Update of 22th Feb 2022- Tipping Point of Glyphosate Price Downtrend
Curtain falls on Beijing 2022 Winter Olympics. The International Olympic Committee president Thomas Bach declared the Beijing 2022 Olympic Winter Games closed this Sunday.
Mr. Yimou Zhang, the editor of the closing ceremony, on behalf of the Chinese people, broke a willow branch as a special gift for athletes from all over the world. In ancient China, the ancestors of the Chinese people hoped that the best friends who were about to leave would stay more time and have more joy, so they would give the guest a willow branch as a kind of gift which is representing their feeling inside of their heart.
During Beijing Winter Olympic Games, Chinese people felt that they are part of the world when they saw foreign athletes guest comes and love the “Bing Dun Dun” so much. At the same time, China also provides the signal to join together with the world. The Olympic Games looks like an international course to let ordinary Chinese, even grandmas and grandpas could have a chance to know more foreigners. It is so impressive to see the friendship between Chinese athletes and other countries’.
Most young Chinese do not know Chinese culture deeply. But the culture is inside of our genes as it is always there. Mr. Yimou Zhang is a great introducer. He inspired the Chinese people to motivate the inner culture gene. It is also a kind of education for 1.4 billion Chinese at the same time. More Chinese would like to know our 5000 years Chinese culture deeply. The core of culture is its influence on people. Chinese culture is hidden in our spoken and written language. This is why the Chinese people, after thousands of years, can still inherit.
China's traditional culture is mainly composed of Confucianism, Buddhism, and Taoism. Confucianism is the doctrine of Confucius, who began to travel around the “countries” in China around 500 BC, spreading his ideas. Buddhism, also known as Sakyamuni Buddha, was introduced into China during the Eastern Han Dynasty and Western Han Dynasty around A.D., from ancient India. Tao is the traditional Chinese insight system of integrating people and nature, which is probably the earliest systematic insight of sustainable development in the world. If we want to know a little bit of China culture, we shall learn all of them as just a beginning.
For foreigners, it is too difficult to understand Chinese with a lack of a basic understanding of Chinese culture. But, success in the Chinese market requires leaders with a deep and systematic understanding of Chinese history and culture. It could be “Mission Impossible” for the international business teams. The complexity of China culture is the reason why we said only the Chinese can deal with Chinese issues.
A few days ago, a Chinese manager from a multinational company asked me a question, how can you make China sourcing successful? I sumarrized some reasons. To be honest, there is no routine way to succeed. If MBA can make a great business, every graduate from Harvard Business School shall have billions of dollars easily. But the truth is the MBAs are working for the true enterprise who build the business from simple, hard-working from the ground. Did you experience a tough life which desires money, food, and clothes? If yes, you are much closer to being successful.
All the things I mentioned were not related to agrochemicals. They are the tips for the global procurement teams to start cooperation with China. There is more possibility to learn from the people who you respect. When you know more about your Chinese partners’ friends, you will be aware of who are they in detail.
Back to our main topic, the China Agrochemical Insights.
Agribusiness Global Reports:
According to a Feb. 11 letter sent to customers from Dr. Udo Schneider, Bayer Crop Science Global Head of Active Ingredient Manufacturing, which CropLife viewed, one of the company’s key raw material suppliers experienced a mechanical failure in its manufacturing plant, which is resulting in a substantial reduction in production rates.
The force majority letter from a supplier with more than 300 thousand Mt Glyphosate brought a big surprise in China market. The most influence is to let traders forecast that the price of Glyphosate would keep on going up due to the “future tight supply” from Bayer CropScience. However, the weak demand during early 2022 from overseas is impacting the confidence of key manufacturers in China. The cost of Glyphosate is on the way back to the ordinary margin.
2021 was a crazy year that the multinational companies and global distributors had to increase the safe inventory level. By November 2021, China's total export of pesticides was 2.2 million Mt, up 44.51% from the same period in 2020 and 28.56% year to date in 2019. The extraordinary level of safe inventory was driven by the early demand and panic on the future shortage of ag-inputs.
