Dr. Mirza Nomman Ahmed Dr. Mirza Nomman Ahmed

Executive Board Member & Regional Manager Asia Pacific, Kleffmann Group
    After a challenging 2015 in which the industry experienced free falling commodity prices, significant currency headwinds, credit constraints, abruptly changing weather patterns, political uncertainty and turmoil, shrinking global crop protection and seed markets for the first time this decade - all eyes are on 2016 and beyond. Conditions remain challenging - and with a lot happening in the area of M&A – many different market outcomes and scenarios are possible. 
    Although the actual downturn came in 2015, signs were visible much earlier – in form of a synchronous economic growth slowdown, which has been underway in key emerging markets (Brazil, Russia, China, and South Africa) since 2010. Trade and finance connect emerging markets to the global economy – and increasingly, their importance for global growth has gained relevance ever since both financial and economic crises hit the markets “deemed stable” of the global economy. Roughly 60% of global economic growth and ~40% of global GDP come from emerging economies. Therefore, economic changes in key emerging economies can have significant spillover effects on other emerging markets as well as momentous impacts on global market dynamics. According to latest research conducted by the World Bank in 2016, a single percentage point decline in BRICS growth (Brazil, Russia, India, China, South Africa) is associated with 0.5% slowdown in the global economy and 0.8 – 1.5% slowdown in other emerging and frontier markets. Adverse spillover effects are more pronounced if general growth slowdown is paired with financial market stress. Factors that have contributed to the slowdown are both domestic (lack of productivity growth, political uncertainty, lack of policy stimulus due to shrinking fiscal buffers) and external (global trade slowdown, weak commodity prices, and financial market turbulences) as well as cyclical and structural. 
    The global market for agrochemicals has its own set of “BRICS” countries. Figure 1 displays the changing dynamics in the set-up of the global crop protection (CP) market, showing countries that have over the last 7-8 years evolved as the driving contributors, as well as markets that have lost their relevance as key contributors. 
    Figure 1: Changing contribution of TOP 10 countries to the global CP market 2008-2015
                 Source: Author’s own analysis
    The CP market is obviously also impacted by these global macro-economic developments, although with major differences between regions and transmission elasticities. In nominal terms, the global crop protection sales declined by 9.8% to US$ 54.6 billion in Harvest Year 2015 Y-O-Y, as measured at the ex-company level. It is also the first year that the market has declined this decade, and brings to an end a five year period of growth. Spillovers from major CP markets to the global market are very pronounced in both directions (e.g. an average decline of 10% in the top markets translated into a 9.8% decline in the global market - see Figure 2). 

    Figure 2: Growth dynamics of the TOP 10 CP Markets and their transmissional impact on Global CP Market growth 2009-2015 (based on % yoy growth)
                 Source: Author’s own analysis
    It is always worthwhile to look at the market in nominal and real terms. As Figure 3 suggests, a deflationary period in 2012 and 2013 switched to an inflationary period in 2014 and 2015. Across the board, different markets were coping with either deflation, inflation, or hyperinflation (e.g., Venezuela). A significant share of 2014 and 2015 growth was attributable to inflation. When looking at absolute figures, Figure 4 reveals that over the years, the gap between nominal and real-term market turnover has increased. In 2015, however, the growth rate gap between nominal and real was smaller, hinting at other factors than inflation that most probably played a bigger role in determining the global market outcome – such as substantial currency fluctuations across key CP markets and persistently low commodity prices. 
    Figure 3: CP Market Growth Nominal vs Real
                 Source: Author’s own analysis

