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ICI Pakistan Limited

Annual Report 1998

CONTENTS

ICl Pakistan Limited

COMPANY INFORMATION

Board of Directors

Desmond O'Shea

(Chairman)

Munnawar Hamid

(Chief Executive)

A Razak Dawood

Barry Hallam

M J Jaffer

Razi-ur-Rahman Khan

Azhar A Malik

Rashiq Sufi

M Nawaz Tiwana

J S Butt

(Alternate Director to Desmond O'Shea)

Audit & Remuneration Sub Committees of the Board

Audit Sub Committee

Senior Remuneration Sub Committee

M J Jaffer

M Nawaz Tiwana

(Chairman)

A Razak Dawood

Desmond O'Shea

Munnawar Hamid OBE (by invitation)

Azhar A Malik (by invitation)

Ian D Black

(Group Chief Internal Auditor - by invitation)

Executive Management Team

Munnawar Hamid OBE

J S Butt

Azhar A Malik

S Imran Agha

Rashiq Sufi

Jehangir B Nawaz

Barry Hallam

Waqar A Malik

Khalid B Osmany

Nausheen Ahmad

Feroz Rizvi

Company Secretary

Nausheen Ahmad

Bankers

ABC International Bank PIc

Faysal Bank Limited

ABN-Amro Bank NV

Habib Bank Limited

Al Faysal Investment Bank Limited

Habib Bank AG Zurich

Allied Bank of Pakistan Limited

Muslim Commercial Bank Limited

American Express Bank Limited

Mashreq Bank psc

ANZ Grindlays Bank Limited

Midland Bank PIc

Askari Commercial Bank Limited

National Bank of Pakistan

Australia & New Zealand Banking Group Limited

Oman International Bank S.A.O.G.

Bank Alfalah Limited

Pakistan Kuwait Investment Company (Private) Limited

Bank of America NT & SA

Societe Generale, The French and International Bank

Citibank NA

Standard Chartered Bank

Credit Agricole Indosuez

The Bank of Tokyo-Mitsubishi, Ltd

Deutsche Bank

The Hongkong & Shanghai Banking Corporation Limited

Emirates Bank International PJSC

United Bank Limited

Auditors

A F Ferguson & Co

Registered Office

ICI House, 5 West Wharf, Karachi-74000

STATISTICAL DATA

Year at a Glance

Rs Million

1998

1997

Turnover

11,062

8,472

(Loss)/Profit before taxation

(2,469)

223

Taxation

Current

(54)

(36)

Deferred

379

(70)

(Loss)/Profit after taxation

(2,144)

117

Gross assets employed (excluding capital work-in-progress)

33,771

9,074

Paid-up capital

7,886

Shareholders' equity

9,050

9,436

Earnings per share after taxation and before exceptional items - R

(2.72)

0.21

Earnings per share after taxation and exceptional items - Rupees

(2.72)

0.15

----------

Number of employees

1,788

1,929

==========

REPORT OF THE DIRECTORS FOR THE YEAR ENDED 31 DECEMBER 1998

Board of Directors

Desmond O'Shea

Munnawar Hamid OBE

Azhar A Malik

Barry Hallam

Rashiq Sufi

The Directors take pleasure in

presenting their Report together

with the audited accounts of the

Company for the year ended 31

December 1998.

There have been no changes in the Board of Directors during 1998. The Sub Committees of the

Board for Audit and Senior Remuneration met regularly during the year and submitted their

recommendations to the Board.

Elections to the Board of Directors of the Company will take place at the Annual General Meeting to be

held on 21 April 1999 as a result of which the following changes are intended:

Mr. Desmond O'Shea, Vice President Asia Pacific ICI Plc UK who is Chairman/Director of ICI

Pakistan, will relinquish office as Chairman at the conclusion of the Annual General Meeting but will

continue to lend his valuable support to the Company as non-Executive Director.

Mr. Munnawar Hamid will be appointed Chairman in place of Mr. Desmond O'Shea in addition to his

current role as Chief Executive.

