Mar. 15, 2018
When I talked with my friend about the weather recently, it was generally accepted that the air quality this winter was really much better than in previous years. Compared with last year, the number of days with blue skies since the beginning of winter this year is far more. Just a few years ago, people were suffering due to the poor air quality in China and the government was forced to take measures. The authorities determined to tackle the issue of air pollution, and an “environmental storm” swept the country quickly. The effect of intense environmental control can be described as immediate and instant.
The environmental inspection campaign of China, started in the second half of 2016, has affected a large number of industries, and the pesticide industry is no exception. For a time, fears of shutdown, production stoppage, bankruptcy, supply shortage, price escalation, out-of-stock in spite of rising or dropping price were not rare in the entire market. For the pesticide industry, the environmental inspection campaign led to a shortage of intermediates, and the soaring prices of intermediates then led to a reduction in pesticide production, which affected the completion of purchase orders. Some foreign enterprises that rely on the pesticide exports from China were not able to fulfill their agreements to their customers due to delay or even cancellation of orders by Chinese suppliers. Hit by such a rapid “environmental storm”, China, a big country in terms of production and export of pesticides, “cooled down” its supply and the global pesticide industry which has yet to step out of the "winter".
So what is the impact of China's environmental inspection campaign on pesticide enterprises? How will the enterprises respond to and treat this challenge? What adjustments will be made and what are their plans for the future? In response to these questions, AgroPages interviewed companies in the two main markets directly affected by the environmental measures, namely, Chinese companies that play a leading role in the export of pesticides, and Latin American enterprises that rely heavily on Chinese pesticides.
How big is the impact?
As mentioned, China's environmental inspection campaign was launched in the second half of 2016. As the campaign progressed, it affected the pesticide companies, and many Latin American companies started feeling the impact of environmental protection policies of China in the second half of last year.
General Manager of Anasac International and Director of Anasac Colombia
Anasac is a Chilean agrochemical company, it mainly buys technical grade pesticides from China, and formulates them in its own production facilities located in Chile, Argentina and China, then sells to the Latin American market. “Since the second half of last year, the supply situation became critical. Many factories didn´t accomplish their delivery commitments, affecting our response time to serve our customers and even in some cases preventing us from fulfilling our agreements with them,” said Daniel Traverso, general manager of Anasac International and director of Anasac Colombia.
German Pessagno, operation manager of Chemtec SAE, told us, “For now, we have encountered initial difficulties, but if this situation persists, we will face many more. Last year, the supply was compromised. Many of our friends' suppliers have had difficulty in supplying and quoting, and above all, in being able to maintain the offers. Some of the contracts were cancelled by them, and some came too late.”
Chemtec SAE is a pesticide importer based in Paraguay, most of its products come from China. They have developed a good business network and have dealings with professional suppliers, and have managed to cover almost all their supply, but with great difficulties. “Not only have we encountered supply difficulties and in many cases delays in shipments, even with cancellation of contracts, but we are also facing the same difficulties this year,” German said, adding, “We have been very careful when making decisions. Undoubtedly, uncertainty about the future prices and the reality of Chinese politics are making purchasing decisions highly risky.”
Operation Manager of Chemtec SAE
Sebastian Calvo, president of the Argentinian company Red Surcos, believes China is currently restricting non-compliant businesses through more stringent environmental policies. Product prices will inevitably rise because environmental costs are being added to the operating costs of the companies that are conforming to the requirements. Calvo believes that only a third of all companies that currently provide raw materials for the agrochemical industry will stay in the business.
Brazilian agrochemical company CropChem LTDA has assured that the unfavorable situation has had no impact on their 2017 financial year, but they believe that the year 2018 will be challenging, with lower supplies and higher prices. Many companies have started diversifying, whether in the provinces in China, or in other countries. They believe the supply will normalize in the medium term, with the factories meeting the demands of the government.
So, what is the business situation in China? We interviewed several companies located in different provinces.
Shandong Luba Chemical Co., Ltd. in Shandong Province stated in 2017, the agrochemical industry of China in experienced the most severe test. Shandong Province, as the key province in the final round of national environmental inspection, received intense attention. Luba Chemical is one of the key agrochemical companies in Shandong Province. All factories of Luba Chemical are located in the province and each factory was treated to stringent environmental inspections. Fortunately, due to the company's continuous high investments in environmental protection and safety norms in recent years, the factories under Luba Chemical passed the stringent inspection and safety checks of the country, and none of them was ordered to suspend production due to violation of state laws and regulations. Consequently, Luba Chemical has been able to honor the demands of the market and supply to domestic and foreign customers. Though the factories were unable to operate at full capacity, the export and domestic sales goals of the company were successfully achieved this year.
