Observations on the Chinese Agrochemical Market for 2016

 

China's pesticide industry has been on a slow track in 2016 
 

In 2016, China's pesticide industry has continued down a path of depression. The total production has grown by a slight amount, less than the year-on-year increase registered in 2015. Operating revenues from pesticides have experienced a lower growth rate, as sluggish demand has led to a glut and suppressed the prices of most products. 
 

Under an initiative to realize zero growth in pesticide usage, China has spared no effort to advocate high-efficiency, low-toxicity, and low-residue pesticides in 2016. Meanwhile, it has done its best to popularize plant protection machinery. All this has made it possible to achieve better efficacy with a smaller amount of pesticides, because efficiency has been raised. On the flip side, however, farmers have used more imported pesticides year by year. 
 

Both, the domestic market and the international market, have been struggling with adversities, including limited demand, bans on high-toxicity pesticides, measly returns in the planting industry, and an oversupply of pesticides. As a result, pesticide prices have run at low levels in 2016, declining more and rising less than in 2015. To complicate matters further, ever more stringent requirements for safety and environmental protection have sent production costs of upstream firms on an upward trajectory and actually executed prices on a downward one. The profit margin of the pesticide industry has been severely squeezed, and companies have languished just above break-even. 
 

Imports and exports of pesticides have also been bleak in 2016. According to statistics from the Institute for the Control of Agrochemicals, Ministry of Agriculture (ICAMA), both quantities and prices have fallen well below what we saw in 2015, the first year in history seeing such a dual decline. In the first 10 months of 2016, China exported 1.0998 million tons of pesticides worth US$4.512 billion -- down 15 percent and 27 percent year on year, respectively. Over the same period, China imported 32.8 thousand tons, amounting to $371 million -- 35 percent and 37 percent less than a year earlier, respectively.

 

Industry consolidation and environmental governance have led to increased prices 
 

At the end of 2015, China released its 13th five-year plan for the pesticide industry. The plan called for industry consolidation and encourages pesticide firms to cluster together in industrial parks. In 2016, the Ministry of Industry and Information Technology, acting under state policies, issued a list of such firms to be relocated. The list was made public part by part on a few occasions and mainly included provinces performing well in the chemical industry, such as Shandong, Sichuan, and Jiangsu. In Shandong, chemical-industry firms in old urban areas have to be moved or upgraded, and firms dealing with hazardous chemicals must relocate to industrial parks. In Jiangsu, efforts are underway to usher in standardized management and strengthen infrastructure. By all accounts, pesticide firms are working faster to move into industrial parks. 
 

In 2016, apart from expedited industry consolidation, pesticide firms have been confronted with operational and even life-or-death challenges from a nationwide crackdown by the Ministry of Environmental Protection across the chemical industry on violations of its rules for environmental protection and sustainable development. 
 

The environmental inspection team of the central government carried out two nationwide checks this year, in July and November, respectively. They sent shock waves of accountability across 15 provincial-level regions, many of which were subjected to unprecedentedly rigorous examination. A lot of firms were ordered to suspend production because of slippage on environmental protection, and the people responsible were punished. Some of these firms were based in major chemical-producing cities of provinces such as Hubei and Sichuan. 
 

Since winter started in November, Beijing, Tianjin, Hebei, and surrounding areas have issued weather alerts for severe pollution. Parts of major provinces in the chemical industry, like Hebei, Shandong, Henan, and Sichuan, have also been blanketed in smog at times, and emergency measures have been taken to limit production, suspend production, and restrict pollutant discharge, among other things. The most forceful campaign against smog has been launched throughout the country. 
 

These actions have brought an extra burden on production, which has in turn beset the supply of agrochemicals and upstream raw materials. Take glyphosate, over half of whose global production comes from China. It has just experienced a staggering year-on-year price hike of 30 percent. At this moment, its high-end quotation is as high as ¥23 thousand to ¥25 thousand per ton, and its prevailing quotation is between ¥21 thousand and ¥22 thousand per ton. Glufosinate, which stood high at over ¥300 thousand per ton in 2014 and later hit a rock bottom of ¥110 thousand, has also seen a gradual rally in late 2016. In December this year, some firms claimed that its actually executed price had climbed back to ¥155 thousand. 
 

Next year, the Ministry of Environmental Protection will launch a second nationwide survey of pollution sources. Plus, it will release and enforce the Action Plan for Protecting the Soil Environment and Treating Polluted Soil to look deep inside the issue of soil pollution in China. Consequently, firms in the chemical industry may be under greater pressure to go green. The Chinese government has become aware that a balance must be struck between rapid economic growth and environmental resource consumption. It has worked towards that balance. The chemical industry, which has traditionally been a major pollution source, needs to fathom how to embark on a path of sustainability. This is a tough yet crucial test for all firms involved as the state resolutely transforms the industry. 

