Growing more from crops
Crop protection remains a strong market but how can suppliers best benefit? Andrew Warmington reports from the EFCG Forum in Barcelona
Chemspec Europe being the agrochemicals sector's single most important exhibition and the European Fine Chemicals Group (EFCG) being a long-term partner to the event, it is no coincidence that the EFCG and its sub-group, the 17-member Agrochemical Intermediate Manufacturers in Europe (AIME) now hold their Crop Protection & Fine Chemical Forum every year before the show. This year in Barcelona was no exception.
The forum featured a panel discussion among executives from major players discussing a pre-agreed selection of questions posed by Dr Georg Weichselbaumer, vice president of chemicals and applications at AlzChem, who also overviewed AIME and its new updated Voluntary Guidelines for the manufacture of ISO-regulated fine chemical intermediates and active ingredients. The seven topics were:
- Market trends
- Working capital management
- Innovation in agrochemicals
- The value proposition for European agrochemical producers
- Regulatory experience, mainly REACH (which was not actually discussed for lack of time)
- Non-agrochemical activities
- Markets beyond the EU
The crop protection market, it is clear, is fundamentally healthy. According to Dr Matthew Phillips of consultants Phillips McDougall, who also spoke at Barcelona, it rose by an estimated 14.9% in 2011 to reach over $44 billion - not as fast as the GM seed business, which was up 21.9% to $15.9 billion, but very good for an industry that seemed to be in tailspin a decade ago.
The pointers for 2012 and beyond remain broadly positive, Phillips told delegates. Crop prices remain high and the high oil price will sustain growing demand for biofuels. Agrochemical prices remained stable in Europe last year and have the potential for improvement this year, due to the strong farm economy and the underlying demand for higher crop yields.
EFCG and AIME hold their forum alongside Chemspec Europe every year
Over the next ten to 15 years, Weichselbaumer observed, there would probably be small growth with a stable or slightly increasing demand for crop protection chemicals worldwide, though possibly stronger growth in some regional markets. Key issues will be changing outsourcing patterns and end markets, plus technological advance, notably process intensification.
The fine chemicals industry will need to address continued competition from developing countries and the effect of re-registration, he added. "How will volume growth be secured by industry? What is the need for investment? What are the growth prospects for catalogue products as opposed to custom manufacturing? And what will be the impact of the increasing market share of generics?"
"We all agree that trends over the coming years are definitely sustainable as the world needs higher yields," said Dr Andreas Veit, head of the custom manufacturing and new business development unit at CABB. "But it will it be another boom and bust?"
Dr Michael Helwig, head of marketing and sales for the agro & ISO custom manufacturing business at Lonza, agreed that the agrochemicals market is "currently growing very nicely" but cautioned that the mega-trends driving this do not always translate directly because there are many variables down to the weather, regional markets and so forth. Much depends on which products a company is in; custom manufacture is going well in corn insecticides, for example, but not cotton insecticides
AIME members want to support their volume needs of agrochemicals companies, Veit added. However, they are wary of building up capacities that might not be needed in six to 12 months time. Thinning pipelines are a problem, as is the increasing demand for generics that Eastern competitors can generally supply more cheaply - which, all agreed, means that better working capital management is essential.
There is increased volatility in both demand and volume forecasts, Weichselbaumer noted in this context. This gives rise to several questions. Who should manage the risk - supplier, customer or both? How can suppliers react to increased flexibility demands? And, are European manufacturers inherently the better choice because of this?
"You need to be creative in your business model and meet the flexibility needs of your customers. Working capital management is a key target and a key service that customers demand," said Dirk Sandri, head of marketing and sales for the agro and speciality chemicals business line at Saltigo.
(Saltigo, it was noted jokingly from the floor, had recently been very creative indeed in this respect: it had got Syngenta to invest in dedicated equipment at its Leverkusen site. As Sandri noted, however, customers will always be paying one way or another; this was an option that suited both parties and there was a lot of infrastructure already in place.)
Saltigo runs a unique customer-financed crop protection synthesis facility at Leverkusen
"Be prepared," advised Dr Thomas Sauer, vice president of the custom manufacturing agro market segment at Evonik Industries. "The customer may come and say 'I need twice as much' or 'I don't need anything'. You must be prepared to deal with either before that knock on the door. Ask yourself 'What if...?' and communicate early, especially with those accounts where a sudden change could cause real issues."
Suppliers should get customers' views on how they see things developing and ensure that their people are constantly in touch with customers, because one customer's changing needs can impact others, Sauer added. "Customers tell us to be flexible and we are but we need to know what the consequences are and who will pay for it and manage it. You must build flexibility into the business you do with customers."
Lastly, Sauer said, use inventory wisely. No-one wants to carry inventory any more and there is no standard recipe for who carries it but it must be somewhere out there and an empty plant will hurt the customer more than a full inventory. Finding the best balance is important and it is best to carry at least some.
"Don't just compare inventory with empty plant," agreed Helwig. "Consider also the lost markets if the customer can't deliver to the market. When you look at inventory build-up from a CMO point of view, with materials getting more complex and more different companies contributing to them, everyone must be in the same boat. You can't build up inventory if you don't get in the speciality raw materials from other companies."
