The slump in glyphosate prices which has caught out industry giants such as DuPont and Monsanto is here to stay thanks to overcapacity in China, Credit Suisse has said.
A return to the margins of 25% western giants once enjoyed on the generic weedkiller "seems like a stretch" given the ramp up in global capacity for making glyphosate, the bank said.
China alone has sufficient manufacturing capability to meet world demand of 600,000 tonnes a year, after more than tripling its capacity in 2007-08, with extra plants in the pipeline.
Red Sun, based in the eastern city of Nanjing, was planning facilities capable of producing 100,000 tonnes of glyphosate a year, which would make it China's biggest producer, overtaking Wynca, the Shanghai-listed chemicals group.
'Frenzied prices'
The fate of the market "continues to hinge on China over the coming months, and how quickly we see a return to balance", Credit Suisse said.
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China's biggest glyphosate producers, in output per year
Wynca: 80,000 tonnes
Nantong: 60,000 tonnes
Anhui: 25,000 tonnes
Country total: 600,000 tonnes
Red Sun is planning to build facilities with capacity of 100,000 tonnes
Sources: IBES, Credit Suisse |
"Therefore, in the absence of production discipline, the supply versus demand imbalance is likely to keep a lid on prices for the foreseeable future."
The bank quoted Liu Xia, the chief executive of Wynca's agrichemicals division, who said: "The price of glyphosate will never return to the heights of 2008 in my lifetime. The prices were just frenzied."
Indeed, prices may remain weak enough to force China's "relatively fragmented" sector onto the backfoot, and force consolidation among its 2,900 manufacturers.
These had been, like their Western peers, dented by last year's slump in prices, with Wynca's profits falling by some 85%.
Nufarm worries
Credit Suisse's comments came in a note in which it placed an "underperform" rating on Nufarm, with a price target on the Australian agrichemicals supplier's shares of Aus$6.40 in 12 months' time.
Consensus forecasts assumed a return to peak operating profit margins within two years which looked unlikely given the prospects for glyphosate prices, despite Nufarm's stranglehold on the Australian market, of which it boasts a share of 65-70%.
Furthermore, Nufarm requires near-record second half earnings to meet a full-year earnings target of Aus$110m-130m.
"This is equivalent to its strongest second half, in 2008, a period in which glyphosate prices hit all-time highs," Credit Suisse said.
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