Trends in the global chemical/agrochemical industry and analysis of corporate developments

Date:10-15-2024

The content and data presented in this article are mainly based on a keynote speech by Rohit Nagraj, Senior Vice President of Centrum Broking Limited, delivered at the 2024 China Pesticide Exporting Workshop(CPEW) held in Hangzhou, China, in July 2024. AgroPages edited and compiled the article.

Rohit Nagraj, Senior Vice President of Centrum Broking Limited

Overview of the global chemical industry development

The global chemical industry has seen remarkable growth over the past decade (Table1), with sales surging from €3.033 trillion in 2012 to €5.434 trillion in 2022, marking an impressive growth rate of 79.2%. China has played a pivotal role in this expansion, significantly increasing its chemical production capacity since joining the WTO (in December 2001) and subsequently capturing global market share that reached 44% by 2022. This surge has correspondingly led to a decline in market shares for regions such as the EU, the U.S., Japan, and South Korea.

Table 1. Sales and market share of global chemical industry (2012-2022)

Looking at the global import and export dynamics of 2022 (Table2), the 27 EU countries (″EU27″) accounted for a considerable share of both chemical exports and imports, with the export share at 37% and the import share at 34%. Despite China’s massive output, its exports have remained largely self-sufficient, with total exports in 2022 at approximately €194 billion and imports at €208 billion.

Table 2. Global import/Export dynamics (2022)

The global chemical industry experienced multiple fluctuations in recent years, with 2022 as a turning point. The outbreak of the Russia-Ukraine war precipitated a sharp decline in the production index of the EU27 from February/March 2022, which impacted the global market. The chemical production index and capacity utilization rate in the EU continued to decline in 2022 and 2023(Figure1), with the latter dropping to 74% in 2023, affecting trading partners worldwide.

Figure 1. Chemical production and capacity utilization of EU27(2009-2023)

However, starting in the third quarter of 2023, the EU chemical industry began to show signs of recovery. Data suggests an increase of capacity in the EU27 chemical industry from 74.4% in Q3-2023 to 75.5% in Q1-2024, though the current capacity level is still far below the long-term average of 81.4%. During the first four months of 2024, the output of the entire EU27 manufacturing sector saw a 3.6% decrease compared to the same period in the previous year, with the pharmaceutical sector experiencing the most significant downturn.

In terms of trade, the EU27's chemical exports reached €57.3 billion in Q1-2024, up from €51.7 billion in Q4-2023. Imports dropped slightly from €43.6 billion in Q4-2023 to €42.5 billion in Q1-2024.

China continues to lead global chemical production in 2024, accounting for more than 40% of global chemical sales. Germany, Italy, and Belgium, among others, are still caught in the decline phases of the industrial business cycle, while others, most prominently the UK, South Korea, and the US, are set to experience an upturn. The EU market is also projected to enter a recovery phase, with production and trade returning to normalcy by 2025.

In the U.S., high inflation and interest rates posed challenges in 2023, resulting in only a 0.2% increase in industrial production. However, as overall demand recovers, chemical production and sales are expected to improve. Moderate growth in industrial production is projected for the second half of 2024, with an estimated growth of 1.7% in 2025. The U.S. economy will drive demand across many key chemistry end-use industries, which should ensure a healthy increase in chemical output. The rising regulatory impact on the chemical industry could dampen this promising outlook, threatening to undermine the U.S. competitive advantages in energy and the potential growth generated by the rebound in its manufacturing sector.

Chemical production in the U.S. is projected to grow by 2.2% in 2024, with agrochemical production expected to increase by 2.6%. Capital expenditures in the chemical industry are on the rise, closely tied to government policies aimed at bringing manufacturing back to the U.S. This strategy, focused on attracting manufacturing from China, has resulted in significant increases in capital investments. This growth aims to safeguard local job opportunities, reduce unemployment, and lessen dependence on imported chemicals, ultimately boosting the self-sufficiency of domestic industries. As a result, the chemical industry is seeing annual capital expenditures exceeding $30 billion, highlighting the U.S. commitment to promoting domestic manufacturing and strengthening economic independence.

