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New Patterns of Global Agrochemical Supply: A Study of the Agrochemical Industry Cooperation between China and Indiaqrcode

Oct. 11, 2019

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Oct. 11, 2019
In recent years, China, the largest pesticide producer in the world, is witnessing considerable changes. Internal policies and a complex international trade environment have caused many uncertainties to the future of the Chinese pesticide industry, which has had a significant impact on global pesticide supply and demand. By contrast, India, the second-largest pesticide producer in Asia after China, has gained the attention of the industry, due to the rapid development of its local agricultural market and the accelerated expansion of its agrochemical industry, becoming a source of some international purchases.

The positive transformation of China's agrochemical industry is the outcome of many significant efforts. On the other hand, while India offers many policy advantages, it still has many disadvantages, such as raw materials and other issues. Considering the globalization of resources, can agrochemical companies in China and India identify opportunities for cooperation, overcome obstacles in terms of industrial chain, technology and management, and jointly create a new era of global pesticide supply?

During the 2019 China Pesticide Exporting Workshop held in Hangzhou on 4th and 5th July, 2019, the organizer, AgroPages, invited experts from the Pesticides Manufacturers & Formulators Association of India (PMFAI), Sunidhi Securities & Finance Ltd., Heranba Industries Ltd., Nongbo Bio-Technology and Rotam to jointly discuss these topics. In this article, we will highlight data and opinions from the experts’ speeches at the workshop, to provide information for readers.

Chart 1: Indian Chemical Market Value
Indian agrochemical industry: Installed capacity needs to be further utilized, in the context of surging domestic demand

Over the past 10 to 20 years, due to the rapid growth of the economy, India’s chemical industry has achieved considerable development, becoming one of the fastest growing industries in the country. From fiscal years 2011 to 2018, the value of the Indian chemical market witnessed an average growth rate of 6.2% (see Chart1). Between fiscal years 2018 to 2025, the market value is expected to increase from the current US$163 billion to $304 billion, at a compound annual growth rate of 9.3%, exceeding the growth of the global chemical industry.

As one of the categories of the wider chemical industry, commodity chemicals account for 25% of total output value (see Chart 2), followed by special chemicals, accounting for 22%, while agrochemicals related to special chemicals account for 3%. From fiscal years 2018 to 2023, the global average growth rate of special chemicals is expected to be between 4% and 6%, with China expecting a growth rate of between 6% and 7%, while India will exceed these two indicators, reaching between 12% and 13%.

Chart 2: Proportion of Indian Chemical Output Value
India is a major agricultural country, and the rapid development of its agricultural economy and technology sectors has driven the growth of its agrochemical industry. The Indian agrochemical output value is currently the fourth largest in the world, behind only the United States, Japan and China, with a market value of $4.5 billion and a rapid growth rate. From fiscal years 2012 to 2017, India ranked sixth in the list of top 20 fastest-growing markets in the world, behind Russia, Ukraine, China, Thailand and Indonesia. Even during a global agricultural recession, India’s growth rate is expected to maintain a value of 6.5% from fiscal years 2015 to 2020, while the compound annual growth rate of the value of its pesticide exports is expected to reach 9% during the same period.

India relied heavily on China for pesticide supplies. During the last six years, India’s manufacturing capacity has been under-utilized and little investment was made, due to imports from China, which provided opportunities for Chinese companies to utilize available pollution compliant capacities and make new investments.

The tables below (see Tables 1 and 2) highlight the growth of India’s installed and actual pesticide production capacity between fiscal years 2011/2012 and 2016/2017. During this period, the installed pesticide capacity remained stable, with a compound annual growth rate of 1.24%. Although actual production grew rapidly, reaching 6.73%, there was still a big gap between actual and theoretical capacities.

Table 1. Growth of installed pesticide production capacity from 2011/2012FY to 2016/2017FY

Table 2. Growth of actual pesticide production capacity from 2011/2012FY to 2016/2017FY

China is a major import source of pesticides for India. In fiscal year 2017/2018, 55% of India's pesticide imports came from China. India’s import and export of pesticides have clear characteristics, its imports are mainly new generation compound molecules that are patented with high added value, while its exports are mainly generic old generation products, which are relatively low in value but are exported in high quantities.

The table below (see Table 3) highlights India’s import and export of pesticides from fiscal years 2012/13 to 2016/2017. In terms of quantity, India recorded a compound export growth rate of 17.5% over five years, which is considerably higher than the 9.3% import growth rate. However, in terms of value, the five-year compound import growth rate is 16.79%, which is higher than the 13.42% export growth rate. Therefore, the major challenge faced by India's pesticide export market is how to upgrade the value structure of its exported products.

