Sunnier days for agrochemicals

12 June 2006 00:00  [Source: ICB Americas]

A leaner market is yielding better results, but the future is uncertain

SEVERAL YEARS of turbulence and restructuring not only changed the face of the agrochemical industry, but also eliminated a number of the fine chemical companies serving it. Sales are recovering now, and with them the fortunes of the contract manufacturers that have managed to stay in the game, but a crisis may be looming as the number of new product launches steadily declines.

Between 1998 and 2003, global agrochemical sales plummeted 15%. Depressed commodity prices in the 1990s and early 2000s and changes in farming practices, such as no-till and minimum tillage cultivation systems, were some of the factors at work, says Rob Bryant director of UK-based agrochemical consultancy Agranova. But the penetration of GM (genetically modified) crops such as Roundup Ready corn was key. Herbicide sales fell 22% between 1996 and 2002, in large part owing to the loss of market share by higher-price selective herbicides for soybean, corn and cotton—three success stories for GM. The impact on insecticide sales was slightly less, he points out: a 15% decline in the same period. Fungicides, on the other hand, were spared, with sales dropping only slightly in the absence of GM competition. “Soybean rust stimulated sales in the Americas in 2004,” Bryant adds, “but the threat is now better understood after overstocking in the USA in the 2004–2005 season, and sales have fallen back somewhat around $1 million in 2005.” Nevertheless, the soybean rust problem will continue to generate additional sales in 2006 and the market is expected to reach $140–160 million by the end of 2006 according to estimates from Cropnosis.

During the recovery of 2004, global sales rose 5%, but the market has been static since then, in real terms. (Global sales did grow by a nominal 3.8% in 2005.) Agranova estimates the 2005 value of the total agrochemical market (ex-factory prices) at $33.6 billion, with herbicides accounting for $15.4 billion; insecticides, $8.8 billion; fungicides, $7.7 billion; and fumigants, nematicides, acaricides, plant growth regulators and other agrochemicals, $1.6 billion.

A recent report by Citigroup Research offers a similar picture, also pointing to the influence of economic problems in South America as well as subsidy reforms in the EU and US to explain the market’s long decline. Its recovery since 2003 stems from four factors, says the firm: the emergence of Asian rust in Brazilian soybean crops; the general recovery in crop pricing; the 2003 recovery from drought in Europe; and currency fluctuations—about two-thirds of the market’s 2004 growth in US dollars resulted from exchange rate movements.

This year began with agrochemical companies reporting a slightly weaker market than 2005. Cold weather and snow delayed planting in Europe, while economic conditions in Brazil have been poor. The North American market, however, has been reliably solid.

In the mid- to long term, the outlook for the agrochemical companies is “generally positive,” according to Citigroup. There are negative considerations. For example, the reform of subsidies in the EU could reduce demand by about 1% per year, estimates the firm. On the positive side, however, global food stocks are relatively low, and demand for crops is rising by 1.4% annually. “Technical crop demand is set to rise substantially and may enhance demand over a five-year view by a further 1.5% per annum, although much of this incremental demand will develop on a two- to three-year view, not next year,” the report adds. Consolidation of the market is, moreover, “relatively” complete. Most “key players are seeking to increase the value from their investments in crop protection not market share,” says Citigroup. “The main companies are all price-focused, and this should deliver a more orderly market place with a better chance of some price inflation.”

Bryant agrees that consolidation “has greatly slowed over the past two to three years” in the US and Europe, although it continues at a slow pace in Japan. “Attention to launching new and improved products has become more important,” he observes.

OUT WITH THE OLD

The re-registration process mandated in both the US and the EU has had important positive effects. Intended to remove from the market older agrochemicals that do not meet current health and environmental standards, it has also been a boon to innovation, given a boost to revenues, and encouraged restructuring, says the Citigroup report. “The market share of [newer, environmentally friendly] products was constrained by the availability cheap generic versions of old products,” it states. “The re-registration process has eliminated about 40% of the entities approved in 2000, and this has created the headroom for the better, newer products to grow in. These older products had about 15% of the market in 2000. The biggest category of products being phased out is organophosphates.”

Syngenta, for example, has cut its own portfolio from about 130 actives to around 75 as a direct consequence of re-registration, Citigroup notes. “This has had a dramatic impact on the group. First, the business has been oriented onto the high EBITDA products—the smaller product range requires less marketing support to be effective. Second, the elimination of smaller products has substantially reduced the complexity of the supply chain and the resources needed within the manufacturing activities. And third, the reduction in generic competition, in the context of the reduction in the number of approved entities, has enabled Syngenta’s big products to grow market share.” Syngenta’s latest restructuring program, which targets $300 million in further savings by the end of 2008 along with the elimination of 2,700 jobs and significant site rationalization, is one consequence, says Citigroup. “Re-registration has had a significantly positive impact on the major crop protection companies and a relatively durable one at that.”

Certainly other agrochemical majors are cleaning up their own portfolios, some drastically. BASF, which had more than 300 actives in 2000, aims to have a portfolio of about 100 actives for 2006, a further reduction of about 25% compared to the end of 2005. Its ultimate goal is to focus on about 60 core ingredients. At the same time, it is highlighting new products, in March projecting the peak sales potential of its R&D pipeline at €1.9 billion ($2.5 billion).

