ADAMA: End-product prices increase in some regions, raw material prices expected to remain high in coming months

Date:11-03-2021

ADAMA:

- The high price trend of raw materials is expected to continue in the coming months.

- End-product prices have been rising in regions with specific market demand.  

- Agricultural material prices are expected to continue to rise in 2022. Demand remains generally unchanged.

- ADAMA and Syngenta’s affiliated companies are teaming up to provide better freight services and better prices.

On 27th October, 2021, ADAMA received visitors from several Chinese securities institutions for field research. Ignacio Dominguez (President and CEO) and Wayne Rudolph, (Global Head of Strategy, Corporate Development and Capital Markets) presented ADAMA’s performance in the first nine months of 2021, and answered questions raised by analysts. 

Q: After the power supply restriction in Jiangsu Province in September, the prices of raw materials in the domestic market have risen significantly since October. In the upcoming fourth quarter, which is a procurement season, does the management believe the price rise trend will continue? Apart from the supply-side shortage, has the low inventory level at the distribution channel phase played a part in the substantial price rise? 

A: On your first question, first of all, the restricted power supply is not limited to Jiangsu Province. We expect the high price trend of raw materials will continue in the coming months. Restricted power supply, energy consumption and production controls are expected to exist for a few months. Disruptions to production are unpredictable in the coming months, so there should be no overstocked products. 

Q: Since the start of this year, agrochemical multinationals have achieved more sales in China than in other regions. Is this due to any special reasons related to the plant protection industry or the Chinese market? 

The improved performance of multinationals in the Chinese market is attributable to the service and product advantages of multinationals. On the one hand, Chinese farmers recognize the service and products of multinationals. On the other, Chinese market segmentation is also a reason. Chinese farmers use e-platforms and service platforms that meet farmers’ segment market needs, which are pretty specific and quickly translate into increased yields and profits. This is what we noticed when we produced and supplied our product portfolio to Chinese farmers. Meanwhile, we also noted platforms, such as the Modern Agricultural Platform (MAP), which truly improving Chinese farmers’ professionalism.

Q: We have noted good sales in the financial statements of multinationals this year, but the end-product prices are not escalated, resulting in a decline in gross margins. Why is the cost rise not passed on to the end side? 

Regarding cost transfer, our experience is that it is possible in a segmented market where product demand and supply of products are specific, such as Brazil and the United States, where we have escalated our prices. However, price escalation faces difficulties for markets with more generalized bulk products, such as Australia, South Africa and many other places. This is the current challenge confronting all companies in the plant protection industry.

Q: What are the respective contributions to profit margins of herbicides, insecticides and fungicides? Are herbicides quite different in terms of profit contribution? Will the price rise of mainstream herbicides this year drive higher demand for other herbicides, as well as insecticides and fungicides?

A: I understand this question if the profit contribution of herbicides in the third quarter is more significant than other pesticide categories. It depends on which region we are talking about. During the planting season of some crops in the northern hemisphere, such as in Europe and North America, herbicides play a more important role in business performance. In the southern hemisphere, such as in Brazil, where the main contribution comes from fungicides, crops are already planted in the third quarter.

In general, the contribution of herbicides has significantly increased in the third quarter. Still, if you look at the first nine months, the contributions of various product categories have been the same as their historical performance. Herbicides contribute at a rate of 40%, while the contribution of insecticides increased slightly from 29% to 30%. The rates of the contribution of each category have very stable in the long-term.

The price trend of glyphosate and glufosinate typically represents the current industry status, where the cost increase in raw materials translates into the rising cost of the production of technicals. Of course, these two products are special, because this round of price rises is closely associated with the price trend of yellow phosphorus, which is the raw material. The price of yellow phosphorus rose from Yuan18,000 per ton in early September to nearly Yuan70,000 in early October, which has now fallen back to Yuan40,000. It is important to watch if the price will further decline because there is a link between raw material prices and finished products. In addition to the rising raw materials prices, there was a shortage resulting from the shutdown of Bayer’s plant in North America due to flooding, which stopped running for three weeks. The combination of these two factors led to the historic high prices of glyphosate and glufosinate in the third quarter.

Q: There is a forecast for severe cold weather this year. Will this have an impact on spring sowing this winter/next year? There was a relatively rapid price rise in agricultural materials this year, which may be passed on to downstream sectors. Will this affect farmers’ willingness to plant next year and consequently affect the demand for pesticides and fertilizers next year? 

A: With regards to the cold winter and the La Nina phenomenon, Southeast Asia may experience drought. However, it is uncertain whether this will affect the plant protection business, as sales fall while prices may increase.

We do not believe the price rise which farmers are currently experiencing will affect downstream demand. Smaller farms may be affected, but industrial farming benefits from strong market demand and higher crop selling prices. In terms of the economic situation of farms, despite the inflation in agricultural inputs, the earnings of practitioners have increased. We estimate the price rise of agricultural inputs will continue in 2022, which will not hit farmers’ overall demand.

Q: There has been continued pressure on ocean freight and procurement from the first to third quarters. What is your view of the shipping cost trend? As a subsidiary of Syngenta and Sinochem, will you seek resources from your parent companies to relieve the pressure?

A: Our business relies on the stable and orderly running of the supply chain. As logistical costs increase, business operations are affected. Ocean freight costs may not continue to rise, but they will not decline either, unless more freight spaces become available. Of course, there is a key factor that may turn things around. More air cargo spaces will be available If air passenger service starts to return to normalcy, but this is not foreseeable today. Therefore, it is expected that ocean freight will remain popular for some time.

We are indeed seeking more freight resources from Sinochem and Syngenta. ADAMA’s outstanding performance among the industry is primarily due to our capacity to maintain our growth in sales because we could still acquire goods to sustain sales under the circumstance of shortage of supplies, not every company can do this. In face of supply constraints and as a member of the Syngenta Group, we are working together with our brother companies to strive for more freight spaces. We are also negotiating for better freight prices, so we can jointly defeat competitors. But increases in logistical cost will indeed have a substantial impact on business operations.