    Figure 4: CP Market Growth - Absolute Gap Nominal vs Real
                 Source: Author’s own analysis
    Leading agrochemical companies operate globally and are therefore more vulnerable to economic shocks than their smaller competitors with more regional or local foci. The recent wave of M&A activity is a sign of the challenging times the MNCs have been confronted with lately. Although the overall agrochemical market value declined in 2015, volumes more or less remained stable, hinting towards loaded distribution chains filling the void. Although further de-stocking continues in 2016, stocks remain brimming, hinting at another challenging year for the entire industry. There seems to be a glimpse of light at the end of the tunnel, with rebounding commodity prices every now and then and policy measures in key markets to tackle the credit crunch farmers are faced with. Furthermore, robust sales in local currency terms in some of the emerging markets (Russia, India, China, etc.) have helped local players maintain positive momentum, which could also benefit them in 2016. The same is true for the established markets of Europe (e.g., Germany and Italy) that maintained positive growth in local currency terms. Moreover, China - a key building block of the industry’s future, is increasingly transforming into a mature market, with its agriculture being in the middle of a period of structural change. The modernization of the sector, emphasized by the accelerated speed of land transfer and a crackdown on “excessive toxicity” through environmental scrutiny, has in part contributed to a transient market slowdown. In the near future, however, the modernized Chinese agriculture is set to spur the demand for high-quality farming inputs. Within the North American region, the US market in 2015 fell for the first time in several years, and while the Canadian market was essentially flat in local currency, the region as a whole fell by close to 5% in US dollar terms. Lighter stocks in 2016 could provide the much needed momentum for the North American market to rebound to the growth levels of the years preceding 2015, depending on new orders in Q4. 
    The Middle East & Africa (MEA) region continues to be an area with vast potential and under-reported sales at the retail level. South Africa, Turkey, and increasingly Iran remain markets to watch out for in the coming years as well. African countries, in particular, are challenged by long spells of cyclical drought, which in its own right is a major concern for the region’s ascent to the top of global agrochemical regional markets. Turkey, amid political unrest, managed to achieve positive growth in US dollar terms in 2015, marking an exception against the overall market trend. However, 2016 may bring more unpredictable challenges for the country, which may impact the agrochemical market. As the first data are starting to come through, the agchem market’s blind spot – Iran – is promising to fill the void that has been created elsewhere in the MEA region. For many of the MEA markets, however, where registration requirements are less robust, low value products continue to dominate to the overall benefit of the “generic” producer. The Middle East generally remains dominated by political instability, though there are positive signs in some markets. 
    When one shifts focus toward recent developments shaping the industry, merger and acquisition activity sticks out the most. The 2015-2016 period might see three mega mergers being realized–between Dow and DuPont, ChemChina and Syngenta, and Bayer and Monsanto – and more to come soon after. As a light at the end of the tunnel, in the wake of these three proposed mergers among the top six companies, new opportunities will arise for the second- and third-tier companies. Mega mergers in the past have never resulted in turnovers of the parties involved adding up perfectly, along the lines of one plus one equaling two. With an eye for detail in picking up fall-out opportunities (direct or indirect), there would still be enough market value and some to spare for the Tier 2 and Tier 3 companies. In 2016, the patents of several chemicals will expire. The peak for the introduction of new molecules was reached somewhere around the turn of the millennium. These two contrasting peaks are responsible for recently changing dynamics and foci in the industry – across the board – with a heightened interest in older chemistry. Nonetheless, challenges for the industry remain daunting as these particular “aged” molecules are falling prey to environmental and regulatory scrutiny, with the former triggering the latter. The paraquat ban in China is one prominent example of environmental scrutiny resulting in a regulatory crackdown, with more to come in the future, and not to forget the European Union’s release of new criteria on endocrine disruptors. Re-registration delays are adding salt to the wound, and bans have been issued even when no real alternatives are available. Figures 5 and 6 reveal interesting insights into the most important old and new molecules sold in the market over a period of three years (2013-2015). 

    Figure 5: Most CP-Market-relevant Proprietary Chemistry 
                 Source: Author’s own analysis

    Figure 6: Most CP-Market-relevant Off-Patent Chemistry
                 Source: Author’s own analysis
    Consolidation might have a positive financial impact for corporations, but innovation may suffer. The potential downside of the new merger wave could be the consolidation of R&D budgets, which would most likely be smaller than those of separate entities. Figure 7 displays the dynamics of key proprietary molecules between 2013 and 2015, using a calculated index. 
    Figure 7: Dynamics of Key Proprietary Chemistry 2013-2015 (index) 
                 Source: Author’s own analysis
    Increasingly, multinational corporations (MNCs) need to focus on protecting their chemicals by introducing “smart” new formulations that can prolong the market life of their off-patent chemicals. Thus, even with the decline of new active ingredients, the industry remains technology driven, and changing technology continues to shape the industry. The new battleground is in formulation technology, and it is in this area that many of the second-and third-tier companies are excelling. Consolidation will not end at the MNC level; it is bound to continue at the level of second- and third-tier companies, particularly in China and India. The number of MNCs from the Far East and the South East will increase in the future. The initial signs are visible with the likes of ChemChina, Sinochem, UPL and so on - already playing in the premier league of the industry.