Several other companies said they were not impacted by the environmental inspection. CAC Group stated the company's main products have maintained a normal production status, and sales have not been affected. Zhejiang Zhongshan Chemical Industry Group responded that although the company did not suffer much in this round of environmental inspection, it could not fully meet the needs of the market due to insufficient supply of raw material and limited capacity. However, Zhongshan Chemical exported products worth US$160 million in 2017, an increase of 30% over last year.
Like Zhongshan Chemical, Lier Chemical Co., Ltd. in Sichuan Province also achieved overseas sales growth of 30% in 2017. When it comes to environmental inspection, Lier Chemical is very confident as the company has invested in pollution control. "As a responsible company, Lier Chemical has been attaching great importance to environmental protection and invested a lot in environmental protection facilities and equipment. We have been following the requirements of discharge. Therefore, in this round of environmental inspection, our production remains normal and efficient, and both production and sales are thriving," confirmed Fan Qian, Vice President of Lier Chemical.
It can be concluded that one of the main reasons the interviewed companies were not impacted greatly in this round of environmental inspection is because they have been placing great emphasis on the supporting raw materials and core intermediates. By controlling the upstream supply and cost of the industrial chain, these companies are able to manage a continuous and stable supply of products. Many other companies recognized the importance of supporting product deployment and supply chain extension, and emphasized they would implement this strategy more rigorously.
How to respond?
Several Latin American companies interviewed agreed that, although, they had not been affected significantly by the environmental protection policies of China in 2017, the market situation will be even more severe in 2018. Then how will they respond to it? What are their strategies in the future?
Anasac took action promptly when it smelled the changes in the market. They handled the situation by acquiring advanced strategic technical grades to ensure supply from every authorized factory they work with. Additionally, the price increase of lower strategic technical grades (that means, technical grade with lower profit), led them to buy short-term and keep less stock.
Speaking of how to cope with the future challenges, Daniel Traverso thinks that the only way to face the situation is with market intelligence, which means understanding the synthesis processes– the raw materials and the intermediates used in the product synthesis, as well as to know all the suppliers involved in the process. In addition, keep up with the changes in local legislation that may influence the availability of active ingredients (technical grade). This last point is particularly important in China.
General Manager of CropChem
CropChem looks to its future strategic adjustment. “Our strategy is to find our blue ocean through good relationships, by offering competitive prices to our clients, a lean cost structure and diversification of products and manufacturers,” explained Rodrigo Leão, general manager of CropChem.
German Pessagno, operations manager at Chemtec SAE, further elaborated on the importance of formulating strategy correspondingly. “I think the biggest challenge from now on is to overcome the lack of clarity ... will this situation really last? Is this a bubble that will explode in our face like in 2008? Should we start developing new suppliers, new registrations, new purchasing strategies, or should we just wait without risking major purchases? In our near future, there are more doubts than certainties, and that is why it is difficult to evaluate new strategies. We have not only the antecedents against us, but also the lack of reliable information.
“Usually the most difficult thing when making decisions and strategizing is the lack of information. As we have been saying, this uncertainty is the greatest of difficulties. When changes occur in policies and, therefore, in prices with the speed that is occurring, the most flexible companies are usually the ones in a winning position. I think the most important thing will be to stay in line with these changes and be able to foresee as best as possible, if this situation will be maintained or not, to be able to take advantage of this and change our strategy,” he emphasized.
What's going to happen in 2018?
“The dizzying rise in prices was not reflected in the same proportion, nor speed in the local market; that is to say, many of these products imported at the end of 2016 or at the beginning of 2017, which experienced sharp increases as of the second quarter of 2017, were sold in the local market at purchase prices and not at replacement prices. This will undoubtedly generate a new scenario for this year's purchases,” German noted.
In addition to the challenges, German also spoke of the positive side of the issue, “If the situation continues with vertiginous changes, we foresee that small and agile companies such as ours will be able to take advantage of larger companies, where decision-making is more bureaucratic and slow. I think we must stay very active to take advantage of these changes and seek to focus on the products where we are most competitive.”
Sebastian Calvo, President of Red Surcos, also talked about the positive impact. “These changes will have a positive impact on companies that produce in Argentina. Now, we will have fairer competition, because it will be harder for outdated products to enter the country with prices as low as before.”