The slow resilience of the global supply chain made the situation worse. Moreover, the shortage pushed up inflation in the US and other consumption countries. It would be impossible for farmers to get low-cost ag-inputs in 2022. For the global farmers, they might still face the problem of key ag-input availability in their hands. USDA mentioned Supply-chain constraints and staffing problems are leading to higher prices for products and supplies across a variety of industries, especially food. And according to the USDA, in inflation-adjusted 2022 dollars, net farm income is forecast to decrease by $9.7 billion (7.9 percent) in 2022 from 2021.
It seems the FED’s QE monetary policy caused a butterfly effect on the economy. And the shrink of farmers’ income could hit the economy to lead to a vicious circle. Such QE from the COVID19 pandemic was totally different from the previous economic crisis. There is no dollar lake to absorb the inflation to make the economy healthy.
On the other hand, the currency of USD to CNY was decreasing. CNY currency reflected that the USD would face pressure when they head into China's capital market. China market seems not to be the “lake” since China just started QE at the beginning of 2022. But it did not stop the strong capital from the US to China market which would be the signal for a balanced choice on the management of return of investment (ROI).
“China is a big modern nation, has a huge population, huge modernity in past 30 years. And we invested some money in China because we could get more value in terms of the strength of the enterprise and the price of the security than we get in the United States. And in China, the companies we invest in are stronger relative to their competition and priced lower. We get more strength per dollar invested. That's why we are in China.”, Billionaire investor Charlie Munger comments from Daily Journal's annual meeting on 16th Feb.
The rumors about China cannot stop the global leaders to invest in their diversity of investment. A similar situation is happening in China's agrochemical industry. From the multinational companies headcount inquiries, someone needs 3rd party alliance leader to build a strategic alliance with Chinese suppliers. And some other multinational companies are searching for strategic sourcing leader to support their future success on supply chain value creation in China.
When Mr. Shane Thomas discussed FBN competitiveness, he mentioned in his post in Upstream Ag Insights, “Building-integrated infrastructure out is expensive”. I cannot agree more on this point. The value creation from upstream not only needs the continuous investment on upstream sourcing and operation. It also requests the expertise to match its strategy with its raw material suppliers and manufacturers’ competitive advantages. The “strategy match” is a series of business actions to relocate the suppliers’ resources for global retailers or distributors, including the security of raw material supply, consistent operation capability, portfolio and category adjustment for market demand, supply chain resistance to the adversity (For example, the supplier can keep capacity and operation rate when they face the sudden change of policy; Or keep the lower cost when the market goes smoothly). From R&D, raw material supply, manufacturing, and logistic management, they are integrated into the “full value chain” from upstream to downstream. It seems like a magic wand that can create sustainable profitability by the long-term view investment.
For long-term view, the Glyphosate price will be a soft landing. We can see the below picture to check the change history of raw material for Glyphosate. The Phosphorus Trichloride was touching high when China announced the “Double Control” policy. The policy caused a low operation rate accordingly. Since manufacturers cannot have the raw materials to produce when the yellow phosphorous supply capacity decreased around 50% in China. So the demand for raw materials decreased within one month. By the end of 2021, the impact of double control was mitigated because China started to evaluate the affection by the sudden policy. Not only the Phosphorus Trichloride, but the PMIDA price also dropped from EXW 6.88 USD/Kg to EXW 6.25 USD/Kg.
So that the tipping point of price downtrend could be coming soon or it had already happened without notification.
China Glyphosate AI price is landing at EXW 11.8 USD/Kg compared to the end of Jan 2022. The Beijing Winter Olympic Games did not affect the operation so much for China Glyphosate producers. The Glyphosate AI price is heading down slowly. You might remind me of Bayer’s force majority letter. Yes, I still remembered. Based on the key trend of price decreasing, the short time tight supply will be not affecting on the market demand landing in 2022. Without vicious competition and monopoly, price trends can reflect the changing of balance between global demand and supply precisely. And I am very confident in Bayer CropScience capability because they are facing serious competition with Corteva’s Enlist on the market. So the lead time and availability are their key factors for 2022 sales.
Till the end of March, the price of Glyphosate AI from China would be stable on the soft-landing trends. Consistent sourcing could be beneficial based on such a trend in the coming few months. Before August, the Glyphosate AI price could be back to the reasonable margin. The only uncertainties shall be coming from the global inflation and timing in which the FED raises interest rates. The cheap Glyphosate era could be gone with the wind forever.