Overcapacity Prevents China's Pesticide Industry from Recovery   

By Zhang Weinong

It is expected that in the whole year of 2011, the total output of technical-grade pesticides (100% active pesticide ingredients; the hereinafter the same) in the country could reach 2.5 million tons, and the total domestic demand could be about 308 000 tons. Although the production and sales of pesticides increased, the profitability situation of the pesticide industry did not improve.
   According to statistics, in the first 11 months of 2011, the accumulative output of pesticides in China was 2.342 million tons, and the domestic demand was about 290 000 tons. And in the first half of 2011, listed pesticide companies in China achieved a combined operating income of RMB13.08 billion, up 15.9% year on year (yoy); a combined net profit of RMB310 million, down 47.1% yoy; and an average gross margin of 16.6%, decreasing by 2.7 percentage points compared to the same period of the previous year. Statistical data show that the overall performance of pesticide manufacturers in China declined in 2011. The downturn trend has continued since 2009.
   In China, the output of pesticides has increased by leaps and bounds in recent years, but the domestic demand only accounts for less than 1/8 of the output every year, so the pesticide industry relies heavily on exports. If the annual export volume of pesticides can reach about 1.21 million tons, the inventory of pesticides in China can reach about 1 million tons. It can be said that serious overcapacity is threatening China's pesticide industry all the time. In recent years, China's pesticide producers have formed a bad habit that once they find a very profitable product, they would rush to set up many facilities to produce it. Soon, the product will be in oversupply and become unprofitable. At present, driven by profits, the majority of large and medium-sized pesticide enterprises in China tend to produce major varieties of technical-grade pesticides, easily leading to that the markets of some mainstream pesticides are quickly saturated. Mainstream pesticides, such as imidacloprid, abamectin, glyphosate and acetochlor, are now in serious oversupply. The situation is the result of pesticide producers' blind investment in order to seek the maximum benefits. According to statistics, the total production capacity of glyphosate in China has reached 1.166 million t/a, and its annual output is 300 000 to 350 000 tons, while its annual domestic demand is only about 50 000 tons. As the glyphosate market as a whole is in overcapacity, the market competition is fierce and the sale of the product is difficult, resulting in that listed glyphosate companies generally suffered losses in 2011. According to reports, Shandong Dacheng Pesticide Co Ltd suffered the most, up to RMB270 million; Jiangsu Yangnong Chemical Group Co Ltd (Yangnong, SH: 600486) had an operating income of RMB1.019 billion (up 3.2% yoy) and a profit of RMB104 million (down 11.8% yoy) in the first half of 2011; and other major glyphosate  producers like Zhejiang Wynca Chemical Co Ltd (Wynca Chemical, SH: 600596), Nantong Jiangshan Agrochemical & Chemical Co Ltd ((SH: 600389) and Anhui Huaxing Chemical Industry Co Ltd (Huaxing, SZ: 002018) all suffered losses in the first half of 2011 because of their overcapacity of glyphosate. The capacity of acetochlor, a major upland herbicide, has reached 140 000 t/a, while its annual domestic demand is only about 10 000 tons and its annual export volume is 20 000 tons. As a result, its market is in downturn, and its inventories in the hands of producers and distributors are very large. Major acetochlor manufacturers, such as Dalian Raiser Pesticides Co Ltd, Hangzhou Qingfeng Agrochemical Co Ltd and Jiangsu Lulilai Co Ltd, have poor economic performances. Imidacloprid and abamectin are two major varieties of pesticides in China. Due to product homogeneity and overcapacity as well as the impact of foreign patented products, imidacloprid and abamectin producers struggle arduously, especially in 2011. There are more than 30 legal imidacloprid producers in China. But only five still produce the product normally now. The output of avermectin TC (technical grade) in China reaches about 3 600 tons a year, while the actual domestic demand for it is only 2 800 tons annually. Oversupply makes the price of abamectin powder plunge from RMB700 /kg down to RMB500 /kg, down 28.6%. For major imidacloprid producers like Hong Yang Group, Hubei Sanonda Co Ltd and Jiangsu Changqing Agrochemical Co Ltd, their profits have also declined to different degrees. Leading abamectin producer Zhejiang Qianjiang Biochemical Co Ltd was able to keep a meager profit margin in the first half of 2011 by sales of Jinggangmycin and gibberellin (GA).
   Under the shadow of overcapacity, the recovery that the pesticide industry expected in the beginning of 2011 fell in vain. In the beginning of 2011, some experts predicted that due to the overcapacity of the global glyphosate industry as a whole, the glyphosate industry would continue to be in downturn but has basically reached the bottom, and with the re-shuffle of the industry, Zhejiang Wynca Chemical Co Ltd, Nantong Jiangshan Agrochemical & Chemical Co Ltd, Jiangsu Yangnong Chemical Group Co Ltd and other leading producers would take the lead to recover. But the expected strong demand did not emerge. In addition, some predicted that as international and domestic food prices soar, crop plantation acreage would increase substantially with food prices, and the demand for pesticides would rise, so pesticide producers would harvest good incomes in 2011. However, recent statistics show that the sale of pesticide formulations was very difficult, and the market competition was fierce, so many companies had to reduce the selling prices of their products and finally achieved very meager profit margins. The recovery process of the pesticide industry is still full of twists and turns.
   Needless to say, overcapacity leads to price war. It is still the main reason that blocks the profit growth of pesticide producers. In recent years, due to the shrinkage of the domestic farming area and the promotion of high-efficiency, low-toxicity and low-dosage pesticides, the consumption of pesticides in China has declined. The Chinese Ministry of Agriculture said that in the next five years, China's agricultural industry will implement specialized pest prevention and control measures and its demand for chemical pesticides will reduce by 20%. At present, the capacity growth of pesticides has far exceeded the demand growth in China. But faced with a few hot products, such as chlorpyrifos, pymetrozine, bifenthrin, lambda-cyhalothrin, cypermethrin, prochloraz, tebuconazole and quizalofoppethyl, and foreign patent-expired products like nicosulfuron and rimsulfuron, many domestic enterprises still scramble to build plants to produce them. This can easily lead to more serious overcapacity. The rise of raw material prices is the second reason for the low profit margins of pesticide producers. The prices of major basic raw materials for pesticide production soared, such as coal, caustic soda, methanol, benzene, phosphorus, alcohol and sulfuric acid. But the ex-factory prices of pesticides cannot climb synchronously with rise of raw material prices, because farmers, the end users, are very sensitive to pesticide prices and can hardly accept any pesticide price hikes. Under the context of serious overcapacity and fierce market competition, in order to retain their customers, pesticide producers have to sell their products at low prices, resulting in that the prices of emamectin benzoate, metalaxyl, atrazine and many other pesticides have declined since 2009. In addition, the RMB appreciation is also a factor affecting the economic efficiency of pesti