President of Red Surcos
India, which is also a big country in terms of pesticide production and consumption, has recently attracted not only a lot of foreign investment but also launched a series of favorable policies. In 2017, Indian companies bucked the trend and achieved eye-catching performance. Will the pesticide industry of India rise rapidly by taking advantage of the “environmental storm” of China? We invited the top executives of these Latin American companies to share their views as these companies have imported products from India in addition to China.
It was commonly agreed among the respondents that China's environmental inspection campaign will benefit the development of India's pesticide industry. Sebastian Calvo said, “The Chinese have been positioned as the absolute industry leaders because of their low production costs. But now the scenario has changed. The shift toward India as the industry’s main producer is already happening in key products, such as mancozeb, pyrethroids or chlorpyrifos, which can be now purchased cheaper from Indian companies than Chinese ones.”
Daniel Traverso explains, “India is growing in its capacity for synthesis, having increased its supply and competitiveness in the last few years.” Rodrigo Leão states, “Indian companies were already enjoying a healthy financial growth through regular investments.”
In addition, India's policy related adjustments have played a positive role in the development of the industry. Rodrigo affirmed Indian companies have reached a tipping point, with a higher investment level and the government’s 'Make in India' campaign raising its market share in the global market. German mentioned that the changes in both taxes and registration will give the Indian industry a more competitive edge, but the focus will probably be more on the local market rather than the global markets.
Although the recent development and future prospects of the Indian market have been confirmed by the respondents, it is not a simple matter for Latin American companies that have long relied on Chinese pesticides to re-select new partners.
Sebastian explained that the change will not be simple for the industry in Argentina, which purchases several types of raw materials from China, as changing suppliers require new legal processes related to regulation, approvals, and other issues. “These processes have been established over several years with Senasa and cannot be modified overnight,” he added.
“Even if India gets competitive, it will not be an easy task to "seduce" companies such as ours to start registration in India. This will take a long time in many countries. It means that India must have huge investments to gain the capacity to produce, and produce in an aggressive way to compete against China. They must sustain this investment long enough to show the world that the prices are sustainable. Then companies will start registrations with Indian origin, and only after that, India will start selling truly,” German opined.
What will happen in the future?
Although this round of “environmental storm” in China has had some impact on some companies, whether domestic or foreign, the determination of the Chinese government in environmental governance is very firm. This can be evidenced by some recent events. In March 2017, Li Keqiang, the Premier of the State Council of China, proposed at the Fifth Session of the 12th National People's Congress that the government should resolutely win the battle for the defense of the blue sky with special emphasis on the comprehensive promotion of pollution control. The 19th National Congress of the Communist Party of China in October 2017 stressed the importance of environmental supervision and defined the building of ecological civilization as the "Millennium Project." On January 1, 2018, the first "Environmental Protection Tax Law of the People's Republic of China," especially for promoting the construction of ecological civilization in China, was formally implemented, and an environmental protection tax will be levied on those companies and other production and business operators that discharge taxable pollutants directly to the environment. More detailed policies may be introduced in the future. The strategy of economic growth at all costs will be abandoned. The new direction of China's economic development will focus on the environment and concern for the ecology. Therefore, the “environmental storm” will not cease, but will become a lasting battle.
I remember about 5 years ago, China's pesticide industry was still surrounded by chaos, including excess production capacity, homogenization of competition, operation without licenses, fake and shoddy products, and uncontrolled waste discharge. In recent years, as the regulation increasingly tightened, the industry has been moving in a more healthy direction. In the "International Finance Forum 2016 - China Report" addressed by Zhou Xiaochuan, the governor of the Central Bank of China, mentioned that the backward production capacity is caused by price distortion, while the environmental cost issue is actually a kind of price distortion. If the environmental costs are not absorbed by pollution-causing industries, the prices will be inaccurate. Enterprises will think the industry has high profitability, which will lead to higher investment and production capacity. When there are higher environmental requirements, there will be higher fines for environmental pollution, consequently, many companies will not be able to carry on, and the excess production capacity will be exposed.
The pesticide industry of China experienced this exact situation. Excess production capacity reflects, to a large extent, the inadequacy of state environmental supervision, and a too small investment in environmental protection. The introduction of environmental related policies will help the regular and compliant companies to achieve upgradation, explore new growth modes, and obtain more development opportunities. It will also help the industry eliminate outdated production capacities, standardize market operations, increase the degree of concentration, improve their international competitiveness, and achieve healthy and sustainable development. In the long run, we believe the gradual formation and improvement of the pesticide industry of China will surely promote a healthy development of the global pesticide industry.
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