Global agrochemical industry consolidating to
correct erratic growth & meet farming needs of the future
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The
global agrochemical industry is seeing its most dramatic restructuring with
three mega-mergers radically transforming both the nature of the industry and
the competitive environment. The deals are taking longer than usual, not
surprising considering the industries they represent – agrochemicals and
seeds – underpins agriculture and food security – aspects that developed and
developing countries alike rightly deem as critically important. If these
deals go through in the form in which they are now being permitted to do so,
it will lead to a oligopoly of three large firms with integrated operations
spanning conventional agrochemicals, seeds (genetically modified or
otherwise) and biopesticides.
2016 better than 2015
The
global agrochemicals industry was valued at about $56.452-bn in 2015, with
crop protection chemicals accounting for about $49.920-bn and non-crop
applications (mainly for household use and lawn care) accounting for the
balance of about $6.532-bn. This represents a decline of about 1.9% compared
to the year before, but it should be borne in mind that 2015 represented a
decline of about 10% compared to 2014.
The
driver of growth (and one of the main reasons for degrowth) in recent times
has been Latin America and Asia. Robust prices for agricultural commodities
globally in the years leading up to 2012 sent demand for all sorts of
agrochemicals soaring in Latin America. The sharp price corrections in 2014
led to a precipitous 14% decline in agrochemical demand in 2015, and smaller
– though still significant – 6% decline in 2016.
The
situation was aggravated by adverse developments in Asia in 2015 and 2016.
India’s fragmented agriculture suffered the consequences of two bad monsoons,
and China’s policy of zero pesticides growth reined in demand, which for all
of Asia fell 1.4% in value terms in 2016.
The
NAFTA region was the only major region to show growth in 2016 thanks to
increasing acreage under corn, and a shift away from soybean cultivation for
commercial reasons. This shift was also driven by the increasing use of corn
as a source of ethanol – a biofuel mandated for blending into motor gasoline
in the US, the largest market in the region. (It needs to be borne in mind
that corn uses a higher share of insecticides compared to soybean). The end of
two years of drought in California – a prominent agricultural region – also
contributed to the improvement in market conditions, though high inventory
levels remain a concern for the future.
Brighter prospects for 2017
The
prospects for 2017 seem bright for now. Agricultural commodity prices are
showing an uptick in the futures market, giving hope to producers that spot
prices could rise by the end of the year, reflecting a recovery in demand and
reduced inventories (except for rice). Significantly, glyphosate prices are
also rising, after several years of decline brought about by a flood of
output from several producers in China. This agrochemical alone accounts for
about $5-bn in sales or about 10% of global agrochemical demand.
In
Latin America the area under corn cultivation in Brazil and Argentina are up
and the strengthening of their local currencies (against the US Dollar) has
made imported agrochemicals – which account for much of the market – that
much cheaper. Concerns over the damaging effect of El Nino, which
typically brings less rainfall to the region – have abated. Importantly, the
monsoon in India is now expected to be near normal – both in terms of
rainfall likely and its equitable geographical spread. Early assessments by
the country’s meteorological department and by private agencies had pointed
to a monsoon bordering on the lower end of normal, and raised some concerns
amongst planners in government.
Global rankings: shuffle at the bottom
The
global ranking of agrochemical companies in 2016 by Agrow, a research outfit
tracking the industry, pegs Syngenta at the top of the heap with revenues of
about $10-bn, followed by Bayer CropScience ($9.182-bn), BASF ($6.461-bn),
Dow AgroSciences ($4.913-bn), Monsanto ($4.758) and DuPont (3.037-bn). UPL
Ltd. is the sole Indian company in the top-10 list, weighing in at number 9,
but could move up a notch or two in coming years. While the top-rung of the
industry has remained largely unchanged in the last few years, a lot of
jostling has taken place for places from 11-20. Japanese companies
traditionally dominated this part of the league of biggies – each with
revenues of $300-mn to $600-mn, but in recent years have been edged out by
Chinese companies who now account for six of the ten spots from 10-20.
