US Patent Expiry of Roundup Creates Uncertainty in Glyphosates

11 December 2000 00:00 Source:ICIS Chemical Business
By Patricia Van Arnum

Following the expiration of the US patent for Roundup (glyphosate) in September, a key question is how Monsanto Company, now of subsidiary of Pharmacia Corporation and the holder of the glyphosate patent, will respond to declining prices and generic competition.

"Roundup pricing is expected to face a major challenge this year in the US due to the expiration of its patent," concludes a recent report by Salomon Smith Barney. In preparing for the patent expiry, Monsanto has been lowering the product's price and building additional capacity for several years. The average US price has declined 9 percent per year for the past decade. During that period, volume increases have averaged 20 percent.

Monsanto took its most aggressive action by dropping the price of glyphosate by 16 to 23 percent in September 1998. The company is also said to be constructing a massive new glyphosate facility in Camacari, Brazil, that will increase the company's capacity by 35 percent.

Those moves are designed to protect against the patent expiry. "The overall effect of the company's strategy has been volume increases that have more than offset prices," concludes the Salomon Smith Barney report.

"However, going forward, competition is bound to heat up. Monsanto has attempted to forestall capacity additions by its major competitors by setting up a series of supply agreements with these same competitors. These agreements allow for Monsanto to earn returns greater than its cost of capital of sales of glyphosate. So far, the strategy has paid off, as no major crop chemical player has announced any plans to construct a new glyphosate plant."

Monsanto has entered into long-term glyphosate supply agreements with several major manufacturers, including Cheminova, Dow Chemical, Microflo/BASF, Nufarm, and Syngenta (through Zeneca and Novartis), according to industry reports.

Those agreements stipulate a contractual price for the purchase of glyphosate, which will earn Monsanto a better-than-cost-of-capital return, concludes the Salomon Smith Barney report. The supply agreements do not cover any type of formulation technology that Monsanto uses to make Roundup.

The strategy behind the agreements is to use the competitive and falling pricing environment, which is expected now that the US patent has expired, to create a barrier of entry. The construction of the $235 million plant in Camacari acts as a barrier that is likely to dissuade other large competitors from committing the capital for building their own plants.

Roundup is Monsanto's leading product in terms of sales revenues and profits. In 1999, glyphosate products accounted for 70 percent of Monsanto's $3.58 billion in sales, or $2.48 billion.

Roughly 70 percent of Monsanto's glyphosate sales are outside the US. Sales of glyphosates are made predominantly for conservation and tillage applications.

Although the company has positioned itself against patent expiry, glyphosate's growth is expected to decline. From 1997 to 1999, Roundup posted a compound average growth rate (CAGR) of 12 percent, according to Salomon Smith Barney, although the entry of generic competition should lower the CAGR to 6.5 percent between 2000 and 2003.

Nevertheless, the investment house still cites significant US competition. It estimates that the glyphosate prices will decline by 12 percent, but that volumes will grow by 20 percent in 2001.

CAUSTIC POTASH--Vulcan Chemicals is increasing its off-schedule prices for all grades of liquid caustic potash, effective December 1 for spot customers and January 1, or as terms and conditions permit, for contract customers. The increase for 45 percent basis is 70c. per KOH hundredweight, and the increase for 50 percent basis is 80c. per KOH hundredweight.

CAUSTIC SODA--Vulcan Chemicals is eliminating all off-list pricing for liquid caustic soda, effective January 1. All pricing will increase on that date in accordance with a specified list price schedule.

Vulcan says the demand for caustic soda continues to exceed supply, and inventories are seriously depleted. The company is instituting an 80-percent-of-expectation order control program during December. The program will be based on average monthly sales during the first 10 months of the year.

CHROMIUM CHEMICALS--Elementis Chromium is increasing prices on chromium chemicals, including sodium dichromate, chromic acid, chromic oxide and chrome hydrate, by 7 to 9 percent, effective immediately or as contracts permit. Standard freight terms are also changing to a delivered basis as of the same date.

FLUORIDES--Quadra Corporation and Prayon-Rupel will increase prices on all sodium silicofluoride, potassium silicofluoride and sodium fluoride products by 2c. per pound, effective January 1.

HYDROGEN PEROXIDE--FMC will raise off-list pricing on all high-purity electronic grades of hydrogen peroxide, effective January 1. Prices will increase by 3c. per pound on a 31 percent solution basis and are specific to FMC's high-purity electronic grades of hydrogen peroxide, including Semiconductor, SEG, RGS, RGSII and RGSIII grades.

PHOSPHATES--Astaris LLC is increasing prices for its heat-activated leavening phosphates Levn-Lite, Pan-O-Lite, Pyran and Stabil 9, effective for shipments on or after January 1 or as contracts permit. The new prices, effective January 1, are: Levn-Lite, $113 per cwt.; Pan-O-Lite, $123.50 per cwt.; Pyran $94 per cwt.; and Stabil 9, $103 per cwt. All prices are f.o.b. Astaris's Carondelet plant in St. Louis, freight equalized with the nearest recognized competitive producing point.

SODA ASH--FMC Wyoming Corporation is increasing its off-list prices for all grades of soda ash by $5 per short ton, not to exceed list prices, effective immediately or as contracts permit. The increase applies to both bulk and bagged soda ash. It follows a previous $5-per-ton increase announced on August 31.

General Chemical Group Inc. is raising the price of its soda ash by $5 per ton, effective immediately or as contracts permit. That increase follows a $5 per ton increase announced on September 27.

SODIUM CHLORATE--Nexen Chemicals is increasing its sodium chlorate prices by $30 per ton and C$50 per ton for product delivered in North America and by $50 per ton for offshore exports, effective immediately or as contracts allow.