When examining the growth trends in chemical production, forecasts for 2024 and 2025 suggest a relatively optimistic outlook (Table3). In 2023, total chemical production in the U.S. saw a decline of 1.3%, but it is projected to rebound with growth rates of 2.2% and 1.9% in 2024 and 2025, respectively. Meanwhile, global chemical production growth is more stable, with overall growth rates ranging from 3% to 4%. These figures signal a positive recovery in the chemical industry, and the entire sector is expected to benefit from this upward trend in 2024 and 2025.

Table 3. Chemical volume growth-US and global

Corporate performance

Multinational originator companies: Cautiously optimistic about industry recovery

In fiscal year 2022, the agrochemical industry experienced robust growth, with rising product prices significantly boosting performance for most agrochemical companies. However, entering fiscal year 2023 brought challenges due to inventory buildups, resulting in sharp declines in product prices across nearly all firms. Data from eight primary traditional originator and generic companies (Table4) revealed that most experienced varying degrees of revenue decline, with only Kumiai Chemical and Sumitomo Chemical of Japan achieving revenue growth. Regarding gross margin, the situation appears slightly more optimistic, although Bayer, Sumitomo Chemical, and Syngenta reported declines.

Table 4. Financial performance of global agrochemical companies (2020-2023)

In 2023, many agrochemical companies experienced working capital levels that surpassed historical averages due to panic-driven inventory buildups in 2022 that extended inventory cycles (Table5). When this inventory hit the global market, it notably affected product prices. Despite these challenges, significant multinationals have largely maintained their capital expenditures on technology investments to ensure future returns and profitability.

Table 5. Working capital days and inventory days of global agrochemical companies

Looking ahead, originator multinationals are cautiously optimistic about the industry’s recovery. While conditions in 2024 are anticipated to be a bit better than in 2023, most global innovative agrochemical companies believe 2024 will still face challenges, mainly due to the ongoing price declines seen in 2023, which are expected to impede recovery in 2024. This pricing trend could negatively impact overall financial performance in 2024. However, there is a more positive outlook for 2025, with expectations for improvement. Currently, most products are expected to maintain stable pricing.

Chinese manufacturers: Significant shrinkage in overall profitability for 2023

In 2023, Chinese pesticide manufacturers faced severe challenges. Despite a sustained increase in sales volume, the significant drop in raw material prices — some products fell by as much as 70% from peak levels—combined with rising logistics costs, had a substantial negative impact on the financial performance of Chinese pesticide manufacturers. This led to a widespread decline in company profitability, with gross margins also affected. Among the 16 major listed agrochemical companies in China (Table6), all experienced a decline in revenue, with only Shandong Weifang Rainbow, Noposion, and Sino-Agri Leading Biosciences achieving slight increases in gross margin.

Table 6. Financial performance of Chinese agrochemical companies (2020-2023)

Chinese companies also experienced increased working capital and inventory days like their multinational counterparts. In 2023, among the 16 listed companies, all except Xinfa Group and Limin Group reported longer inventory days, with Shandong Weifang Rainbow facing a staggering 93% year-on-year rise (Table7). This increase drained the companies’ available funds, adversely affecting their financial operations. If a company’s profitability fails to generate enough cash flow, it may have to turn to external financing, and the weight of high interest rates could trap it in a vicious cycle that further undermines future profitability.

Table 7. Working capital days and inventory days of Chinese agrochemical companies

As for price trends, pesticide prices saw a slight peak at the beginning of 2023 but then declined each month, hitting their lowest point by the end of the year. While global market demand remained stable overall, elevated inventory levels suppressed prices. Looking ahead, as industry inventories are gradually depleted, prices are expected to recover slowly. (Editor’s note: Recently, in September, several leading companies in China’s agrochemical industry have started raising product prices, with increases ranging from 5% to 15%, involving bulk products such as glyphosate, which may signal a potential market recovery.)

Indian manufacturers: Intensifying efforts to expand exports and integrate the supply chain

As a major player in pesticide production, Indian agrochemical companies faced challenges in the fiscal year 2024 ending March 31, 2024, following strong growth in 2021 and 2022. Among the 13 major Indian companies (Table8), eight reported revenue declines, and six saw decreased gross margins. UPL, India’s largest agrochemical company, reported a 19.6% revenue decline and nearly a 6% drop in gross margin year-on-year, primarily due to high inventory levels and pricing issues.