Mr. Alexander Beveridge Anderson, Senior Vice President, Technology, ICI Pie UK will be appointed

non-Executive Director.

Mr. Jabar Shafique Butt, General Manager Soda Ash, and who has 31 years of manufacturing and

engineering experience with the Company will be appointed Executive Director.

In addition to the above changes, National Investment Trust Limited has also notified the

Company that its nominee on the Board will be Mr. Nasim Beg, Deputy Chief Executive (NIT) in place

of Mr. Razi-ur-Rahman Khan, Chairman and Managing Director (NIT). The Board wishes to

place on record its appreciation for the services rendered by Mr. Razi-ur-Rahman Khan as Director.

OVERVIEW

Operating profit in the non-PTA Businesses for 1998 was Rs 887.6 million which represents a 23% increase

over 1997. This very considerable improvement, however, has been offset by the severe depression in

the PTA Business and as a consequence, the Company incurred an operating loss of Rs 980.0

million compared with an operating profit of Rs 720.0 million in 1997. This, together, with the combined

effect of very heavy financial charges, consequent to the capitalisation of the PTA Project, resulted in a loss

before tax of Rs 2,469.1 million compared to a profit before tax of Rs 223.0 million in 1997.

The Company's major Businesses were adversely impacted by the Far Eastern economic recession

which put severe pressure on margins, in particular in the polyester staple fibre, soda ash,

and pure terephthalic acid (PTA) Businesses. As a consequence, all efforts were singularly focused on

improving manufacturing efficiencies and manpower productivity, on reducing fixed costs,

maintaining and improving market shares, and achieving supply chain benefits.

SPECIFICALLY, IN THE

NON-PTA BUSINESS:

· All Businesses except Agrochemicals exceeded production records; in particular Soda Ash

achieved a second consecutive year of record production.

· Original design capacity was exceeded by almost 5% by the Polyester Fibre CP Plant with

a distinct improvement in product quality.

· Sales volumes were increased, particularly in Polyester Fibre, which was able to improve

volume by 27% over 1997.

· Market shares were increased in Polyester Fibre, Soda Ash, Sodium Bicarbonate, Paints,

and Specialty Chemicals, while the Seeds Business and the Cardiovascular segment of

the Pharmaceuticals Business maintained their lead market positions.

· Paints successfully launched its new Dulux Master Palette of 6,000 colours.

· Manpower productivity, as measured by turnover per employee, increased by 23%

across these Businesses over 1997.

· Energy consumption improved by 15% over 1997.

In addition, several other Corporate milestones were achieved: the Soda Ash Business won the ICI

Plc Chief Executive's Global Safety Award; the Paints Business achieved "Class A" international

accreditation in Manufacturing Resource Planning (MRP II); all Businesses have made satisfactory

progress in order to achieve Millennium compliance and an excellent overall safety performance.

The Pure Terephthalic Acid Plant was successfully commissioned in June 1998 and is operating in-line

with expectations. Product quality has successfully met customer satisfaction and this enabled the

Business to achieve a market share of over 50% by 31 December 1998. As you are aware, negotiations

between ICI Pakistan and DuPont for a 50/50 Joint Venture in the PTA Business were terminated in

December 1998 as detailed arrangements could not be satisfactorily concluded and consequently, this

Business continues to be retained within ICI Pakistan. The cyclical downturn currently being

experienced in this Business, just as it is by other PTA manufacturers in the region and

internationally, is of unprecedented severity and is as such beyond anticipation. As a result, the

Business has recorded an operating loss of Rs 1,867.6 million, depressing the significantly

improved performance of the traditional on-going Businesses to an overall operating loss of Rs 980.0

million for the Company.

As the Company steers the PTA Business through this extremely adverse phase, it will fully use all its

financial, technical and managerial capabilities. ICI Plc UK, the principal shareholder of the

Company has expressed its commitment to support the Company both technically and financially. It

would be important to note that ICI Pakistan continues to be a licensee of DuPont for the

manufacture of PTA regardless of the Joint Venture, and very considerable engineering and

manufacturing capability exists with ICI Plc UK Technology Group to give the necessary additional

support to ICI Pakistan. Plant productivity is expected to improve in 1999 with ramped-up

production and local demand is expected to remain robust as fibre manufacturers move to full

capacities. However, the business cycle is expected to remain depressed and consequently, prices will

remain below original expectations. Additionally, the Company's profitability will be impacted by a

full year's interest charge for this Business.