39 pesticides have been banned, but the aqueous solution of paraquat is not gone 
 

As China becomes more concerned about sustainable development and human health, the government has worked tirelessly to phase out and replace high-toxicity pesticides. Regulatory improvements have been made to achieve low toxicity and low residue. This past September, the Ministry of Agriculture issued an announcement to revoke the registration status of dicofol as a pesticide, bringing the total number of pesticides banned from sale and used in China to 39. 
 

The most high-profile ban this year was imposed on the aqueous solution of paraquat, whose sale and use were outlawed in China on July 1, 2016. The aqueous solution of paraquat is the second most sold herbicide worldwide. As the deadline approached, a heated discussion ensued across China's agricultural supplies community. In May 2016, the Ministry of Agriculture made a further move and reclassified paraquat as hypertoxic. It ceased to process applications for paraquat's field experiments and registration, provoking a backlash from firms that made this product in China. 
 

The aqueous solution of paraquat was widely used in China. After the ban went into effect, paraquat was detected by the Ministry of Agriculture in aquacide samples for spot checks conducted in provinces like Shandong, which are heavy users of pesticides. On top of that, some glyphosate products on the market were found to be adulterated with paraquat. Despite the ban, the aqueous solution of paraquat is unlikely to be eradicated anytime soon. This has proved to be a big headache to regulators.

Glufosinate and pyraclostrobin have attracted much attention 
 

This year, two products have been major hits, causing a scramble among pesticide firms to develop, register, and produce them. One of them is glufosinate, which has ridden on the popularity of genetically modified seeds. The other is pyraclostrobin, whose patent in China expired last year. 
 

Glufosinate owes its nascent popularity mostly to Bayer's success in promoting genetically modified anti-glufosinate seeds and China's ban on the aqueous solution of paraquat. Another driving force is glyphosate resistance, which keeps occurring and evolving. As genetically modified crops come in a wider range of varieties and grow on larger pieces of land, glufosinate is in rising demand and has huge market potential. 
 

In early 2015, the capacity of producing glufosinate started to increase in China and overseas. The excess capacity failed to be consumed by markets quickly enough. As a result, the price of glufosinate technical supplied by domestic pesticide firms went into free fall, down from a record high of ¥350 thousand per ton in 2014. In June 2016, the lowest quotation was a meager ¥119 thousand. It was not until the end of 2016 that the constantly tight environmental policy helped nudge the price up to ¥155 thousand. 
 

At present, the glufosinate capacity of domestic manufactures is roughly as follows:
 

 

The price of glufosinate technical has hit the bottom and will by no means plummet further. Chinese firms are still imitating their way forward when it comes to glufosinate production. They are beleaguered by technical gaps that are difficult to fill. Glufosinate technical they produce is not pure enough and easily causes safety accidents such as explosions. That means companies have to purchase equipment that meets tough standards and invest a lot in its maintenance. If domestic pesticide firms fall short of addressing these issues properly, they are at risk of being forced out of market competition. 
 

In June 2015, the patent for pyraclostrobin technical in China expired, spelling new opportunities for the production of technical and formulations. Aside from domestic demand, the international market is buoyant, with consumers from places such as Europe and India closely following market trends in China. After the year turned to 2016, a flurry of registration certificates was issued to Chinese firms, followed by an upswing in the numbers of product categories and types. Pyraclostrobin technical, after surging to ¥350 thousand per ton, was still in short supply. The whole market was on fire. 
 

By December 31, 2015, there were 179 registration certificates for pyraclostrobin products and 45 for pyraclostrobin technical. Altogether, 92 Chinese and foreign firms were in the game. In 2016, an additional 137 registration certificates were issued for pyraclostrobin products, and an additional 17 for pyraclostrobin technical. Another 42 firms jumped on the bandwagon. 
 

Shanghai Heben, Dezhou Luba, Shandongn Hailir, Shandong Kangqiao, Zhejiang Boshida etc. have introduced or expanded capacity for producing pyraclostrobin technical. Their extra capacity is expected to be unleashed in the next half of 2017. Market competition is bound to be more relentless. 
 

In China, pyraclostrobin is mainly used for fruit trees, vegetables etc. Globally, dry-land field crops account for most of its usage -- 60 percent applied to beans, cereals, and corn, as compared to just 20 percent going to fruit trees and vegetables. Another noteworthy thing is fungicide usage. Six percent of fungicide are used in dry-land fields in China, as opposed to nearly 40 percent in South America. All this indicates good market prospects for pyraclostrobin in China. 
 

E-commerce has cooled down, with the agricultural Internet back on the right track 
 

E-commerce for agricultural supplies was the top buzzword of the Chinese market in the three years to the end of 2015. After two years of rapid progress and fast trials, it abated in 2016. Early this year, 17 Chinese and foreign pesticide firms, including multinationals such as Syngenta, Dupont, and Bayer, banned online sales of their products and disavowed responsibility for products sold via such channels. This amounted to a boycott of e-commerce. Against this backdrop, a whole bunch of strong players in e-commerce for agricultural supplies backed off, and a few even quit altogether. 
 

