Mar. 14, 2018
The article is first published in AgroPages business magazine "2018 Chinese Pesticide Suppliers Guide"
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In 2017, the overall global trade environment was not optimistic. Protectionism had gained momentum and the uncertainty in the United States (US) dollar had increased throughout the year, hugely impacting the global pesticide trade while mergers and the re-organization of pesticide companies had gradually materialized. During these mergers, the pace of innovation of new active molecules further slowed.
The global pesticide industry shifted from an old pattern to a new one, and the pesticide sector in China also underwent significant changes. Firstly, the introduction of revised regulations on the management of pesticides highlighted China’s new direction while the regulation of the pesticide market intensified, potentially regularizing the sector. Secondly, in 2017, several product suppliers of pesticide technicals or intermediates were suspended or dissolved, resulting in short supplies of pesticides and soaring prices, an unusual phenomenon in the area of global procurement that year.
Overall, the pesticide sector staggered forward and was affected by external and internal factors. In the following article, the author will examine the events and phenomena in China's pesticide industry throughout 2017 from three dimensions - policies, the market and companies. The author will also attempt to summarize the overall trends in China's pesticide industry.
♦ Regulations on the management of pesticides
In June 2017, the Ministry of Agriculture in China, breaking with the old administration system established over the past two decades, launched what were arguably the most stringent regulations on the management of pesticides, as well as another five sets of auxiliary regulations, including measures on the management of pesticide registration, a move that posed severe challenges to the entire industry. In July, MOA issued strict restriction on 5 toxic pesticides including Endosulfan, Methyl bromide, Acephate, Carbosulfan, Dimethoate. By the year 2019, there will be only 10 toxic pesticides registered and used in China. All these pointed that China has started to reform its pesticide industry at a policy level, and as a result, the current chaotic market environment began undergoing change. The market will enter an era where good players will drive out the bad ones. While transitioning to the new policies, companies in the pesticide industry will face many further challenges.
♦ More stringent environmental supervision
Since 2014, the Chinese Government was examining the chemical industries that caused pollution. Over the past three years, this policy had attracted the attention of global buyers, as it directly affected the supply and prices of their technical products while dictating whether they could complete their procurement plans. In 2017, environmental assessments were further reinforced and became standardized. These assessments were conducted on companies in major chemical-producing provinces, such as Jiangsu, Shandong and Guangdong. Major companies that discharged pollutants became new targets for regulation. The move led to production suspensions and the end of many companies. Pesticides, therefore, were in short supply throughout 2017, resulting in the global shortage of pesticide technical.
♦ Chemical industrial parks further concentrated
In 2017, the concentration of chemical industrial parks in China rose rapidly. In 2016, China began to establish chemical industrial parks, and in 2017, these parks were reorganized and were required to meet more stringent compliance standards. The new chemical industrial parks improved their overall investment standards and decreased in numbers in 2017. Shandong Province, a chemical powerhouse of China, underwent the most drastic changes by shutting down a quarter of its industrial parks and passing, in October, what was arguably the most stringent set of compliance standards for chemical industrial parks. The concentration of companies in chemical industrial parks and the scale of such industrial parks highlighted the trend of clustering in China's chemical industry.
♦ “Supply-side” reform
The “supply-side reform” policy that the Chinese Government launched in 2015 became a hot term in China's pesticide industry in 2017, as it featured frequently in a wide range of government reports and industry meetings. In 2017, the Chinese government adopted the reform into practice, by introducing the “pesticide zero growth” policy, providing support for the bio-pesticide sector, and developing well-targeted IT-based agricultural technical services. The adoption of the policy also produced higher demands on production and operation, as well as on the product restructuring of pesticide companies. Pesticide producers shifted towards developing bio-pesticides, UAV (unmanned aerial vehicle) pesticides and products with proprietary intellectual property rights. Meanwhile, competition among companies began to shift from homogenization to personalization.
♦ Pesticide technicals became more expensive or out of stock
Journalists from AgroPages interviewed buyers and Chinese pesticide producers at the CAC and ACE exhibitions, which were huge industry events held in March and October in China. They felt an unprecedented tension during these interviews. From the start of 2017, the prices of technicals kept soaring. Imidacloprid, Acetamiprid and Thiamethoxam more than doubled in price over the previous year while Emamectin benzoate and Abamectin saw significant price increases, and a few products became unavailable. At the ACE Exhibition in October, most Chinese vendors adopted a strategy of stopping to offer and accept orders while some foreign trade firms transferred their orders to other countries, such as India.
