Key Takeaways
- We anticipate growing optimism in the Asia-Pacific agrochemical industry. This is following the normalization of market conditions in 2023 and the ongoing reduction of inventory in distribution channels.
- We expect Chinese glyphosate prices to improve from the second half of 2024 amid a restocking globally, which would indicate pricing upside for herbicides.
- For Asian crop protection companies, this implies a general recovery in operations and earnings. The priority for these firms will be to convert this into cash flow and lower leverage.
- China's sustained supply gluts, ongoing market volatility, and persistent high costs may limit the pace of the recovery, especially for generic products.
Green shoots seem to be appearing for the Asia-Pacific agrochemical industry. We see signs of an improvement in the supply and demand dynamics. These signs include a gradual increase in global demand for restocking as inventory levels are steadily normalizing; an easing in China's investment spending and the phasing-out of smaller, expensive players as we expect. China is still the biggest producer and exporter of crop protection products, and it remains oversupplied.
This gradual upswing has implications for the issuers we rate. We expect the earnings of India's UPL Corp. Ltd.'s to improve, but our focus will be on its ability to deleverage. For China-based Syngenta Group Co. Ltd., its leverage will remain high but a recovery in industry fundamentals will help moderately lift its earnings.
The Supply-Demand Dynamics Will Gradually Improve
There is growing optimism that the industry may turn around in the second half of 2024 and beyond. Indicative of this is the Chinese pesticide market. More than half of the top 50 companies in the global agrochemical market in terms of sales are based in China, and the country is the single most significant market for pesticides.
Following strong growth in 2021 and 2022, the year 2023 was one of normalization for the global crop protection market. Pricing pressure suppressed market performance. For major crop protection companies, conditions were tough. Limited demand from distributors for pesticides and a glut in China caused steep price declines. UPL suffered its first major declines in a decade. Its revenue for fiscal 2024 (ending March 2024) fell about 20% and its EBITDA 50%.
There are now signs of upside. According to S&P Global Commodity Insights, January-June volumes of Chinese pesticide exports (HS 3808) jumped by 50% year over year. We believe the spike in volume growth stems from the restocking demand among the distributors. This is an encouraging sign for global pesticide demand. So too is the fact that China continues to increase its pesticide exports amid a glut of supply in its domestic market.
Chart 1
In terms of average export unit pricing, prices were down 25% year-on-year during the same period. We think the prices for Chinese pesticide exports have bottomed, averaging about US$2.6/kg to US$2.8/kg between January and June of 2024. Over the past 15 years, with the exception of 2021/2022, prices ranged between US$2.5/kg and US$3.8/kg.
We see a trough and expect the average pesticide prices to show some level of rebound over the next 12 to 18 months. We base this on the strong Chinese export volume growth following a significant destocking in the market in 2023, which continued into 2024.
Chart 2
A model developed by S&P Global Commodity Insights, which projects quarterly glyphosate price trends in China, supports our views. The model assumes stability will return to the market, that prices will rebound from the second half of 2024, and that glyphosate prices to increase will rise 17%-24% in 2025.
Chart 3
Chart 4
Credit Implications For UPL Corp Ltd., And Syngenta Group Co. Ltd.
After a tough 2023, the issuers we rate may see some upside. But there will be bumps to monitor. The recovery will differ for each company according to the regions to which they are exposed, and their product mix (generic versus patented).
China's sustained supply glut, ongoing market volatility, and persistent high costs may limit the pace of the recovery, especially for generic products. Additional sector risks include volatility stemming from U.S. dollar currency fluctuations, unpredictable weather, and ongoing changes to regulations.
UPL Corp. Ltd. (BB/Negative/--)
We expect UPL's fiscal 2025 operations to improve; industry factors and the fact it's coming off a low base will chiefly drive this. Its EBITDA should improve by about 40% this year. Its greater exposure to Latin America is positive because we believe the Americas will post good growth during the fiscal year, aided by more favorable weather. Our expectation of a brighter outlook for glyphosate pricing should bode well for UPL, considering that it still derives about 65% of its total revenue from post-patent products. While stronger Chinese pesticide exports could imply a supply glut in the market, we believe the recent surge in Chinese exports is an indication the global demand is picking up. Indicative of this is UPL's 16% year-on-year volume growth in the first quarter of fiscal 2025.
Our focus, however, lies more on the company's ability to deleverage. This includes its ability to improve its ratio of funds from operations (FFO) to debt to the 20% level over the next three years. UPL's operations have weakened, whereas its debt levels have increased during fiscal 2024. UPL has previously securitized receivables to free up some working capital, thereby alleviating short-term liquidity pressure. However, its working capital remains high. And its securitization program will likely free up lower amounts of working capital than in the past, considering the higher funding cost.
Our focus will be UPL's ability to generate cash flow, while managing its working capital during the recovery ahead. The company is conducting a rights issuance to raise up to US$500 million, which it aims to complete before the fiscal year-end.
Chart 5
We may revisit the ratings and outlook on the company if we no longer think UPL's FFO-to-debt ratio can recover toward 20%.
Syngenta Group Co. Ltd. (BBB+/Stable/--)
We expect Syngenta's leverage will remain elevated at 7.3x-7.9x over the next 12-24 months. We base this on continued destocking of crop protection products globally, and a higher leverage base in 2023 amid large working capital outflows during business cycles.
We do, however, anticipate Syngenta's 2024 earnings will grow moderately as industry fundamentals gradually turn around. The company's focus on patented products, versus commoditized ones, should help mitigate earnings volatility. The company's business expansion in China and cost controls will also support earnings.
Cash flow management will remain Syngenta's priority amid the market volatility. We anticipate it will manage its working capital by lowering inventories and receivables; working capital outflows should moderate from the highs of 2022-2023. Additionally, by focusing on key projects it will slightly decrease capital expenditure in 2024-2025. Its debt is largely stable. By replacing some higher-cost debt with lower-cost debt, its funding costs should moderately drop.
Syngenta's credit profile continues to derive strength from its global leadership in the crop-protection and seeds markets, with strong R&D capabilities. Its parent is state-owned Sinochem Holdings Corp. Ltd., which we expect to continuously support Syngenta's refinancing plans by guaranteeing some of its debt.
The seeds of recovery in the Asia-Pacific agrochemical sector appeared to have been planted. Time will tell the extent to which they take root.
Writer: Lex Hall
Related Research
This report does not constitute a rating action.
| Primary Credit Analysts: | Shawn Park, Singapore + 65 6216 1047; shawn.park@spglobal.com |
| Betty Huang, Hong Kong (852) 2533-3526; betty.huang@spglobal.com |
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