Last autumn Bayer claimed to have the “best-stocked” R&D pipeline in crop science. Since 2000, the company noted, it had introduced 16 new substances, which already posted revenues of €517 million in the first half of 2005. Including 10 more substances scheduled for launch through 2011, Bayer projected that its new products have a peak sales potential of €2 billion. Meanwhile, the company is, like BASF, trimming its portfolio, with plans to reduce the number of actives from 113 in 2002 to 93 in 2008.

However, the number of new launches by the agrochemical industry has been in decline for the past decade (see table at right). Moreover, the center of agrochemical innovation is shifting toward Japan, says Bryant, driven in part by the consolidation of the US and European agrochemical industry, the greater influence of GM technologies in the West, and the declining number of homegrown chemists and chemical engineers. Since the mid-1990s, the Japanese contribution to new agrochemical leads has steadily risen, last year nearing 50% (see table below). The neonicotinoids are one example. Early lead compounds developed by Shell such as nithazine, the original nitromethylene nicotinic, were ultimately unsuccessful, due at least in part to photosensitivity. “In Japan, researchers identified the nitroguanidine group as being more effective in the field (less photolabile), and this led to the introduction of imidacloprid and the neonicotinoids,” says Bryant. He also points to the ryanodine receptor agonists, a new group insecticides being developed separately by Nihon Nohyaku-Bayer and DuPont.

 

 

 

 

 

Agchem leads recovery

For the fine chemical companies that serve the agrochemical industry, business has, remarkably, improved in the last several years, while the pharmaceutical sector, once the place to be, is “in the doldrums,” as Bryant puts it. “In 2004–2006, it was the agchem sector that became less gloomy,” he says, noting European producers’ optimism, albeit from a much reduced industry. “It seems that some of the majors have developed a more realistic assessment of the advantages provided by the Asian sector,” he surmises. “Europe and the USA still offer better technical development support.”

“We have definitely seen our agrochemical business pick up since [2000], certainly in terms of opportunities,” says John Wetzel, vice president, global marketing, at Weyl-Chem WeylChem was formed in 2005 by International Chemical Investors out of the fine chemicals business acquired from Rütgers Chemicals. “The things that affected the segment six years ago have not gone away. Indeed they’re as strong as ever and growing,” he says, pointing to GM organisms, the dominance of the herbicide glyphosate and Asian competition in particular. “A significant amount of capacity was taken out of the fine chemicals sector in the past six years, including the closing of our State College [Pa.] site. This shake-out may have slowed by now, but it still goes on; there is still a lot of consolidation happening in our industry. So I think the business that’s left, and still in the West, is being done in a smaller pool of reactors.”

Asian suppliers getting high-value, high-volume opportunities, have been a key factor in the consolidation of agrochemical contract manufacturers, says Wetzel. “The rest of us have to be more competitive; we have to offer value that interests our customers, and this includes the lean, flexible, responsive engine that is our model. Full and unqualified service and support are a given. Such business will be that for which shipping costs and logistics play a larger role. There are also strategic reasons our customers don’t go to Asia, one of the big ones being IPR in the PRC, to coin a phrase,” he says, referring to intellectual property rights. “They don’t want to lose their business by giving their IP (technology and know-how) away to their future competitors. These are among the businesses we are after.”

Bryant estimates that perhaps 20%–30% of agchem outsourcing of proprietary products (mainly intermediates, but increasingly products) by US and European companies goes to Asian firms, while the proportion for generic products would be higher. The agchem majors have the resources to control the production of intermediates and (in some cases the AIs) by Asian contractors. It is believed, for instance, that DuPont is even sourcing intermediates for its new developmental RyR agonist insecticide, rynaxypyr, from China. Although still behind India by several years, the Chinese fine chemical industry is rapidly catching up and will become as important as India as a source of contract manufacturers within the next five years. Major European contractors include Degussa (Trostberg, Germany and Seal Sands, UK), Lonza (Switzerland), KemFine (Finland and UK), Lanxess (Germany), DSM (Linz, Austria), Rhodia (France and the US). The “big three” also produce for third parties as well as for their own production, he says. In the US, long-time agchem sites include Solutia. Dow and DuPont likewise produce for third parties as well as for one another.

“There will always be finite business opportunities for the surviving suppliers in the West,” says Wetzel. “There will always be a need for fine chemicals manufacturing over here, and I think our new owners are positioning themselves to be a significant player,” he adds. “I don’t think this industry will die in the West like so many others have.”

Major agrochemical companies
Company	2005 sales ($million)*
Bayer CropScience	7,017
Syngenta	6,307
BASF	4,095
Dow AgroSciences	3,131
Monsanto	2,793
DuPont	2,280
Makhteshim-Agan	1,540
Sumitomo	1,383
Nufarm	1,236
Arysta Lifescience	764
FMC	725
Cheminova	490
Uniroyal	369
Ishihara (ISK)	364
Sipcam-Oxon	355
Nippon Soda	346
Kumiai	337
Nihon Nohyaku	328
Nissan	319
Hokko	291
United Phosphorus	281
Isagro	229
Cerexagri	200
Sankyo	182
Amvac	132
Nippon Kayaku	118
*Sales are agrochemical sales for the crop sector only
SOURCE: AGRANOVA AND CROPNOSIS

By: Clay Boswell
+1 713 525 2653

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