New Policy and Stricter Inspections Are Driving up Chinese Agrochemical Prices

In 2017, the Chinese agrochemical industry continued the recovery started in 2H 2016. The revenue and profit of listed companies increased significantly. Total revenue from Q1 to Q3 was CNY 83.4bn and the net profit was CNY 6.0bn, up by 26% and 108% respectively. Aside from the global recovery of the agrochemical market, we see two drivers behind this revival.

1. Management policy upgrades

In June 2017, the Ministry of Agriculture introduced the new Pesticide Act together with five supporting regulations on pesticide management, which are the strictest ever seen. There are significant changes when it comes to agrochemical production, registration, and management systems. These new policies pose great challenges to the industry. They promote a standardised way-of-working for manufacturers and distributors and ensure safe application of agrochemicals.

2. Stricter environmental protection inspection

Agrochemical production growth has been slowing down since 2015, owing to unprecedented environmental compliance pressure, which leads to a strained supply of active ingredients (AI) and intermediates. CAGR of AI production declined sharply from 15.4% (CAGR 2004-2014) to 1.6% (CAGR 2014-2016)(see Figure 2). Environmental protection inspections were extraordinarily strict in 2017, which greatly impacted agrochemical production and AI prices. AI prices have been rising steadily (up 1.6% MOM), while China’s agrochemical price index (CAPI) reached 98.36 in December 2017 (up 32.3% YOY) (see Figure 1). This is the highest value seen in the last three years.

The supply tension is hard to change in the short term, given the higher environmental protection policy pressure. We expect agrochemical prices to keep rising at least until Q2 2018, supported by a shortage of raw materials and increasing production costs. On top of that, the new pollutant discharge permit management system and collection of the environmental protection tax will promote the concentration of the agrochemical industry.

China’s agrochemical industry has entered a period of radical adjustment. The intensified policy pressure and increased levels of inspection will accelerate the reshuffling and consolidation of the industry, both in horizontal integration and up- as well as downstream integration. Manufacturers who have the ability to produce AI and formulation will benefit from this transformation and be able to enhance the strength of continuous production and supply. Backward production capacity will gradually retreat from the market, driven by the increase of environmental protection inspections and standardised administration.

Author: Jingyan Sun