Table 8. Financial performance of Indian agrochemical companies (2020-2023)

Like the Chinese market, some Indian companies showed increased inventory days, although their overall performance was somewhat better than their Chinese peers. Six out of the 13 companies had inventory days higher than the same period last year (Table9), with Best Agrolife and Dhanuka Agritech showing the largest increases of 26%. However, Indian companies did not perform well regarding accounts receivable days, as the increase in accounts receivable days and the lengthening of the collection cycle have impacted working capital.

Table 9. Working capital and inventory days of Indian agrochemical companies

Despite market challenges, Indian companies have benefited from the solid cash flow generated from their rapid development in previous years, supporting future expansion and investments. In fiscal year 2023, nearly all companies ramped up investments, focusing on developing new technologies and products, expanding export markets, and integrating the supply chain. Although the investment momentum slowed slightly in fiscal year 2024 due to market conditions, this trend is expected to resume post-recovery.

When examining the capital expenditure trends in the Indian agrochemical industry, attention can be drawn to some representative companies' investment projects and directions. Dhanuka, a traditional manufacturer of formulations, has plans to forge partnerships with American and Japanese companies, effectively catering to the needs of the export market. Insecticides India continues to invest, including pursuing backward integrations, to lessen its reliance on imports. PI produces active ingredients and custom intermediates for global innovative firms, notably manufacturing Pyroxasulfone exclusively for Japan’s Sumitomo Chemical. Product prices may be affected as relevant patents expire and production capacity grows. Meanwhile, both Rallis and UPL are actively increasing their production capacity and investing more in molecular products and for export. The capital expenditure trends of these companies illustrate the proactive stance of the Indian agrochemical industry in the global marketplace and the growth of its export potential.

Anti-dumping measures: A double-edged sword for domestic chemical development

In recent years, the global chemical industry has experienced a wave of anti-dumping actions that present challenges and opportunities for the chemical industry of relevant countries. With strong government backing, India and the U.S. have significantly ramped up their chemical manufacturing capacities in recent years.

The U.S. has introduced various anti-dumping measures to protect its chemical industry from the effects of low-priced imports. For instance, it has issued affirmative preliminary determinations for anti-dumping and countervailing duties on epoxy resins imported from China. Additionally, the U.S. has initiated anti-dumping investigations on certain chemical products imported from India, reflecting its proactive stance in protecting its domestic chemical industry.

Meanwhile, as an emerging major player in the chemical market, India is also leveraging anti-dumping measures to defend its domestic market. In 2023, India initiated anti-dumping investigations against several chemical products from China, including epichlorohydrin. These actions aim to prevent foreign chemical products from flooding the Indian market at prices below fair market value, thus supporting the growth of India’s domestic chemical industry.

These anti-dumping measures have profound implications for global chemical trade. On the one hand, they shield domestic chemical industries from the impacts of low-priced imports and maintain market stability; conversely, they can lead to increased trade costs for global chemical products, affecting the supply chain and market competitiveness.

Overall, anti-dumping measures are a double-edged sword. While protecting domestic industries, they can also pose challenges to international trade relations and the development of the global chemical industry. Nations must carefully balance the benefits and drawbacks of such measures to maintain a healthy equilibrium between domestic protection and the global trade order.

Conclusion

Based on the presented data, one can draw several conclusions. For the industry’s long-term viability, some capacity restrictions are essential. If agrochemical companies persist in trying to expand their capacity, it could negatively impact the entire industry. The demand for agrochemical products remains relatively stable; farmers consistently need these products despite price fluctuations. Additionally, demand for agrochemical products varies across regions, economic contexts, and environments, with production capacity having little effect on overall demand. Government policies, adopting new technologies, and managing raw materials and overcapacity are key factors influencing the industry.

Another noteworthy trend is the shift towards biotechnology and biopesticide products. The advancement of biosynthetic technologies could offer solutions to issues related to capacity and demand. However, this transformation is a lengthy process that involves complex procedures such as registration and documentation, which can take months or even years to complete. New technologies and products in the agrochemical field are anticipated to spill over into other segments, such as molecular, pigments, and CSM, thereby broadening demand.

Finally, companies need to evaluate whether their accumulated profits can support ongoing losses and concentrate on pricing strategies for a potential recovery to help them navigate challenges. Environmental, social, and governance (ESG) considerations are also critical elements for the sustainable growth of the industry and businesses, requiring careful attention.

This article was originally published in AgroPages magazine 2024 Market Insight. Download to read more.