However, while examining the reasons for these price hikes, only some of them were driven by the demand. Most of the hikes resulted from environmental pressures. The enforcement of environmental policies made an appreciable dent on the production activities of companies. Under such circumstances, the agrochemical industry will be forced to expedite the elimination of their outdated capacity, and increase the number of mergers and partnerships within the industry. It is estimated that over the next five years, another 40% small and medium-sized firms will disappear. By that time, pesticide production in China will be more concentrated, and companies with complete industrial chains will grow stronger and become industry giants.
Looking forward to 2018, it is predicted that the pesticide technical market will experience another wave of short-term price increases, which will slow down in May.
♦ Export recovery
In 2017, due to the recovery of global demand and the price increases of technicals, the recession in pesticide exports, which lasted over two years, came to an end. From data sourced from ICAMA between January and October, 2017 witnessed an increase in both the export volume and export amount of pesticides. The increase of export amount being higher than volume, but both indicators fell short of their 2015 levels.
Chinese pesticide export volume in 4 years
Chinese pesticide export value in 4 years
In terms of export structure, the increase of export volume and export amount of formulations have remained greater than those of technicals, which align with the change in China’s export structure this year. This demonstrates the constant optimization of the export structure of Chinese pesticides. China is currently undergoing grueling environmental supervision. However, as industry patterns further change, China’s unrivalled superiority in technical industrial chains will be fully realized, providing support for the pesticide formulation producers and exporters in China.
Chinese pesticide technical export volume in 2 years
Chinese pesticide technical export value in 2 years
♦ Preliminary industry consolidation effects demonstrated
In 2017, the completion of major acquisition cases in the global agrochemical sector ended the reign of the six agrochemical giants. A new industry structure was taking shape, resulting in the rapid consolidation of China's agrochemical industry.
- In June 2017, China National Chemical Corporation (ChemChina) announced the completion of the takeover of Syngenta in Switzerland, the largest ever takeover of an overseas company by a Chinese firm, valued at US$50 billion, which took a year and a half to complete. The global agrochemical structure, where the US, the EU and China dominate, became a reality.
- In 2017, the world's largest chemical company, DowDuPont, arrived in China, after the completion of its merger with DOW Chemical in August 31. In November, the Agriculture Division of DowDuPont made its debut at the National Plant Protection Conference and launched its first product, DuPont™ Pexalon, as well as the Dow AgroSciences® Rinskor® Active herbicides.
- In July, 100% of ADAMA's equity was transferred to Sanonda, which became China's top pesticide company. Today, Sanonda prides itself as China's only international company based in China and links it to the world in the crop protection sector. It is also ChemChina's sole listed agro-business, with a market value of nearly RMB30 billion.
- As early as the middle of October 2016, it was rumored that ChemChina and Sinochem Group will merge, after the take-over of Syngenta. Although the rumor was denied by both sides, speculation remained in 2017 about whether they will merge. Nonetheless, more contributors are required for the merger to materialize.
In 2018, as compliance requirements further intensify and the enforcement of new regulations becomes more stringent, mergers and integration within the industry will gather steam. As a result, disadvantaged businesses will be eliminated or acquired while companies with mutually reinforced resources may join forces to deliver the result of “1+1>2.”
♦ Company performance recovery
In 2017, due to price increases driven by policy rigidity, as well as recovering overseas demand, the price of the primary commodity, Glyphosate, fell before rising again while the prices of many insecticides kept rising. This export recovery led to strong performances among companies.
Since the first quarter of 2017, the recovery in the business activities of listed Chinese pesticide companies continued and their profitability significantly improved. In the third quarter of 2017, the quarterly net profit of these listed firms approached total profit for the first half of the year. As of October 31, listed Chinese pesticide firms, excluding the newly-listed Sino-Agri Group, posted a figure of $ 15.16 billion in sales revenue and $ 1.16 billion in net profit over the past three quarters.
The years 2016 to 2017 saw many pesticide companies being successfully listed or intended for IPO. During this period, some firms filed listing applications, most notably Jiangsu Sword Agrochemicals Co. Ltd., Suli Co. Ltd., Zhejiang Zhongshan Chemical Industry Group Co. Ltd., Jingbo Agrochemicals Technology Co. Ltd., and Nanjing Fengshan Chemical Co. Ltd., while some firms successfully went public, most notably Jiangsu Flag Chemical Industry Co. Ltd., Hailir Pesticides and Chemicals Group, Shandong Cynda Chemical Co. Ltd., and Sino-Agri Group, a leader in the field of agricultural input circulation. This is due to the expected accelerated IPO issuance examination and partly reflecting the strong intentions of companies to enter the capital markets.
