Week Sept 25- Sept 29, 2017

 ISec Report: Global Agrochemical Industry: Muted prices drive consolidation

Agro-chemicals i.e. chemicals used for controlling the occurrence of pests/infestation of pests in crops are witnessing muted global demand scenario globally amidst high channel inventory and subdued agro-commodity prices in international markets. Such is the scenario that the global agro-chemical industry has de-grown for two consecutive years from US$ 63 billion in CY14 to US$ 58 in CY15 (down 9% YoY) and US$ 57 billion in CY16 (down 2% YoY) with growth expected to rebound at the end of CY17. This muted demand scenario and profitability challenges has led to a wave of consolidation amongst global agro chemical players, the end result being envisaged as 3-4 super giants controlling the global agro chemical industry in due course of time (Oligopolistic structure). Such an oligopolistic structure is likely to result in more pricing power in the hand of companies and synergies realised through extended distribution network, cross-selling of products and removal of duplicity spend on operational overheads.

Agro-chemical Industry trend (CY10-16)

Source: ICICI Securities, Phillip McDougall

Global agro-commodity prices witness a declining trend

Crop prices witnessed a declining trend after clocking a peak somewhere in CY12-13 with sharp fall witnessed in CY14-15 and stabilization being witnessed from CY16 onwards. The fall has been steep in the case of Soybean and Rice (down by more than 30% from their peak) while relatively soft in the case of cotton

Major crops pricing trend

SSource: ICICI Securities, Phillip McDougall

Agro chemicals market size by crop (CY15)

The major crops that command a sizeable share of the global agrochemical industry are Soybean, Cereals including Maize & Rice. The pricing trend of these crops is a key determinant driving the purchasing power of farmers for a host of agri inputs including agro chemicals.

Agro chemicals market size by crop (CY15)

Source: ICICI Securities, Phillip McDougall

Revenues were soft at major global agro-chemical players in CY15-CY16…

Major agro-chemical companies reported decline in agriculture sales in CY15 & CY16 following the industry trend with the decline arresting to some extent in H1CY17.

Agricultural Revenue at major agri input companies

Source: ICICI Securities, Company; Note: *Euro bn and rest are in US$ bn

… which triggered Consolidation

In a series of announcements over past 2 years the top players in the global agro chemicals space have announced mega merger plans. The trend was initiated in December 2015 ~by US$ 130 billion merger announcement between Dow chemicals & Du-Pont, followed by ~US$ 44 billion acquisition of Syngenta by ChemChina in February 2016. The last in the pipeline was announcement of acquisition of Monsanto by Bayer AG in May 2016 amounting to ~US$ 66 billion.

In the agro-chemical space, it will lead to industry becoming a more oligopolistic in structure with 3 main participants post consolidation constituting a lion market share (in excess of 50%). As of CY15, the total agro-chemical industry size stood at US$ 57.5 billion with Syngenta reporting agro-chemical sales at US$ 10 billion (market share 17%), Bayer AG (9.2 billion, 16%), Dow Chemical (US$ 4.9 billion, 9%), Monsanto (US$ 4.8 billion, 8%), ChemChina (US$ 4.3 billion, 7%) and DuPont (US$ 3.1 billion, 5%) among others. Post consolidation merged entity market share will be led by Syngenta+Chemchina at 25%, followed by Monsanto+Bayer AG at 24% & Dow+DuPont at 14% among others.

Global Agro-chemical Industry market share trend & prospect

Source:  Bloomberg; ICICI Securities

The concentration will be more drawn out in the seed segment wherein post merged entities will command a combined market share in excess of 60%. As of CY15, the total seed industry size stood at US$ 37.2 billion, with main players being Monsanto (US$ 10.2 billion, 27%), DuPont (US$ 6.8 billion, 18%), Syngenta (US$ 2.8 billion, 8%), Bayer AG (US$ 1.4 billion, 4%) & Dow Chemicals (US$ 1.5 billion, 4%) among others. Post consolidation merged entity market share will be led by Monsanto+Bayer AG at 31% followed by & Dow+DuPont at 22% and Syngenta+Chemchina at 8% among others.

Global seed Industry market share trend & prospect

Source: Bloomberg; ICICI Securities

Global R&D spend is envisaged to increase, particularly in the development stage

The survey conduct by Phillip McDougall in 2015 projected a 22% rise in R&D spends by 11 agrochemical companies to US$3.2bn in CY19E vis-à-vis CY14, through this was prior to the mega merger announcements. The major rise was expected to come in the development of new Active Ingredients, which was anticipated to rise by a robust 43% to US$907mn & capture 28% of total R&D spends. Notably, ~70% of R&D spend was in North America and Europe region.

Global R&D spend trend

Source: ICICI Securities, Phillip McDougall

Innovators noticing falling success rates, rising costs and increasing lead time for developing a new active ingredient
Innovators are witnessing multiple headwinds in agrochemical R&D: 1) falling success rate, hence higher number of products needed to be processed to get a successful product; 2) rising costs due to stringent regulatory requirements; and 3) increasing development lead time.

Falling success rates

                                                 Source: ICICI Securities, Phillip McDougall

New Active ingredient development costs on the rise

                                                 Source: ICICI Securities, Phillip McDougall

Development lead time also rising

                                                 Source: ICICI Securities, Phillip McDougall

Consolidation, Increasing R&D spends offers opportunity for “Make in India”

Consolidation in the global agro chemical industry is currently undergoing various stages of regulatory approvals given a large part of product overlaps and attainment of majority market share in key crops (competition commission laws). This offers an opportunity for the Indian agro-chemical industry which can witness enhanced demand in the case of down trading (purchasing generic product for the same molecular composition) by global farmers. With envisaged rising R&D spends amidst increasing costs in developing new active ingredients, there lies a high probability of increased outsourcing of labour intensive research & development work (CRAMS) towards cost effective nations like India, thereby acting as a shot in the arm for our flagship scheme i.e. “Make in India”.



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