Table 3. Volume and Value of Indian Pesticide Imports & Exports

Indian chemical industry needs to be upgraded to create opportunities for cooperation between China and India

India has the largest arable land area in the world of over 150 million hectares. However, the use of pesticides in India is far lower than the global average (see Chart 3). In China, the amount of pesticide used per hectare on cultivated land is 13 kilograms, while in India, the figure is only 0.6 kilogram. Every year, the value of economic loss caused by pests is as high as $1.7 billion. Therefore, there is growth potential for domestic demand in India.

Chart 3. Consumption Level of Agrochemicals
In the context of rapid development, the Indian chemical industry has improved considerably in terms of environmental protection, safety and automation. Through continuous industrial transformation, the country’s underutilized manufacturing capacity has advanced with regards to environmental compliance in recent years, with pollutant emission levels gradually complying with required standards, providing a foundation for cooperation between China and India.

There are currently over 40 manufacturers of pesticide technicals and more than 900 manufacturers of formulations in India, of which over 125 companies are above the designated size. Among around 60 technicals and 350 formulations, insecticides make up the largest proportion, accounting for 53% of all products, followed by herbicides at 20% and fungicides at 25%. Major varieties include pyrethroid, chlorpyrifos, mancozeb, pendimethalin, 2,4-D, dicamba and acephate.

As of June 2019, only 21 pesticides are registered in India, which is much lower than in other countries. India has an efficient patent protection system, enabling the same pesticide to be produced under a shorter cycle and at a lower price. India also has a strong research and development capacity related to pesticide technical materials and formulations. Currently, the Modi administration is promoting the “Make in India Initiative” and has made agriculture one of its priorities, while promising to double the income of farmers by 2022 and provide various agricultural subsidies. The government will also introduce more policies to support agricultural development. Chinese companies can take advantage of these benefits when investing in India. Japanese agrochemical companies always had a good strategic vision and are actively cooperating in transferring technologies with India, attaining good returns on their investments.

From the perspective of the industrial chain, although the Indian chemical industry has bright prospects for growth, it relies heavily on imports of key technical materials and intermediate products and has low levels of production, creating many cooperation opportunities for Chinese companies.

Table 4 below highlights India’s domestic production, imports and yearly demand for major raw chemical materials. In 2017, the domestic production of EVA/VAM/MDI/Styrene was non-existent, so the country relied completely on imports. In 2018, India produced small amounts of EVA and phenolic products, reducing its dependence on imports, but this was still a drop in the bucket. Using the example of acetic acid, India’s total production output is 165,000 tons, while China’s output is 8.3 billion tons, with the smallest acetic acid factory in China producing 250,000 tons per year. Therefore, the two countries have many opportunities for cooperation in the area of raw chemical materials and can work together for a win-win result.

Table 4. Capacity and Demand for Major Raw Chemical Materials in India

China’s chemical industry has a relatively large overall manufacturing capacity, a robust industrial chain and the ability to constantly update products. According to incomplete statistics for 2018 (see Chart 4), China produced over 800 varieties of intermediates, with a total annual yield of around 4.9 to 5.0 million tons. At the start of 2019, stock levels remained high. However, after the Xiangshui chemical plant explosion in March 2019, supplies of intermediates became low, but the price of most intermediate products eventually stabilized and rebounded.

Due to environmental protection and industrial policy restrictions, major chemicals manufacturing provinces, such as Jiangsu and Shandong, have imposed strict restrictions on chemical industrial parks. Many companies that produce intermediates have moved to Western China, India, Vietnam and Cambodia. The availability of production areas and chemical parks with good development prospects, as well as reliable partners, are vital to the ongoing development of many Chinese chemical companies.

Chart 4. Production and Demand of China’s Pesticide Intermediates
Compared to China’s 600 or more chemical industrial parks, India currently has only four major PCPIR chemical industrial parks, less than 1% of the number in China. However, unlike China's restrictive development, the Indian government is improving infrastructure and actively attracting foreign investment. Among the country’s four chemical parks, one is in Western India and the rest in Eastern India.

From fiscal year 2009/2010, the Indian government began to prioritize and promote the development of chemical industrial parks that achieved their objective to attract investments, except the Tamil Nadu Industrial park, which is still inviting investors, due to the lack of raw materials. Meanwhile, the much larger Gujarat Industrial Park made a much larger impact in Western India, because 85% of India's chemical industry is located in this region. The park has the highest level of foreign investment in the country and is developing rapidly.

Suitable partners are vital for investment markets. At present, Indian agricultural companies can be roughly divided into four groups, based on their characteristics. The first group includes multinational companies, such as Bayer, Syngenta, Corteva, Adama, BASF and FMC, which play a key role in the analysis and research of new compounds and have first-class market development capabilities. The second group includes UPL, Rallis, Gharda and Heranba, which gained market access during the early stages of the development cycle of generic compound molecules. The third group of companies, such as PI Industry, Dhanuka and Indofil, are adept at utilizing authorization, cooperation and other methods to gain ownership of many authorized compounds, especially patented compounds from Japanese companies and other multinational companies. The fourth group is mainly engaged in import trade, represented by Crystal Parijat, Krishi Rasayan and Willowood.

