Facing Chinese Supply Chain Woes Head-On
1 April 2014 
“Will this situation remain long enough to let alternative markets emerge and get competitive, or is this a bubble that will suddenly burst and leave them once again out of the race?” -Pessagno
Editor’s Note: Look for continued coverage on Chinese supply shortages in the May issue of Farm Chemicals International.
FCI: First, can you talk briefly about your background in the agchem industry?
Chemtec S.A.E. is a company that was established in Paraguay about 10 years ago backed by more than 30 years of experience in the field of agrochemicals. Chemtec’s formulation plant has a high capacity to formulate soluble liquids, emulsionables, suspension concentrates, wettable powders and granules, as well as the development of a line of foliar fertilizers and biological products for agriculture.
Chemtec buys technical-grade active ingredients from various selected suppliers from China and India. Today over 90% of those are from China.
I work as COO of Chemtec Paraguay. I am involved in the overall coordination of our company and am therefore heavily involved in the supply of raw materials. In this regard, and since 2007, we have been visiting China at least once a year to maintain a close relationship with our suppliers. As COO I am also involved in areas directly related to the financial as well as technical aspects of registration. In 2006, Paraguay adopted a registration system based on equivalence, as did other countries in the region.
FCI: When did you start noticing trouble in obtaining certain products, and has it worsened this year?
During 2012 and especially in 2013 our company began to have more and more difficulty maintaining a fluid supply in some AIs. The first products we experienced this with were imidacloprid and dicamba. Already in 2012, the supply of these products began to be more difficult. Then from late 2012 and 2013 there was substantially normalized supply in imidacloprid, but the supply of paraquat and glyphosate dramatically worsened. This difficulty sourcing was immediately reflected in a rise in prices of raw materials.
We must bear in mind that the supply is directly linked to our registration, which gives us a limited number of companies that have been registered for this AI. As we know, under our registration rules, registered products are associated with the synthesizing plant, and therefore, our universe of suppliers is limited to those we have previously registered. When we select a vendor to be a source of an AI, it is evaluated to ensure that it is a real manufacturer and has the capacity to supply in the future. In addition, when you register the most sensitive or most consumed products, we also select more than one source for this AI. These forecasts, supply difficulties and lack of availability of some key products are compounded when you are tied to one, two or a maximum of three suppliers of this particular raw material.
FCI: Can you talk about how problems you saw with dicamba, paraquat and glyphosate reverberated through the supply chain?
Regarding dicamba, we started to have some supply problems during 2012, when the synthesis was centralized mainly by two Chinese companies. This limited offer ended in a sharp rise in prices.
With paraquat, the supply situation began to unravel almost at the same time anti-dumping measures were applied on paraquat raw materials – pyridine and its derivatives. From November 2012 to May 2013 the price began to increase gradually almost immediately after confirmation of anti-dumping, and from May to November 2013, the price kept rising until it more than doubled from the year prior. This situation produced stress in the supply chain. This caused alteration of prices, changes to contracts and in some cases, caused the unilateral cancellation of orders by some suppliers. Definitely paraquat was, at least for us, the product more difficult to supply during 2013.
It’s important to note that consumption of paraquat is increasing, thanks to the expanding market, the increase in planted area and the need to complement the application of glyphosate with other herbicides due to glyphosate resistance. From 2010 to 2013, imports of paraquat both as technical grade and as formulated product increased by 100%.
While glyphosate supply has continued to be problematic since 2008 – when many suffered from the glyphosate bubble – during 2012 and 2013, the situation became aggravated. We had supply problems and prices were wildly fluctuating. We had to be very careful with the quantities when we bought both to ensure volumes and price variations.
FCI: How has this unpredictability affected your business?
The unpredictability problem not only affects supply-related sectors in the company (such as our foreign trade department), but also other areas such as the registration department, which was forced to increase the number of registered sources for the same AI, but also strongly influences finances. The decrease in supply caused not only an increase in prices, but also price instability. The peaks and valleys in the price variation have become more extreme, so a purchase made at an inopportune time, especially for low-margin products such as glyphosate or paraquat, may cause substantial economic loss or the loss of market when marketing the product.
In addition to that it affected has financials. Suppliers have to reduce payment terms. The need to ensure provisions requires companies to anticipate their purchases to achieve the necessary volumes of raw material. This “forwardness” in buying, which is not reflected at the time the products are sold – the cycles of soybean and other crops do not care about Chinese manufacturers – implies that the company must increase the time between the purchase of raw materials and the actual collection of the sale (inventory turnover). This means that a company’s sales volume should increase at a very high rate in relation to its financial capacity to bear the higher costs of raw materials for longer periods of time.
FCI: What do you believe to be the root cause of the shortages? Do you think the situation will change soon?
The reasons for these difficulties are still uncertain, although the arguments of our suppliers have been very different. Major environmental controls, greater government control, plant closures, new regulations or taxes, new government regulations concerning the validity of the products have all been named.
Our view from here, being so far from China, has left us feeling that there is also speculation by some manufacturers – controlling the volume of product available to maintain prices at desired values. The greatest difficulty is uncertainty. Lack of clarity in the rules causes insecurity and makes the business more difficult.
Right now there is no reason to believe that this situation will improve. After all, Chinese companies are experiencing good margins and profits, making it difficult to believe that this situation will go back to normal.
FCI: What is your experience in looking locally – and perhaps to other regions – to source product? Are you having more success?
For some time now we have started to evaluate other sources of supply. It is clear that none of the alternative markets to China have yet managed to mold to this new scenario and become competitive enough. Perhaps just like us, they are not entirely clear whether this is really a change in the current paradigm or just a temporary circumstance.
Will this situation remain long enough to let alternative markets emerge and get competitive, or is this a bubble that will suddenly burst and leave them once again out of the race? So far we have not found either in India or other Southeast Asian countries any competitive alternatives to China.
Chemtec owns the industrial capability and know-how to synthesize in its industrial plant some AIs. We have found that when you go out looking for suppliers or for intermediates, we fall back into the same companies that synthesize the AI, and therefore also control prices and supply of intermediaries. Today the chemical industry and particularly the phytosanitary industry have been focused almost exclusively on China, and therefore both are equally unpredictable.
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