For
each of the top-five companies growth has been a struggle. Monsanto reported
a 26% decline in sales from agrochemicals in 2016 (though sales recovered by
a similar amount in the first quarter of 2017), and even the market leader,
Syngenta, had to contend with disgruntled shareholders facing a 4.3% decline
in sales. The situation was no different at BCS (-3.7%), BASF (-4.3%), Dow
AgroSciences (-5.7%) and DuPont (-5.0%).
Factors driving consolidation
Volatility
in growth has been an important factor driving industry consolidation, but is
not the only one. There is a growing belief in the industry that integrated
approaches to crop management that combine conventional agrochemicals with
biopesticides, modern seed treatment, and high yielding, robust seed
varieties (genetically modified or otherwise) is key to sustainable farming.
Tapping into this opportunity will require a portfolio that is not just
comprehensive, but also complementary, and will require integrated innovation
and business planning. While partnerships can achieve this to some extent,
concerns over the sharing of intellectual property, amongst other reasons,
are driving the realisation that crucial elements of the strategy need to be
kept within the company. Companies are hence vying to gobble up others with
complementary competencies. BASF is possibly the only exception to this
approach; it does not have any portfolio in seeds and seems to have no desire
to change the situation.
As
in most other M&A deals there is a desire to spread geographical reach,
achieve economies of scale, improve R&D productivity and deliver better,
higher performing products to modern day farmers. The costs involved in
bringing a new active ingredient to the market have steadily risen and is in
the range of $250-mn to $300-mn. This may not seem much when viewed against
the $2-bn needed to bring a new drug to market, but needs to be juxtaposed
against the fact that the business opportunity is also much smaller in
agrochemicals.
Concerns of regulators
The
M&A frenzy now playing out started with the unsuccessful attempt by
Monsanto to acquire Syngenta. ChemChina’s successful subsequent bid to buy
Syngenta, prompted, in part, by pressure from aggrieved shareholders, is now
well on the way to completion. It has been approved in 19 jurisdictions –
with India’s regulators still holding out – but the approvals have come with
significant conditions. To win EU approval, ChemChina will sell a significant
part of its ADAMA unit’s pesticide business including fungicides, herbicides,
insecticides and seed-treatment products. It will also divest 29 of ADAMA’s
generic pesticides under development and a part of its plant growth regulator
for cereals, along with related assets and personnel. To win approval from US
anti-trust enforcers, the companies have agreed to divest ChemChina’s generic
production of the herbicide paraquat, the insecticide abamectin and the
fungicide chlorothalonil. While Syngenta currently owns the branded versions
of the three products, ADAMA sells generic versions to US farmers. ChemChina
has agreed to sell the generic businesses to AMVAC, a California-based
company.
The
BCS-Monsanto deal will permit a more integrated development of genetically
modified crops (from Monsanto) and herbicides (from BCS). It has some way to
go before it gets the nod from regulators, but again conditions are likely to
be imposed. South Africa, which has been amongst the few to have granted
approval, has put conditionalities that require the merging parties to divest
BCS’s cotton business, sell its Liberty Link technology
and Liberty-branded agrochemicals business, which develop traits
and accompanying herbicides for seeds. The purchaser of these products will
have to commercialise them in South Africa or license the products to a third
party to commercialise.
In
the Dow-DuPont deal too the EU has set harsh conditions including the
divestment of products accounting for $1.4-bn in revenues, to FMC, including
star insecticides like rynaxypyr – one of the largest selling products in the
world. China has also raised concerns over herbicides for rice and Brazil has
insisted on the sale of Dow’s corn business.
Opportunities for others?
The
mergers are expected to eventually go through, and could result in some
opportunities. BASF has so far stayed in the sidelines but could pick up
pieces. But most divestments are expected to go to smaller companies in the
generics space. A handful of Indian companies have the financial strength to
participate here, though there has been no indication so far.
The
‘big six’ in (Syngenta, BCS, Dow, DuPont, Monsanto and BASF) will dwindle to
the ‘giant four’ (ChemChina-Syngenta, BCS-Monsanto, Dow-DuPont and BASF) but
with considerably enhanced clout. They will account for nearly 80% of the
global market for agrochemicals and about 60% of that for seeds. That is a
level of consolidation that neither this industry, nor most others, has seen.
How this will play out for customers remains to be seen.
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- Ravi Raghavan
CHWKLY 6JUN17
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