Indian agrochemical companies generally have a more forward-looking vision of global expansion than their Chinese peers, especially UPL, which has developed rapidly in recent years. Through mergers and acquisitions, UPL has quickly penetrated markets in Europe, South America and other regions, and its overseas business has grown rapidly. As a result, UPL is now ranked seventh in the list of top 10 global agrochemical companies.

Despite some difficulties, the Indian market can be considered a strategic alternative in the near future, rather than a cornerstone.

India is an emerging pesticide production base, along with Vietnam, Indonesia and China’s Taiwan, which have gradually joined the global production community, supplementing the supply chain. However, the Indian market also has some inherent deficiencies, which need to be carefully measured for investment and cooperation.

India's overall chemical infrastructure is still relatively underdeveloped, and its access to key intermediates and raw materials is limited. Indian chemical companies are generally small and lack independent research and development capacities, as well as forward and backward integration capabilities and scale effect.

In India, there are large differences in energy and financial costs between various states, resulting in uneven regional development. The government is currently prioritizing the environment, leading to longer waiting periods for environmental compliance for projects and higher construction costs for chemical plants. With the advancement of India's national economy, the same culture of environmental protection in existence in China could happen in India.

Regarding specific investment cooperation, it is also necessary to measure and consider overall investment costs. Although labor costs in India are relatively low, the rising trend from 2005 to 2015 is obvious, as shown in Chart 5 below. Although India still has a current advantage over China, it is only relevant to frontline low-skilled workers. This gap narrows when the level of employees rises. Agrochemical plants are not labor-intensive, and agrochemical companies hire more middle and high-level R&D and management personnel, to produce safer products and ensure stable processes. Therefore, the hidden management cost of investing in chemical plants in India is increasing.

Chart 5. Labor Cost in India
In terms of operating costs, the current land price, rent, water and electricity costs in India’s chemical industrial parks are not significantly lower than those in China. Chart 6 shows the power supply prices in several countries in June 2018. Both China and India registered 0.08 USD/KWH. It is also necessary to consider the availability of products that support production, such as packaging materials, logistics cost and the additional cost of registration transfers.

Chart 6. Electricity Prices in June 2018
The total consumption of agricultural products in India is still currently low, and the gap is huge compared to China. The Indian domestic market has considerable development potential and will become a strategic partner for many multinational companies. The relatively high manufacturing cost of intermediates and other raw materials in China has given India sufficient space for profits and will stimulate more Indian domestic capital to enter the agrochemical product manufacturing sector. This will not only meet India's domestic demand, but it will also create additional options for Chinese companies and other multinationals.

In terms of global supply, India already plays a major role in the entire supply chain, even leading the world in supplying some compounds. However, multinational companies and Chinese companies have completely different opinions on India’s supply status. Multinational companies have their own global operations and manufacturing capacities, so this issue is more relevant to a company's own industrial structure. For Chinese companies, India is mainly a good alternative.

If India wants to become a cornerstone of China's supply chain, there are still many issues to solve, such as cost, supply chain support and intermediate support. In the short and medium terms, end products exported by India will remain strategic alternatives to China’s global supply for some time to come. A Chinese company wishing to use India as its production base must rely on the support of India's domestic market. It is impossible to fundamentally change the global export environment in a short period of time.

The data and opinions in this article were taken from the following several keynote speeches delivered at the 2019 China Pesticide Exporting Workshop:

1.    The development status of Indian pesticide industry and a discussion on Sino-Indian cooperation opportunities
Speaker: Dr. Samir Dave, Secretary, Pesticides Manufacturers & Formulators Association of India (PMFAI) & Director, Aimco Pesticides Ltd.

2.    Analysis of India's chemical industry and its investment environment
Speaker: Rohit Nagraj, Analyst/ Consultant, Sunidhi Securities & Finance Ltd.

3.    India's pesticide production pattern and Indian companies’ strategic planning
Speaker: Prakash Kumar, International Business Manager, Heranba Industries Ltd.

4.    China's pesticide intermediate supply pattern and its impact on downstream industries
Speaker: Xiao Guoxiang, General Manager, Jiangsu Nongbo Bio-Technology Co., Ltd.

5.    Understanding and countermeasures to the changes in the China-India supply pattern from the perspective of buyers  
Speaker: Lu Jian, Senior Manager of Procurement and Strategic Supply Department, Rotam CropSciences Ltd.

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