2024: Torrid Year for China’s Pesticide Supply Market

By David Li
Contributing Writer

Against the backdrop of global destocking, Chinese pesticide companies will continue to experience financial pressure from the excess capacity. Low operation rates in the second half of 2023 resulted in many companies’ capacity being idle.   

The low market price of pesticide active ingredients is forcing Chinese agrochemical companies to choose between two ways out. 

One is to continue to make additional investments in the production of upstream intermediates and raw materials. The main purpose of the layout of upstream raw materials is to be able to continue to improve the process and reduce production costs for margin maintenance.  

A second option is Chinese pesticide companies could do large-scale development of near off-patent compounds as well as the creation of new compounds with self-owned intellectual property. For example, the expiration of patented AIs, such as fluopyram, pyroxasulfone, etc., due to the synthesis line that has been developed and the intention to build production lines by many companies, the future of such products’ overcapacity is also likely to occur.  

The competitive opportunity period for expiring patented AIs with global market will be only two to three years after patent expiration. As multinationals generally choose to lock-in key intermediates 10 years before the patent expiration, the exclusion of new suppliers by tier one suppliers will also slow down the layout of Chinese AIs producers in the global supply chain. This could extend the value of product assets centered on expiring AIs. 

The R&D gap between Chinese AIs and formulation manufacturers as well as multinationals is rapidly closing. For global distributors, opening up the interface with Chinese agrochemical companies’ R&D pipelines quickly and deeply during the market downturn is the right decision for future growth. Many distributors in key markets, such as Brazil, have already been making the move.

We can regard each launching near off-patent AI as a new round of market reshuffling. In the process of shuffling the market supply, the leading pesticide producers do not necessarily have an absolute early advantage. It depends on their market competition strategy and early investment decision. As China’s economy is currently undergoing a period of structural adjustment, Chinese pesticide companies are not very optimistic about future demand (at least for 2024). While the cash flow of Chinese pesticide companies improved rapidly in 2022, sluggish demand in 2023 is offsetting the enthusiasm of Chinese companies for mergers and acquisitions.

Due to the high pressure on Chinese agrochemical companies to perform in 2023, some rising companies are reluctant to go public to raise capital during this unfavorable timing. Companies use future growth expectations as leverage during the initial public offering (IPO) to gain investors’ trust. Sustainable growth is the only way to maximize the value for the company and investors.

The delay of Syngenta’s listing on China’s A-stock market until 2024 was largely for this reason.

Mergers and acquisitions between agrochemical companies in China will not change significantly in 2024. As China’s high environmental regulatory pressure is normalized, it is more difficult to get EIA (environmental impact assessment) approvals for new capacity. Investors on China’s emerging agrochemical companies are looking to leverage technological innovation to reshape the landscape of China’s pesticide supply market. Capacity is a resource. In a down market, it is unwise to sell resources cheaply.

However, as China’s recent economic growth has encountered difficulties, local governments are looking for sustained corporate profitability to ease fiscal pressure. Therefore, the environmental storms similar to the one that occurred in 2017 in the southeastern coastal region as well as blanket shutdowns will not happen again in 2024.

Regarding carbon neutrality, BASF, a leading global chemistry company, can serve as a case study.

In terms of climate change, BASF has set clear medium- and long-term targets: a 25% reduction in CO₂ emissions by 2030 compared to 2018, and net-zero emissions by 2050. BASF’s carbon-reduction efforts in China are mainly realized through the procurement of renewable electricity.

Beginning in 2021, BASF was one of the first companies to participate in China’s pilot green power trading, becoming the largest buyer of green power in the Yangtze River Delta region and the second largest in the Pearl River Delta region at the time. BASF’s newly built integrated production cluster in Zhanjiang has already achieved 100% renewable electricity supply for its first installations and aims to use 100% renewable electricity by 2025.

Not only that, through product innovation, BASF also promotes the realization of carbon reduction for customers in various industries and upstream and downstream of the value chain. In terms of process innovation, BASF’s innovative hydrogen production process is expected to reduce CO₂ emissions by up to 90%. These are BASF’s efforts to contribute to global carbon neutrality based in China. And BASF’s practice proves that it is achievable for chemical companies to reduce carbon emissions.

Chinese agrochemical companies still have a long way to go to become carbon neutral. However, in the next decade, carbon reduction is a key competitiveness for Chinese agrochemical companies competing in the global market.

In the R&D and production of AIs in China, the green production concept proposed by Nutrichem can be used as a standard for the development of production processes. Companies should not only meet the government’s environmental requirements, but also incorporate energy management and carbon emissions.

China’s new energy infrastructure on the eastern seaboard and in the northwest will be an advantage for process innovators. New regulations in the EU and U.S. will push China agrochemical companies to enhance their operations and supply chains to improve environmental, social, and governance (ESG) reporting.

If there is no Black Swan event, the price of China AIs will remain stable and low. The sourcing behavior of global agrochemical companies is changing fundamentally along with the change in demand from end-users.

Analysts at the recent APEC summit do not believe the U.S. federal government will change its rate hike strategy in 2024, at least there will be hardly any switch into quantitative easing of monetary policy. Financing pressures on North American distributors will not essentially reverse in 2024. This has also made distributors cautious about sourcing AIs from China as well as India. Insight into product on the ground (POG) is always very difficult. We can only estimate demand in 2024 from actual farmer purchase forecasts. Accurate sales forecasts will be more important than ever in 2024. It is a necessary but not a sufficient condition to compete in the 2024 market.

Stimulating consumption as well as consistently increasing farmers’ willingness to pay will be in front of all crop protection companies. Understanding farmers’ needs is at the heart of this.

High temperatures and unpredictable rains are challenges for farmers using agrochemicals. Innovations in tank-mix adjuvants can help farmers—but even more important are innovations in agrochemical companies’ pesticide formulations.

In the past few years, formulations sold as controlled release microencapsulants have been insufficient to generate sustainable competitiveness in the industry.

Ultra-low volume application combined with drone spraying will be a high-growth segment. In 2024, the Asian market will lead global economy growth, followed by Africa, the Middle East, and South America. In these regions, demand for drone application in Asia will grow strongly. Innovative formulations such as OD, DF, etc. that synergize with drone application will be the best formulation type for this regional market.

The upcoming drone crop protection R&D centers in China by multinational companies are a clear indicator to this. For formulation innovation, Chinese R&D teams will not be limited to formulations only. For example, the Pesticide Formulations and Adjuvant R&D Laboratory of China Agricultural University is actively cooperating with multinational companies, from the conduction of the delivery system to the formulation performance in the field. It is being integrated into the innovative formulations and adjuvant R&D system and actively engaged in commercialization.

This is mainly due to the fact that there is still a gap in China’s food supply because of China’s demand for oilseed crops as well as protein. In times of uncertainty, such as the Russian-Ukraine war and the Middle East crisis, food security remains a top priority for countries.

When we think about the logic of growth, business closure is the most critical way of thinking. China is Brazil’s largest trading partner in bulk agricultural products, such as soybeans, beef and others. The upgrading of China’s crop protection supply will definitely bring synergy and create more value with global agricultural production countries like Latin America.  •