A detailed review follows.

POLYESTER

"With improved manufacturing efficiencies and the new CP Plant exceeding

design capacity by almost 5%, the Polyester Fibre Business registered a 17%

increase in production over 1997."

The market for polyester staple fibre grew by 16% in 1998 on the back of higher conversion to

blended yarn, increasing cotton prices, and some concerns on the quality of cotton available. With

improved manufacturing efficiencies and the new CP Plant exceeding design capacity by almost 5%,

the Polyester Fibre Business registered a 17% increase in production over 1997.

Margin erosion, however, intensified further during 1998, as depreciating Asian currencies and

cash flow pressures on Far Eastern producers led to a further decline in international fibre prices, in

response to which local selling prices declined 23% compared with 1997. However, declining raw

material prices, improved raw material conversion efficiencies, and improved plant occupacity helped

to alleviate this severe pressure on unit margins, which as a result rose by 23%. In addition, the per

unit fixed cost (net of depreciation) also recorded a reduction of 15%, and the combined effect,

though not enough to completely negate the impact of uneconomic international prices, restricted

operating loss to Rs 76.8 million compared with Rs 206.5 million in 1997.

The depreciation policy of the Business for manufacturing assets has been changed to write-

off assets over a fifteen year period, against the ten year period used upto 31 December 1997. This

change reflects current practice for process technology industry and brings it in-line with the

PTA plant which was commissioned during the year. This change in depreciation policy has

reduced the depreciation charge in 1998 by Rs 99.0 million.

The imperative of introducing anti-dumping measures for the fibre industry has been

consistently lobbied for with the Government and it is your Company's intention to continue doing so

strongly in the future as well.

SODA ASH

"The Business continued to focus on key customer segments, with special

initiatives in the Bazaar, Glass, and Silicate sectors, as a result of which sales

volume and market share both increased by 3%, despite intensified competition,

particularly from low priced imports from China. The Sodium Bicarbonate sector

demonstrated growth as per expectations and sales increased by 8%."

The Soda Ash Business had the singular honour of winning the ICI Plc Chief Executive's Global Safety

Award, and also completed 4.4 million manhours (1,030 days) without a Reportable Injury Accident.

The Chief Executive's Safety Award is given to the site which demonstrates very significant

improvement in Safety, Health, and Environment (SHE) standards and performance, on the basis of a

worldwide competition between all ICI Group operating sites. This success was made possible by

the commendable efforts of the specially formed Safety Improvement Teams in the Business and a

consequent change in the Work's operating culture. Similar efforts by dedicated manufacturing teams

enabled the Plant to achieve a second consecutive year of record production of 198,210 MT, despite the

fact that 6,000 MT of production were lost during the year due to a sudden closure of the Pakistan Mineral

Development Corporation's salt mines in Khewra.

During the year, the market grew at 10% over 1997 driven by a recovery in the Silicate sector and

strong demand from the washing soda, textiles, and detergents segments. The Business continued

to focus on key customer segments, with special initiatives in the Bazaar, Glass and Silicate sectors,

as a result of which sales volume and market share both increased by 3%, despite intensified

competition, particularly from low priced imports from China. The Sodium Bicarbonate sector

demonstrated growth as per expectations and sales increased by 8%.

Due to the impact of the sharp reduction in import tariffs from 55% to 25% in 1997, coupled with

sharply falling C&F prices from China, the Business could not increase selling prices to the

extent necessary to compensate increases in input costs. However, the very strong drive to improve

fundamental and long-term competitiveness, through fixed cost reduction and improvement in

manufacturing efficiency, has enabled the Business to achieve an operating profit at Rs 612.3 million,

which is only marginally below that of 1997.

