January 9, 2012
China''s pesticide industry faces weak earnings prospects
While China expected a rise in the production and sales of pesticides in 2011, the industry had not shown any improvement in profit outlook, experts said.
According to statistics, in the first 11 months of 2011, the accumulative output of technical-grade pesticides (100% active pesticide ingredients) in China was 2.342 million tonnes, and the domestic demand was about 290,000 tonnes.
In the first half of 2011, listed pesticide companies in China achieved a combined operating income of RMB13.08 billion (US$2.07 billion), up 15.9% on-year; a combined net profit of RMB310 million (US$49 million), down 47.1% on-year; and an average gross margin of 16.6%, decreasing by 2.7 percentage points compared to the same period of the previous year. Statistical data show that the overall performance of pesticide manufacturers in China declined in 2011. The downturn trend has continued since 2009.
In China, the output of pesticides has increased by leaps and bounds in recent years, but the domestic demand only accounts for less than 1/8 of the output every year, so the pesticide industry relies heavily on exports. Serious overcapacity has been increasingly threatening China''s pesticide industry.
In recent years, China''s pesticide producers have formed a bad habit that once they find a very profitable product, they would rush to set up many facilities to produce it. Soon, the product will be in oversupply and become unprofitable. At present, driven by profits, the majority of large and medium-sized pesticide enterprises in China tend to produce major varieties of technical-grade pesticides, leading to saturation in the mainstream pesticides market.
Mainstream pesticides, such as imidacloprid, abamectin, glyphosate and acetochlor, are now in serious oversupply.
According to statistics, the total production capacity of glyphosate in China has reached 1.166 million tonnes per annum, while its annual domestic demand is only about 50,000 tonnes, resulting in losses for glyphosate companies in 2011.
Shandong Dacheng Pesticide Co Ltd suffered the most, up to RMB270 million (US$43 million), and other major glyphosate producers like Zhejiang Wynca Chemical Co Ltd, Nantong Jiangshan Agrochemical & Chemical Co Ltd and Anhui Huaxing Chemical Industry Co Ltd all suffered losses in the first half of 2011 because of their overcapacity of glyphosate.
In the beginning of 2011, some experts predicted that the glyphosate market has basically reached the bottom, and with the re-shuffle of the industry, some leading producers would start to recover.
Analysts also forecast that as international and domestic food prices soar, crop plantation acreage would increase substantially with food prices, and demand for pesticides would rise in 2011. However, the expected strong demand did not emerge.
Recent statistics show that the sale of pesticide formulations had been very difficult, and the market competition was fierce, so many companies had to reduce the selling prices of their products and finally achieved very meager profit margins.
In recent years, due to the shrinkage of the domestic farming area and the promotion of high-efficiency, low-toxicity and low-dosage pesticides, the consumption of pesticides in China has declined.
The Chinese Ministry of Agriculture said that in the next five years, China''s agricultural industry will implement specialised pest prevention and control measures and its demand for chemical pesticides will reduce by 20%.
At present, the capacity growth of pesticides has far exceeded the demand growth in China. But faced with a few hot products, such as chlorpyrifos, pymetrozine, bifenthrin, lambda-cyhalothrin, cypermethrin, prochloraz, tebuconazole and quizalofoppethyl, and foreign patent-expired products like nicosulfuron and rimsulfuron, many domestic enterprises still scramble to build plants to produce them. This can easily lead to more serious overcapacity. Needless to say, overcapacity leads to price war. It is the main reason that blocks the profit growth of pesticide producers.
The rise of raw material prices is the second reason for the low profit margins of pesticide producers. The prices of major basic raw materials for pesticide production soared, such as coal, caustic soda, methanol, benzene, phosphorus, alcohol and sulfuric acid. But the ex-factory prices of pesticides cannot climb synchronously with rise of raw material prices, because farmers, the end users, are very sensitive to pesticide prices and can hardly accept any pesticide price hikes.
In addition, the Renminbi (RMB) appreciation is also a factor affecting the economic efficiency of pesticide producers. Zhejiang Wynca Chemical Co Ltd reported that RMB appreciation makes the export of glyphosate TC more difficult, making producers fall into a dilemma that producing glyphosate TC leads to losses but not producing it results in greater losses.
Currently, the domestic pesticide market has already saturated, and exports are the main way to ease the tension between the domestic supply and demand of pesticides. Yet, the global farming acreage is now steady and obviously cannot digest the surplus of pesticide products. Meanwhile, many high-efficiency, low-toxicity and low-persistence pesticides have been constantly developed. The improving efficacy of pesticides also indirectly reduces the demand for them.
Therefore, under the background of rising costs, halting prices and reducing demand, overcapacity will make the recovery prospect of China''s pesticide industry very dim.