The upside to this is that the remaining ones gained a more solid foothold, developed more down-to-earth philosophies for operation, and started to provide more concrete services. They keep honing their cutting edges in their respective segments of the market. Overall, Internet-based development of the agricultural supplies industry is now back on the right track and focuses on the formation of user habits in the long run. 
 

As a representative of e-commerce for agricultural supplies in China, 16899.com has drawn both attention and criticism since its inception. In recent years, it has set up an operational model that combines its online platform, county-level workstations, and procurement services. On top of that, it has beefed up its website system, which has attracted a growing number of new firms and products. Thanks to its increasingly diversified offerings, it has posted more than ¥400 million in annual sales for two years on end. In 2016, it migrated the crowd-innovation model of the Internet to agricultural supplies. It is not a stretch to say that the development of 16899.com is a barometer of e-commerce for agricultural supplies in China. 
 

Beyond e-commerce for agricultural supplies, the market has spawned quite a few agricultural Internet firms or teams, which help companies or dealerships tackle problems in operations and management. Examples include 51xnb.com and Internet tools dedicated to agricultural technologies, such as Nongyisheng and Fengshoubang. These platforms and applications are still accumulating users and traffic in search of a way to turn a profit. 
 

In 2016, aerial pest control has been the agrochemical industry's darling of the year, posing a sharp contrast to the quiescence of e-commerce. Its emergence has coincided with land transfers and centralized planning that are occurring in China. In addition, a market downturn and mergers between agrochemical behemoths have motivated some Chinese firms to take plant protection services as their new business in an effort to come out on top amid heterogeneous competition devoid of innovations. 
 

Currently, China has upwards of 200 companies involved in the production of drones, and 10-plus of them are major players, including Wuxi Hehan, Anyang Quanfeng, and Zhuhai Yuren. Besides, some pesticide firms have invested in aerial pest control, and rapid progress has been made by the likes of Dragonfly Agri, run by Jiangsu Kesheng, and Nongfeike Agricultural Technology Services Co., Ltd., invested in by Wynca and Huilong Co., Ltd. 
 

In China, the market for aerial pest control is still held back by state policies. A lot of operation service providers cannot get subsidies and have to keep making money to stay afloat. Nonetheless, professional service providers represent a future trend in China's agriculture. By one estimate, agricultural machinery cooperatives, major grain-producing households, family farms, and farmer cooperatives are making up a 15 percent larger share of the country's total number of agricultural supplies consumers each year on average. This pace, coupled with a series of reforms to the agricultural supplies market, is laying the groundwork for more agricultural airplanes to take off in China. According to the latest statistics, over three thousand agricultural drones had been put into use in China by the end of 2015, with more than 2,500 pilots. Most of these drones and pilots were with major grain-producing households and family farms. Although there are still too few of them China covering small areas, their tremendous merits in terms of fertilization, pesticide application, and pollination are a guarantee of success. Theoretical revenues from agricultural drone operation are estimated to near ¥100 billion. 
 

A diversified landscape is in place for specialty fertilizers 
 

China is overflowing with food. In the current economic downturn, agricultural supplies firms in China have realized that, to win future competition, they must develop products that do not just boost yield but also improve quality. Specialty fertilizers are an excellent match for this description. Moreover, facility agriculture is turning pesticides and fertilizers into part of day-to-day farming. Some people have turned into professional farmers, with incentives to use specialty fertilizers, which are now flourishing in China with a diversity of products available on the market. 
 

The term "specialty fertilizer" is a product concept used by foreign companies that import fertilizers to China. In recent years, a large number of foreign specialty fertilizer firms have quietly set up shop in China to deploy resources and get a head start. In 2014, Italpollina from Italy started its business in China by setting up a joint venture called Italpollina Agricultural Technology (Shenzhen) Co., Ltd. In 2015, Biolchim, another firm from Italy, founded its China subsidiary in Qingdao. In 2016, Van Iperen from the Netherlands founded a subsidiary in China, which was its 14th worldwide. Domestic fertilizer giants, including Kingenta, Xinyangfeng, Stanley, and Luxi also piled in. Even Noposion, a pesticide firm, is strategizing about specialty fertilizers. 
 

Thanks to efforts by these multinationals' at market fostering, specialty fertilizers are more well-received in China's local markets than they used to be, especially in regions that reap high value-added from crops. Xinjiang, Shouguang of Shandong, and Yunnan are among the places where specialty fertilizers are most popular and market conditions are best. 
 

The profit margin from compound fertilizers is shrinking, and there may be only hundreds of yuan to make from each ton. Specialty fertilizers, however, can basically promise a 10 percent return, minimum. More firms will come and explore this juicy market of China.

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