Heedless Expansion of Cartap Capacity Has Hidden Hazards

By Wang Jianwo, Secretary-General of Hunan Pesticide Industry Association

Benefit-chasing triggers capital investment stampede

Cartap originated from Sumitomo of Japan. Enterprises in China developed bisultap and monosultap in the course of imitation, forming a product series. More than 90% of the world’s output was concentrated in China. The output of major enterprises here such as Hunan Haohua Chemical Co., Ltd., Jiangsu Tianrong Group Co., Ltd. and Anhui Huaxing Chemical Industry Co., Ltd. accounts for over 60% of the national total.
Relocation of production units by Jiangsu Tianrong Group Co., Ltd. and Anhui Huaxing Chemical Industry Co., Ltd. in 2014 caused a false impression of supply shortage. Cartap prices rose crazily, peaking at over RMB80 000/t. Benefit-chasing triggered a stampede of capacity expansion. In less than one year, the new capacity reached 3 kt/a. The total capacity of existing production units is over 15 kt/a, and there is capacity surplus.
Jiangsu Tianrong Group Co., Ltd. and Anhui Huaxing Chemical Industry Co., Ltd. have already restored the production of cartap. Starting from the second quarter this year, prices gradually returned to normal. Importers reduced volumes drastically. Large producers were stuck with considerable inventory. Except for Hunan Haohua Chemical Co., Ltd., producers have suspended production to reduce inventory and release tied-up capital.
It is not only cartap production and sales that are unfavorable – the same troubles plague other nereistoxin insecticides. Table 1 shows the capacities of major producers of nereistoxin insecticides in China. Table 2 shows the actual output of the producers during 2012-2015.

Table 1    Nereistoxin insecticide capacity of major producers in China (t/a)

Producer    Bisultap    Monosultap    Cartap    Remark
Hunan Haohua Chemical Co., Ltd.    13 000    6 500    3 000    
Jiangsu Tianrong Group Co., Ltd.    15 000    7 000    4 000    Relocation and renovation completed at the end of 2012
Anhui Huaxing Chemical Industry Co., Ltd.    12 000    6 000    2 000    Relocation and renovation completed at the end of 2013
Hunan Gofar Fine Chemical Industry TECH Co., Ltd.    4 000    1 500    1 000    Production started in the second half of 2014
Chongqing Pesticide Chemical Industry Group Co., Ltd.    4 000    1 000    1 000    Production started in the first half of 2014
Anhui Jinbang Chemical Co., Ltd.    6 000    2 000        Trial production expected to start in September 2015


Table 2    Nereistoxin insecticides output of major producers in China, 2012-2015     (t)

Producer
    Year
    Output of cartap    Output of monosultap             Commodity amount of monosultap    Output of bisultap    Remark
Hunan Haohua Chemical Co., Ltd.    2012    2 700    5 300    1 115    11 342    
    2013    2 940    5 700    1 143    12 198    
    2014    3 100    6 400    1 595    13 696    
    2015    1 650    3 100    542.5    6 634    As of June 30
Jiangsu Tianrong Group Co., Ltd.    2012    3 500    6 500    1 075    15 275    
    2013    3 000    6 000    1 350    14 100    
    2014    2 850    5 500    1 082.5    12 925    
    2015    2 200    4 000    590    9 400    As of June 30
Anhui Huaxing Chemical Industry Co., Ltd.    2012    1 750    5 200    2 487.5    12 480    
    2013    1 900    5 300    2 355    12 720    
    2014    1 200    3 000    1 140    7 200    
    2015    800    2 600    1 360    6 240    As of June 30
Hunan Gofar Fine Chemical Industry TECH Co., Ltd.    2014    50    150    72.5    600    
    2015    200    500    190    2 000    As of June 30
Chongqing Pesticide Chemical Industry Group Co., Ltd.    2014        200    200    800    
    2015        300    300    1 200    As of June 30



