Energy For Growth

EVEN AS SOME worry that Pakistan is on the brink of becoming a failed state and that Taliban influence could spread throughout the country, one Karachi-based company sees Pakistan as an emerging economy with opportunities for growth.

That company is Engro, one of the big wheels of the Pakistani chemical industry. It was once known as Exxon Chemical Pakistan. In 1991, as Exxon Chemical was exiting fertilizers, the Pakistani management bought it out and founded Engro.

Today, Engro has about 1 million metric tons of urea fertilizer capacity at its plant in Daharki, giving it a roughly 20% share of the country's market. It is the second largest urea maker in the country behind Fauji Fertilizer, linked with the Pakistani army. In addition, Engro distributes imported phosphate and potassium fertilizers.

Outside of fertilizers, Engro is a 56% shareholder in Engro Polymer & Chemicals, a publicly traded polyvinyl chloride (PVC) maker in Pakistan with 100,000 metric tons per year of capacity. And Engro has branched out into businesses such as power generation and dairy products.

Together, Engro's businesses earned about $60 million in 2008 on sales of $581 million. By way of comparison, ICI Pakistan, an affiliate of AkzoNobel, racked up $453 million in sales last year.

Engro has ambitious plans for growth. Asad Umar, the firm's chief executive officer, says his goal is to expand revenues to $5 billion by 2015. The growth rate might sound meteoric by Western standards, but he points out that India's Reliance Industries was once on a similar trajectory. "Reliance at its peak had a 10-fold increase in 10 years," he says. Umar adds that his company aims for "a 10-fold increase in seven years, but starting from a lower base."

The company is spending $1 billion to build a 1.3 million-metric-ton ammonia/urea plant at its Daharki site. Construction is under way, and the company expects to start up the plant in July 2010.

Umar's justification for such a large investment lies in the quirks of the Pakistani urea business. Pakistani urea prices, he says, usually run about 25–30% below international prices. This is because the government subsidizes fertilizer production by charging urea makers about $1.50 per million Btu for natural gas feedstock, one-third the going rate for other industries.

The Pakistani government offers another incentive for fertilizer makers. It charges new urea plants only 75 cents per million Btu for the first 10 years, a rate comparable to what chemical makers pay in the Middle East, Umar points out. "Even with the domestic fertilizer prices, you still have a viable project," Umar notes, adding that Engro will likely export surplus production at international prices.

Engro's polymer affiliate is in the midst of a $240 million project to increase PVC capacity by 50,000 metric tons and back-integrate into the polymer's raw materials: chlorine, ethylene dichloride, and vinyl chloride. Traditionally, the company has imported vinyl chloride and polymerized it. Now it will import ethylene, which is not made in Pakistan, from the Middle East.

Umar estimates that his company is saving up to $80 million on the project by dismantling an ethylene dichloride/vinyl chloride plant once operated by Formosa Plastics in Baton Rouge, La., shipping it to Karachi, and reassembling it there. This is not a first for Engro: In an earlier fertilizer expansion, it shipped in ammonia and urea plants from the U.S. and the U.K.

Engro is also setting its sights outside of Pakistan. Umar says the company's goal is to have about one-third of its capital invested overseas by 2015. It is studying phosphate fertilizer projects in North Africa. The furthest along of these is in Algeria, where a joint venture with local phosphate mining firm Ferphos plans to build a complex to make sulfuric acid, phosphoric acid, and diammonium phosphate.

BACK AT HOME, Umar says the gains of the Islamist insurgency in parts of the country do not affect his business all that much. "In terms of business—and this may sound cold-blooded—the areas where there are serious security issues add up to 5% of Pakistan's population and less than 1% of Pakistan's" gross domestic product, he says. "While these are very serious issues, the impact on the economy is very limited."

Kamran Bokhari, director of Middle East analysis at the global intelligence firm Stratfor, says Pakistan's security problems may well have little impact on Engro's business. The Taliban insurgency is primarily active in the tribal areas along the Afghan border and in the North West Frontier province. The Punjab, the nation's most populous province and its breadbasket, is relatively calm, Bokhari says. Although terrorists do occasionally attack in the large cities, he says, "you don't have the Taliban holding territory there."

Umar says the security situation's biggest impact is on his efforts to attract talent, because foreigners are reluctant to travel to the country. Even so, Umar says, he employs about 1,000 foreigners, suggesting that the security problem is more of a perception than a reality. "If it was a reality," he points out, "they would have run away."