♦ Product and positioning transformation strategies began to be implemented
As China’s pesticide industry experienced transformation and advancement, pesticide technical producers also embarked on their transition strategies for formulations and eco-friendliness. With the implementation of the national pesticide and fertilizer zero growth policy, pesticide and fertilizer reduction production went into in full swing. Biological bacterial fertilizers and functional fertilizers, which save labor and time, become new areas of growth.
- As early as 2015, Jiangsu Good Harvest-Weien Agrochemical Co. Ltd. (Good Harvest) established its strategies on certain areas, such as bio-pesticides, bio-fertilizers and soil remediation, by combining greener and more functional crop protection products into its crop protection solutions. Good Harvest spent two years marketing and demonstrating the effects of its bio-pesticide and bio-fertilizer products, which are based on phenazine-1-carboxylic acid and bacillus cereus. These products are now well-recognized in the market.
- In August 2017, Huifeng Agrochemical, a well-established supplier of pesticide technicals, renamed itself “Jiangsu Huifeng Bio-Agricultural Co. Ltd” from “Jiangsu Huifeng Agrochemical Co. Ltd”. Based on its existing business, Huifeng made forays into the biologics business, covering bio-pesticides, botanical pesticides and agro-microbial agents. In November, Huifeng launched two polyglutamic acid bio-fertilizer products. Huifeng currently has in excess of 30 microbial technologies and products that are being registered.
- Since 2013, Fuhua Tongda Agro-chemical Technology Co. Ltd. has launched its strategic transformation. Over these years, its Research and Development Centre has conducted extensive field testing on the development of new formulation types and new techniques for its traditional pesticide products. Fuhua Tongda will transform itself gradually and totally from a technical manufacturer into a company that engages in the global sales of diversified formulation brands.
♦ Industrial chains broaden
The country’s new environmental policy has led to production suspension or curtailment. In this context, there were massive cases of horizontal integration while the integration of upstream and downstream companies also gained considerable attention. This strategy allowed pesticide companies to quickly combine the industrial chains of their products while having direct control over core raw materials and intermediates, thereby strengthening their current production and supply capacities.
Following the takeover of Hebei Shuangji Chemicals Company Ltd. in June, Limin Chemical Co. Ltd. completed the largest acquisition in the EBDCs industry of China, rapidly expanding its production capacity of EBDCs to 10,000 tons per year. In November, Limin announced its acquisition of Shandong Damin Chemical Co. Ltd., which produces propineb raw materials and is also a longstanding raw material supplier of Limin. After the two horizontal and longitudinal integrations, Limin ensured a stable supply of raw materials for production and became a genuine leader in the EBDCs industry in China. The competitiveness of Chinese EBDCs companies also greatly improved.
♦ Diversified agricultural services led by international corporations
Major global companies were able to capitalize on the trend of agricultural development and, therefore, became pioneers of the development of the industry. In 2017, international corporations provided more diversified services across China, demonstrating their capacities in areas such as green agriculture and modern agricultural technology.
- Through the “Good Growth Program,” Syngenta used its plant protection technology to help boost its eco-friendly production while seeking to reduce non-point source pollution, slow down soil degradation and control diseases, insect pests and weeds. Syngenta also created partnerships with the Yantai Academy of Agricultural Sciences and the Institute of Apicultural Research (IAR), under the Chinese Academy of Agricultural Sciences (CAAS) among others, setting a good example of developing sustainable agriculture, and showing its commitment to soil protection and promote biodiversity.
- In July 2017, Bayer completed the largest field UAV crop protection in China. In September, Bayer officially launched an UAV channel project. In October, Bayer released, through “China WEEDSCOUT,” a weed-sensing application, which uses a digital platform to help farmers efficiently and accurately identify field weeds and improve agricultural productivity in a sustainable manner.
- Towards the end of December, ADAMA officially announced the launch of a series of digital solutions in China. By introducing products that have been successfully applied overseas, such as Adama Wings Software Services, “Swarm” Robots, FieldIn Sensing Information Services, and the CropVIEW® Agricultural Information System, ADAMA will advance the Chinese agriculture sector by leveraging its new dual drive model, featuring “differentiated agrochemical products + digital agriculture”.
Key words such as policy, market, change at the demand side, and transformation policies of enterprises, were some of the common issues shared by all industries during their development. In the case of the pesticide industry, the change in its external environment over recent years was particularly drastic, and had considerably affected companies, leaving many small and medium-sized firms to exit the market. Other companies, departing from decades of pesticide technical production and price competition, entered a higher level of rivalry. This new wave of competition highlighted the use of technology and forward thinking.
In 2018, the polarization among enterprises will intensify and will further concentrate the industry. Major players will grow larger and their extensive industrial resources will promise to break out into more robust growth. We are convinced that a growing number of global industry practitioners will focus their attention on the Chinese market.