The China factor in India's agrochemical industry
There are several changes
taking place in the broad Chinese chemical industry – the slowing down of
demand; the slackening of the pace of investments into creation of new
capacity; and the stricter implementation of environmental norms that have led
to closure of several plants manufacturing fine chemicals, in particular.
This has been a double-edged sword for the rest of the world.
While it has disrupted several value chains, by tightening of supplies and
increases in prices, it has also bought about a belief that, at last, product
pricing from China will need to reflect the true costs of production, including
that associated with waste treatment and management.
Much has been said about India’s dependence on China for key raw
materials – actives and their intermediates – for making pharmaceuticals. There
is much chagrin in the government and amongst industry watchers that this is an
unsustainable way of growing an important industry. Much less has been said
about agrochemicals, vital for enhancing agricultural productivity and hence
for national food security.
Indian agrochemical market
India has a thriving agrochemical industry, with an annual
output of about $4.2-bn, divided almost equally between exports and domestic
sales. While the volumes of agrochemicals produced and consumed has not shown
much increase in recent years – largely due to their requirement in lower doses
– there has been value growth in the near double-digits. Both Indian and
multinational companies play the turf here and while the market is dominated by
generic products, patent-protected products do have a respectable market share
that some believe will only grow with time.
Nearly every major agrochemical company in the world has a
presence in India – not surprising considering India is still a largely
agrarian economy. Pesticides usage is still small, as compared to the global
averages, and much lower than in some countries like Japan, Taiwan and Korea,
which practice input-intensive agriculture. This is a pointer to the
significant growth potential of the market here, despite the industry having
critics that vociferously and repeatedly call for outlawing pesticides.
Dependence on imports
The producers here can be lumped into two broad categories: one
that are backward integrated into producing active ingredients, better known as
technicals, and some of their intermediates; and those that just do
formulations and serve the market. Most manufacturers of technicals do formulations
as well (unlike in the pharmaceutical industry), while the reverse is mostly
not true.
In addition to domestic supply, India imports close to $925-mn,
or about Rs. 6,500-crore, worth of technical pesticides, intermediates, and
finished products a year. The point to note here is that about 60% of all
imports are from China, and have been growing at a CAGR of about 6% since 2007,
according to a study by Rabobank. If it were not for the recent developments in
China, most experts believe this trend would have continued.
Developments in China
China is the world’s leading producer of pesticides. According
to the China Petroleum and Chemical Industry Federation, the country’s total
pesticide output in 2016 was 3.22-mt.
Production is mainly concentrated in East China – both in number
of producers and tonnage produced – in the provinces of Jiangsu, Shandong,
Henan and Zhejiang, which together account for nearly 70% of national output.
Since about three years, the agrochemical industry in China has been hit hard
by the tightening of environmental norms, and this has impacted output. In
2017, production fell by a significant 8.7% to 2.94-mt, ending several years of
uninterrupted growth.
In hindsight, this is not surprising; the manufacture of
technical agrochemicals and intermediates is largely in multi-purpose plants
operating in batch mode. The processes – like for most fine chemicals –
generates lots of waste, of the order of 10-100 times the quantity of the
desired product (the E-factor). The scrutiny of the hundreds of plants in China
that started sometime in 2015 have led to closure – temporary and permanent –
of about 20% of the inspected facilities, and the process is ongoing. Some of
those who have been permitted to operate have been given conditional clearance
that will be revaluated in subsequent rounds of inspections, while several have
been ordered to curb operating rates in a bid to rein in waste generation.
Mainly due these production constraints, prices of most
agrochemicals and their intermediates have inched up steadily for the past
three years, though there has been some stabilisation in the last few months.
The increase has been more marked for intermediates than for technicals, which
is explained by the fact that plants for the former are smaller in size and
larger numbers have been found to be non-compliant.
More to come
As of mid-July 2018, pesticide enterprises across the country
had obtained 856 pollutant discharge permits in total. Given that the number of
enterprises qualified to produce pesticides is far greater, it is expected that
several more enterprises without pollutant discharge permits will suffer from
suspensions or stoppages in the future.
By 2025, hazardous chemical producers, in general, that do not
meet safety standards have to move into designated industrial parks or shut
down their facilities. This regulation is likely to affect the supply of
pesticide intermediates in China for 2018, as small- and medium-sized
enterprises, as well as large enterprises with major potential risks, have to
start relocation before 2018 and finish before the end of 2020.
The Chinese agrochemicals industry will hence see an overall
rise in the cost of doing business, and this will need to be reflected in
product pricing. However, the scale of the impact will depend on the location
of the affected companies, because the pollution tax rates are decided at the
provincial level. However, it will be safe to presume that it will not be
business as usual.
Opportune time for India
With supply of technicals and their intermediates from China
unlikely to improve in the near-term at the least, this is an opportune time
for Indian agrochemical and fine chemical players to consider backward
integration and diversification opportunities. Some of the larger agrochemical
companies here are known to be re-evaluating their mothballed plans and seeking
to build integrated capabilities at least for their major product lines. This
will take some time, but is a step in the right direction.
Globally too, companies are looking to hedge their supply
options and looking beyond China. Indian producers are a logical choice for
them. Interest from global buyers in Contract Manufacturing Organisations here
is rising and some high value, long-term deals for intermediates, in particular,
have been signed in the last six months or so.
The developments in China have also led to a slight resurgence
of production in Western Europe, as well, and this has enabled Indian
agrochemical companies to widen their supply base, and diversify into newer
products. There is significant spare manufacturing capacity available in the
domestic industry that can be used to switch to products with better margins
and with better safety and efficacy profiles.
According to Rabobank, the growth rate of agrochemical imports
from China is likely to decline 80% from its historical levels, to about 1.2% a
year till 2022, as a result of the supply constraints in China. But the
attractiveness of China’s pesticides and their intermediates will not
disappear. The country has built robust supply chains, and despite the changes,
will still maintain its position as the world's leading pesticide producer and
exporter. But the gap with India will certainly get narrower.
Indian industry must try to make the most of this largely favourable
situation.
- Ravi Raghavan
Chwkly 6nov18
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