approximately 13,032,000 tonnes in 2005, representing a CAGR of approximately 7.66 percent The Directors believe that the increasing popularity of compound fertilizers in the PRC derives from their greater nutrient content compared with that of single-fertilizer mixtures, and the fact that they can be adapted to give crops a variety of different nutrients to cater for different conditions and times of application.

demand growth higher than the world average level. The Directors expect that the steady growth of the PRC’s population and rising income will lead to demand for a diet with higher protein such as meat, which requires grain as feedstock. The PRC’s urbanization and industrialization will result in a continued decline in available arable farm land, thus making it essential for the PRC to raise its agricultural products yield to ensure adequate food supply. At the same time, the Directors believe that economic reform in the PRC will lead to a growth in consumer demand for cash crops such as vegetables and fruits, which generally require the application of higher volumes of fertilizers than traditional farm crops. The PRC Government has mandated that farmers increase crop yields in order to decrease the nation’s dependence on food imports; the growing consensus on the need to use environmentally friendly fertilizers has also been a factor in the growth of the business of the Group. The Directors believe that as a result of these factors, the demand for and the usage of fertilizers in the PRC will increase and that, as one of the fast-growing and competitive fertilizer producers in the PRC, the Group will benefit from the growth of the Chinese fertilizer market.

As fertilizer usage is key to increasing grain production yields, the PRC Government has been encouraging fertilizer application and hence production. Fertilizer production enterprises are given a number of benefits by the PRC Government in terms of electricity supply and transportation. Since 2004, the PRC Government has introduced several preferential VAT policies directly for the benefit of fertilizer production enterprises; for instance, 50 percent of the VAT collected from urea producers is refundable to these producers. To further support the industry, from 1 July 2005, urea producers were temporarily exempted from paying VAT, pursuant to a joint announcement made in May 2005 by the Ministry of Finance and State Administration of Taxation. The purpose of these preferential tax policies, and other supportive policies from the Government, is to promote domestic fertilizer supply and stable fertilizer prices.

In addition, the 11th Five-Year Plan for National Agricultural & Rural Economic Development, promulgated in August 2006, establishes a goal of an annual 0.65 percent increase in comprehensive grain productive capacity over five years, assuming an annual 0.18 percent decrease in planted grain acreage. The allowance for the agricultural industry reached RMB 63.8 billion in 2008, representing an increase of 131 percent over 2007. The PRC Government has recently declared that it will strive to double the income of Chinese farmers by 2020 from the 2008 level and elevate the nation’s agricultural productivity to a higher level. The 11th Five-Year Plan for Fertilizer Industry, issued by the PRC’s National Development and Reform Commission in October 2006, urges that the nation’s fertilizer production should reach 60 million tonnes by 2010, which represents an approximately 25 percent growth above the production in 2004. The Directors believe that these policies will lead to a sustained demand for each type of fertilizer.

Despite this growth however, the PRC has a net chemical trade deficit and remains heavily dependent on imported raw materials, which have over recent years been affected by upward price trends in the world market caused by heavy global demand for raw materials, petroleum and other input.