Falling prices accelerate

Global demand for cartap peaked at 12 kt in 2012. China exported 11.666 kt that year, worth US$52.34 million. Demand slid steadily afterward. Global demand is around 8 kt a year today, and the demand for monosultap is 5 kt a year. Its major markets are rice-producing regions of Asia. The demand for cartap in India, Pakistan and Japan accounts for around 70% of the world total. Around 45% of China’s monosultap output is sold here, and markets for the rest are in Asian countries such as Pakistan, Vietnam and Indonesia. Bisultap is sold mainly in the domestic market, but the sales volume has declined from the peak of nearly 200 kt a year to less than 30 kt a year. Bisultap capacity is already in serious surplus – a major economic constraint affecting the normal production of cartap and monosultap.
The combined nereistoxin insecticide capacity of major producers such as Hunan Haohua Chemical Co., Ltd., Jiangsu Tianrong Group Co., Ltd., Anhui Huaxing Chemical Industry Co., Ltd., Hunan Gofar Fine Chemical Industry TECH Co., Ltd. and Chongqing Pesticide Chemical Industry Group Co., Ltd. is 11 kt/a cartap, 22 kt/a monosultap and 50 kt/a bisultap. Anhui Jinbang Chemical Co., Ltd. is expected to go on stream this month with 2 kt/a new capacity for monosultap and 6 kt/a for bisultap. All three nereistoxin insecticide products are oversupplied, and the prospects of the sector are gloomy.
The national output of cartap was 7 950 tons in 2012, 7 840 tons in 2013, 7 200 tons in 2014 and 4 850 tons in the first half of 2015. Monosultap output was 4 677.5 tons, 4 848 tons, 4 090 tons and 2 982.5 tons respectively. As the actual output in 2012 and 2013 was close to market demand, the supply and the demand were basically balanced, the price was stable and the market was steady. In 2014, the supply was short, driving up prices. Production was restored by adding capacity in 2015, overshooting to surplus. Prices are sliding relentlessly and show signs of acceleration, while producers’ inventories build up.

Future profitability
is a big worry

The following major factors will directly affect future cartap profits:
(1) Surplus capacity: The cartap market is already mature. Demand cannot increase much more and may even decline. Annual cartap demand will likely hover at 8 kt for the next 5 years. China’s capacity has already reached nearly twice that level: 15 kt/a.
(2) Increase of environmental protection pressure: Since the implementation of the new Environmental Protection Law, on January 1, local governments have taken more stringent supervision and punishment measures. With the upgrade of environmental protection standards, producers’ cost of environmental protection will increase drastically. For example, the environmental protection cost in Hunan Haohua will be over RMB8.0 million higher in 2015. Due to the low domestic demand, producers will have to digest bisultap (a byproduct) themselves and treat it for environmental protection. This alone implies a likely financial impact of RMB10.0 million for the sector as a whole, greatly squeezing producers’ profit margins.
(3) Increase of raw material costs: Supervision and control exercised by China on some basic chemical sectors with serious capacity surplus have led to a rise of chemical prices. The raw material cost of making cartap has therefore increased drastically, and further increases are coming.
(4) Increase of substitution pressure: The cartap price has gone from RMB78 000/t to RMB80 000/t, from the second half of 2014 to 2015. The short-term price rise has brought fat profits to producers but also offered opportunities for some substitutes to get quick market access. Chlorantraniliprole and flubendiamine, with better property/price ratios, have already quickly displaced cartap for controlling rice pests in many regional markets, reducing domestic demand for cartap and monosultap. The trend will likely be aggravated through the beginning of next year.
It is expected that the price of cartap will have a drastic downturn in the second half of 2015. The profitability of cartap will therefore likely hover at a medium level in 2015. With the release of more new capacity in the second half of 2016, overcapacity will become even more serious. The profitability of cartap will worsen, so producers are very likely entering a period of thin profits.