PAINTS

"The Decorative and Refinish segments,.... improved their market share by 2%

and 1% respectively over the previous year, through continued strong brand

promotion, after sales service, and new product launches. The Industrial

segment also improved considerably... As a result, overall sales volume and

value increased by 11% and 12%, respectively, and this, together with fixed

cost control resulted in an operating profit of Rs 221.8 million, a considerable

improvement over 1997."

Continued focus on operational effectiveness based on Manufacturing Resource Planning (MRP II)

guidelines, strong working capital management, and On-Time-In-Full (OTIF) distribution enabled

the Business to achieve world class standards in operational excellence, and resulted in a 13%

improvement in productivity over 1997. In the area of Safety, Health & Environment the Business

completed one million manhours without a Reportable Injury Accident during the year.

The paints market for Decorative products remained static during 1998 as a result of subdued

trading conditions in this sector of the economy. The Decorative and Refinish segments, however,

improved their market share by 2% and 1% respectively over the previous year, through

continued strong brand promotion, after sales service, and new product launches. The Industrial

segment also improved considerably on the back of strengthening market conditions in the automobile

industry where increased localisation of motor paint production helped to significantly enhance

performance. As a result, overall sales volume and value increased by 11% and 12%, respectively, and

this, together with fixed cost control resulted in an operating profit of Rs 221.8 million, a considerable

improvement over 1997.

The domestic production of paint suffers from the anomaly of double taxation in the form of sales tax

and excise duty, putting the Business at an unfair disadvantage against imports on which only sales

tax is chargeable as well as providing an incentive for evasion to the unorganised sector. Additionally,

the unorganised sector continues to enjoy the benefits of a fixed tax regime which effectively

reduces its tax burden and consequently results in a cost advantage. Representations have been made

to the Government to remove these anomalies and provide a level playing field, and these will be

followed up as effectively as possible.

AGROCHEMICALS & SEEDS

"...farmer education and training programmes supported by strong product

stewardship activities proved to be of considerable competitive advantage and

despite the increasingly competitive conditions, the pesticide segment was able

to maintain its market position. The Seeds segment also continued to develop,

and maintained its lead market position in the sunflower and fodder hybrids,

which together with control on fixed costs, resulted in satisfactory performance

by the Business as a whole."

The annual cotton crop failed to meet expected targets, and this resulted in a severe liquidity

crunch and reduced farmer purchasing power. In addition, low pest infestation levels, fierce

competition to maintain market shares, and a general preference by farmers for cheaper

generics resulted in an overall static market for branded pesticide products. However, farmer

education and training programmes supported by strong product stewardship activities proved to be

of considerable competitive advantage and despite the increasingly competitive conditions, the

pesticide segment was able to maintain its market position. The Seeds segment also continued to

develop, and maintained its lead market position in the sunflower and fodder hybrids, which together

with control on fixed costs, resulted in satisfactory performance by the Business as a whole.

PHARMACEUTICALS

"...the Medical segment still managed to maintain its upward trend and

registered an increase in sales volume. In particular, strong growth was

registered in the cardiovascular and NSAIDs (anti-arthritic/analgesic) ranges,

with Tenormin and Zestril experiencing sales volume growth of 21% and 31%,

respectively, far ahead of competition. In the Animal Health segment, focus on

farmer education combined with an expansion of the product portfolio also led

to considerable sales growth over 1997."

The Pharmaceuticals Business continued to operate in an industry environment characterised

by slowing growth as a result of unfavourable government policies on price increases and

regulatory approvals. Nevertheless, the Medical segment still managed to maintain its upward

trend and registered an increase in sales volume. In particular, strong growth was registered in the

cardiovascular and NSAIDs (anti-arthritic/ analgesic) ranges, with Tenormin and Zestril

experiencing sales volume growth of 210/0 and 31%, respectively, far ahead of competition. In the

Animal Health segment, focus on farmer education combined with an expansion of the product

portfolio also led to considerable sales growth over 1997. Overall, however, Business profitability

remained under pressure not only due to the Government's persistent refusal to allow

compensatory price increases for raw material cost inflation and rupee devaluation, but also by

arbitrary price reductions of some leading products. While the Business continues to

effectively manage its cost base and improve productivity, future profitability largely depends

upon Government policy on pricing and providing a consistent regulatory framework.