Sandri described the huge volumes sitting in distributors' warehouses as "one of the biggest miracles in the market". Demand is growing; the volatility is in the production side, so should not someone in the industry be working on finding out how much is sitting out there?, he asked.
Unfortunately, as others noted, this would be very difficult to do; there are just a few large distributors dominating the market and most are extremely secretive. Unquestionably, though, they are sitting on a lot of debt. As they buy earlier and pay later in the cycle, they are under severe pressure when prices go down, so their perspective is very different. Often they are trying to hit volume targets at the back end of the year and slashing prices to meet them if need be.
Weichselbaumer - Industry must address continuing competition from emerging economies
Innovation is obviously a crucial theme but what is driving it? asked Weichselbaumer. The shift to seeds, the pipeline drought, product bans and resistance are all factors. CMOs have to evolve strategies to deal with the consequent change in demand, complexity and synthesis and technology, but maybe this is an opportunity for Europeans to show that they really are the better choice.
"Our view is that the number of new molecules is declining but technology change means that more steps, more complex and more corrosive chemistry are needed, so multi-purpose plants have to even more multi-purpose than before," Helwig said. "If you can follow that trend with investments that make sense to the customer and yourself, business is still there to be had."
Phillips interjected that there had been a sea change in R&D trends of late. With the cost of bringing a molecule to market increasing, only Syngenta and Bayer CropScience are realistically able to develop products that would be worth $60-80 million/year. To all others, including second tier R&D-based companies as well, these would be marginal; other than in specific niches, they would have to be sure that a product is worth $150 million/year before pursuing it and they will only develop those they are sure will make it.
The result is indeed fewer molecules coming to market, not due to lack of innovation but pure economics. And, of course, no-one has any idea what other technologies might be available in ten years' time if these products do come through.
Helwig countered that there are opportunities in developing niche products for customers' portfolios, because there is no need to invest in capacity and it comes down to a more basic make-or-buy decision, which could mean more outsourcing. Veit agreed, adding that in some ways niche products can actually be more attractive than the blockbusters that everyone wants to pursue but which very few can make successful.
Others noted that the secondary patent system for mixture products and the registration system effectively protect many actives from competition - very much unlike pharma, when 80% of sales can be lost on the day after patent expiry. One prime example is oxystrobin, whose patent expired last year but continues for different mixture products to 2018 and 2020.
"The good thing about agro is it doesn't just drop off a cliff at patent expiry, though there is cost pressure in keeping them on the market and we need to respond to that," Veit said. Sauer added that when he came into agro four years ago, he was amazed by the seemingly endless life of some old products.
"Even if you beat them, they don't die and all of us will have some of the old molecules in our portfolio. In addition, the manufacturing process is not a given and it is possible to change it to make old molecules better, safer or more cost-effectively. This gives a cost advantage that enables customers to extend the life of the product, so yes, we are actively participating in life-cycle management," he said.
Corn insecticides are in strong demand at the moment
The European fine chemicals industry, Weichselbaumer continued, must continue to offer a cost-competitive advantage to the global agrochemicals industry. This might come from patent position, EHS standards, the Voluntary Guidelines, local production, portfolio balance, strategic relationships or combinations of these.
Non-agrochemical activities will be another important factor, he added. According to Jan Ramakers of Jan Ramakers Fine Chemical Consulting Group, who spoke on exactly this topic at Barcelona, non-Life Science applications accounted for 24% of the fine chemicals market in 2011, or about $7.2 billion/year.
This section of the market is growing at 3-4%/year, slower than pharma and agro, and will account for 21% of the market in 2016, or about $7.45 billion. Even so, it is a substantial market. The major applications are, in descending order, flavours and fragrances, food additives, pigments and dyes, biocides, photographic chemicals, electronic chemicals and cosmetics.
Veit noted that these applications "are significant and always have been. Agro is very seasonal and cyclical and has become increasingly so over the last ten to 15 years. Other markets are a way to buffer against that and remember that other agro wasn't always so bullish. Some fine chemical companies wouldn't have survived to enjoy this market without a lot of non-agro business," he said.
"One positive outcome of the current crisis is that a lot of non-life science companies are beginning to see outsourcing as a strategic option," added Sandri. "Since 2008 a lot of enquiries have been coming in from them, it is a booming market." This was borne out by comments from the show floor later that week, with specialities generating a lot of interest.
Of course, Weichselbaumer concluded, companies must look beyond the EU. India and China might be of interest as customers as well as competitors. Eastern Europe and Latin America may see big changes in local fine chemicals production, while the US market and asset base cannot be ignored.
"Evonik has always been in multiple markets, though we have relatively few multi-purpose plants in the US and we would like to know why that is, when the regional market is so huge and the business environment so much better than it is here," Sauer said.
Latin America, he added, has seen a huge increase in crop production without any real increase in agrochemical active ingredient manufacturing there; it remains based essentially in Europe, North America and Asia. "Will this change? I believe it will but the first movers will be the agrochemical companies. Where there is good reason to, we will follow them."
From Online Issue: August 2012