ChemChina-Sinochem: The New Mega-Company
The ChemChina-Sinochem merger, expected to be announced soon — despite the companies insisting that no such plan is in place — is poised to alter the landscape of China’s chemicals industry. It’s the ultimate move in a rush of consolidations that President Xi Jinping’s administration has pursued to shake up debt-laden state enterprises.
“It’s the final piece of the jigsaw puzzle,” says Graham Dickinson, Managing Director of UK-based Pro-Tekt Consultants, which advises the crop protection and crop production markets across Europe.
The new mega-company will quickly surpass DowDuPont to become the world’s largest chemical group, which is anticipated to have an annual revenue of over $110 billion. This would place the combined group, with units spanning seeds to iron ore trading to oil, at the forefront of the consolidating global agricultural chemicals sector, which Dickinson breaks down below.
When the tie-up of the two Chinese companies occurs, he says, it will further realign the crop protection industry, which has seen massive changes through the acquisition of Syngenta by ChemChina; the merger of Dow and DuPont; and the acquisition of Monsanto by Bayer. The most recent major takeover, that of Arysta LifeScience by UPL, was completed in late January.
The merger fever started with Monsanto’s unsuccessful $46.5 billion bid for Syngenta in 2015, with Syngenta eventually agreeing to the ChemChina takeover as it gave it the option, at least initially, to proceed with business as usual, with no major restructuring to be forced on it by the regulators. This has since changed, but to a minor degree.
Now, ChemChina owns Syngenta and ADAMA. The combined agrichemical revenues of ChemChina from Syngenta ($9.2 billion) and ($3.3 billion) has already created a Chinese-owned agrichemical business worth some $12.5 billion based on last year’s sales. The regulator forced some portfolio reconciliation with products transferred to ADAMA, which also had to offload a range of post-patent products purchased by Nufarm for $490 million, all in Europe.
Based on recent annual reports, revenues of ChemChina-Sinochem would comfortably eclipse Germany’s BASF, the world’s largest maker of industrial chemicals by sales. The Sinochem group claims to have consolidated agrichemical sales of some CNY 8 billion ($1.3 billion). It now sells and distributes Monsanto’s Roundup herbicide in China, Philippines, Australia, and New Zealand, which was formerly done by Nufarm. Additionally, group subsidiary Sinochem International acquired Monsanto’s butachlor and alachlor herbicide businesses in India, the Philippines, Thailand, Vietnam, Taiwan, Pakistan, and Bangladesh.
Towards the end of 2014, Sinochem group subsidiary Sinochem Intenational embarked on a plan to consolidate and unify the group’s diverse pesticide businesses including Sinochem Agro, Shenyang Research Institute of Chemical Industry (SYRICI), Shenyang Sciencreat Chemicals, Zhejiang Research Institute of Chemical Industry, Sinochem Agro do Brasil, and Sinochem Agro Argentina. Sinochem International also has stakes in two of China’s largest glyphosate manufacturers, Nantong Jiangshan Agrochemical and Jiangsu Yangnong.
In 2018, it was reported that Yangnong Chemical will acquire Sinochem International subsidiaries, Sinochem Crop Protection and Shenyang Pesticide Chemical Research and Development.
In early 2019, the dust is far from settled. In the wake of the complex M&A moves, the environmental clampdown in China continues to ravage supplies. “Had it not been the fact that 2018 was not a record year, and that there are remaining inventories in distributor stores, the impact of the shutdowns would have been far greater. The environmental audits and reviews are now well advanced, but we will see the impacts over the next 18 months before the situation comes back to normal. Currently products such as epoxiconazole, fluroxypyr, prochloraz, metribuzin, metamitron, and lambda-cyhalothrin are in tight or limited supply. Other azoles are short, which is leading to significant pricing increases of these products,” Dickinson says.
Many companies are now looking at supply chain to reduce dependence on China, with an eye on India as an alternative, which is helpful for the final stage of production, but in many cases the Indian manufacturers are reliant on the intermediate and building blocks from China.
“Change in supply and sourcing will take at least 18 to 24 months for alternate sources to be defined and to gain regulatory approval. In some countries where the regulatory process runs more slowly, it will add further time to this, so this is not a quick fix,” Dickinson adds.
According to Daniel Traverso, General Manager of Chile-based agrichemical company ANASAC International, from the point of view of supply, the offer is constantly becoming more concentrated.
“This empowers the big players and complicates the medium and small businesses. This is a game that starts to play out between medium and large companies,” Traverso says, while smaller players are left dealing with the brunt of shortages and higher prices.
“This scenario in China is new; before you always had supply and there was always competition,” Traverso says. “As a consequence, more companies are integrating. Companies are backward and forward integrating, buying distribution chains to ensure market access. I think this trend will increase in time.”
To Traverso’s point, in 2019: ADAMA announced it intends to acquire key crop protection businesses of Jiangsu Huifeng Bio Agriculture Co., Ltd, (pending the company sorting out its environmental inspection-related issues), and is making progress on its $234 million purchase of backward-integrated manufacturer Jiangsu Anpon Electrochemical Ltd.; AMVAC acquired a Brazilian crop protection and micronutrient distribution franchise, Agrovant and Defensive; Russians bought a distribution chain in Ecuador.
The advantage of the mergers, Traverso says, is that more capital gives companies the power to invest — notably, in his home base in Latin America: “They’re taking control of the market, with capital to invest in developing new portfolios, registrations, and distribution chains,” he explains, adding:
“This is a trend to which no Latin American company should close their eyes. What companies will do to navigate the environment will depend on each company, available capital, and management capacity,” Traverso says.
Staying competitive will require continuous monitoring and reevaluating of sourcing strategies, says Vale Krishnan, Vice President of Research with Beroe, a North Carolina-based procurement intelligence firm.
“Being adaptable to any policy changes, supply partnerships, environmental policies, currency fluctuation, supply fluctuation, trade agreements, climatic conditions, and political stability is a pre-requisite for a modern buyer.
“Unforeseen price volatility can be tackled via buying techniques such as forward booking, spot buying, hedging, volume bundling, fixed price contracts, and formula-based pricing. For example, Natural Rubber, being a traded commodity, is susceptible to currency movements, changes in crude oil prices, U.S.-China trade issues and other macro factors. Here, pre-booking the required volumes and locking prices for fixed tenures could be a beneficial option for sourcing managers,” Krishnan explains.
He adds: “Hence, staying agile, ensuring strong contingency plan, building proactive sourcing strategies, developing deeper relationships are key for high sourcing performance during volatile market conditions.”