CHEMICALS

"...the Specialty Chemicals Business, the Surfactants segment continued to

grow with increased focus on key customers .....The Adhesives segment also

registered improved profits over the previous year with an expanded distribution

network and continued improvement in productivity."

"The General Chemicals Business registered improvement over 1997, on the

back of a strong demand for Titanium Dioxide, NALCO water treatment

chemicals, and solvents."

In the Specialty Chemicals Business, the Surfactants segment continued to grow with

increased focus on key customers in order to maximise margins and reduce credit risk

exposure, despite a slowdown in the textile industry The Adhesives segment also registered

improved profits over the previous year with an expanded distribution network and continued

improvement in productivity

The General Chemicals Business registered improvement over 1997, on the back of a strong

demand for Titanium Dioxide, NALCO water treatment chemicals, and solvents. The

Polyurethanes Business, however, was adversely affected by a slowdown in downstream demand for

chemicals for the Footwear and Appliances sector. The robust performance in General Chemicals

helped improve overall Business performance.

PURE TEREPHTHALIC ACID (PTA)

"Plant performance was satisfactory and product quality fully met customer

expectations which enabled the Business to achieve a market share of over

50% by the year-end."

The Company's PTA Plant at Port Qasim was successfully commissioned and started commercial

production in June 1998. Other support projects i.e. chemical jetty and industrial gases were also

successfully commissioned during the year, and are meeting the Plant's requirements. The

commencement of the Company's PTA operations, entirely an import substitution industry providing

locally manufactured PTA, a major raw material for polyester fibre and ultimately the textile

industry, helped save considerable foreign exchange during an extremely critical phase in the

country's Balance of Payments.

Plant performance was satisfactory and product quality fully met customer expectations which

enabled the Business to achieve a market share of over 50% by the year-end. However, the cyclical

downturn, a normal feature of this Business, currently being experienced in the Polyester

intermediates industry as a result of current overcapacity in the region and internationally, is of

unprecedented severity and beyond anticipation. Although there was a reduction. in raw material

prices particularly as a result of declining oil prices, the pressure on margins was intense and

consequently the Business incurred an operating loss of Rs 1,867.6 million for the year.

As already mentioned, following the cessation of Joint Venture negotiations with DuPont in

December 1998, the Directors of the Company considered it appropriate not to hive-down tile PTA

Business but to retain it fully within ICI Pakistan. In the context that the hive-down of this Business

into a separate legal entity was a pre-condition to the proposed JV in the absence of such a prospect,

this course of action was seen to be the most prudent and correct. Notwithstanding the current

state of the Business cycle which would not have been any different if the proposed JV had been

completed, the Directors of the Company are satisfied that the Company can run this Business

successfully, even in the absence of such a JV.

PROFIT, FINANCE AND TAXATION

"Operating profit in the non-PTA Businesses for 1998 was Rs 887.6 million

which represents a 23% increase over 1997."

Operating profit in the non-PTA Businesses for 1998 was Rs 887.6 million which represents a 23%

increase over 1997. This very considerable improvement, however, has been dragged down by

the severe depression in the PTA Business which has been already described and the Company

incurred an operating loss of Rs 980.0 million compared to an operating profit in 1997. This,

together, with combined effect of very heavy financial charges, consequent to the capitalisation

of the PTA Project, resulted in a loss before tax of Rs 2,469.1 million compared to a profit before tax

of Rs 223.0 million in 1997.

In light of this situation, a dividend payment is not possible at the present time.

The Profit and Loss for the year is as follows:

Rs '000

The net loss of the Company for the year, before providing

for taxation but after provision has been made for depreciation

and exceptionals, is:

(2,469,144)

Provision for taxation

Current

(54,500)

Deferred

379,354

----------

324,854

----------

Loss after taxation

(2,144,290)

Unappropriated profit brought forward

323,821