2009 is expected, the rate of dependence on import to fall to 78%  6

Pyrite Production: 0.6% less production in Q1 2009 than Q1 2008, the falling rate slowed down  7

Phosphorus Ore Production: 2.9% growth in Q1 2009 than Q1 2008, a rally was seen  7

Ratio between stock and consumption: stock pressure still big . 8

Still surplus production capacity of nitrogen fertilizer, the ratio between stock and consumption in 2009 to rise to 30.7%. 8

Serious surplus of production capacity of phosphate fertilizer, the ratio between stock and consumption to rise to 23.6% in 2009   8

Still serious shortage of production capacity of potash fertilizer, the ratio between stock and consumption to fall to 11.1% in 2009 due to restraint of import. 9

Compound and mixed fertilizers, the ratio between stock and consumption to rise to 24.9% in 2009 9

Fertilizer Import: import in Q1 2009 fell noticeably from Q1 2008   9

4. Growth of Fertilizer Production . 10

Nitrogen Fertilizer Production: bottom hitting in Q4 2008, 9.4% growth in Q1 2009 than Q1 2008    10

Phosphate Fertilizer Production: bottom hitting in Q4 2008, 14.7% growth in Q1 2009 than Q1 2008 11

Potash Fertilizer: 11.7% growth in Q1 2009 than Q1 2008    11

Compound and mixed fertilizer production: minor growth in Q1 2009 over Q1 2008. 11

5. Sales Revenue and Growth of Domestic Scaled Fertilizer Producers   12

Sales Revenue: sales revenue in Q1 2009 was the same as in Q1 2008  12

Growth of sales revenue: drastic growth of potash fertilizer in 2008 and back to normal  12

6. Gross Profit Rate of Fertilizer: continual decline in Q1 2009  13

Fertilizer Price: bottom hitting in Q1 2009, and rally expected in Q2   13

7. Total Profit and Growth of Fertilizer   14