ChemChina and Syngenta: Feeding China's Appetite

Background

The ChemChina-Syngenta deal follows a wave of agribusiness M&A transactions in 2015, including Anheuser Busch InBev’s $107 billion acquisition of SAB Miller in November and the $130 billion merger of Dow Chemical and DuPont in December.

The latest tie-up, which still needs to be approved by regulators, comes after Syngenta rejected several overtures from Monsanto last year. ChemChina’s offer allows Syngenta to keep its existing management team and maintain its headquarters in Switzerland. Syngenta will also be able to expand its presence in China’s $10.6 billion agricultural input market:  currently, the firm has a 6 percent share of the crop chemicals market in the country, compared to an average share of around 12 percent in Asia and nearly 20 percent globally. 

The deal will also improve prospects for Syngenta’s genetically modified (GM) seeds business. No foreign company has been able to get approval for commercial cultivation of GM seeds within China, though Monsanto and DuPont have pushed hard, notes Loren Puette, founder of ChinaAg, a market research firm. 

“Syngenta just leapfrogged both DuPont and Monsanto,” says Puette.

ChemChina, which operates in 150 countries, has been on a deal-making spree recently, purchasing  the Italian tire-maker Pirelli in a $7.7 billion deal in March 2015 and acquiring a 12 percent stake in Swiss commodity trading firm Mercuria Energy Group Ltd. in January. 

As there is little overlap between the ChemChina and Syngenta, the deal is likely to face fewer regulatory hurdles than a Monsanto-Syngenta alliance would have, according to Puette. Given that Monsanto and Syngenta operate in similar markets and both produce crop protection products and GM seeds, there was a strong possibility that American and European Union regulators would force them to sell some of their assets before approving a deal.

If approved, the Syngenta deal will give ChemChina access to the Swiss company’s pipeline of genetically modified seeds and allow it to further diversify its business from chemical fertilizer and pesticides, whose use the government wants to curb given their contribution to soil and water pollution. China is the world’s biggest user of fertilizer, with consumption reaching 59 million tons in 2013, around a third of the global total, though the country accounts for just over a fifth of global grain production. The government is targeting zero growth in total consumption of pesticides and fertilizer by 2020.  

Agriculture reigns

Until now, the biggest foreign acquisition by a Chinese firm was CNOOC’s ( China National Offshore Oil Corporation) $15.1 billion purchase of Canada’s Nexen, an energy company, which was announced in 2012.  

That the CNOOC deal has been dwarfed by one in the agriculture sector speaks volumes about how seriously China’s government takes food security, notes Derek Scissors, a resident scholar at the American Enterprise Institute and author of its China Global Investment Tracker. Scissors sees parallels between the two deals. CNOOC bought Nexen as much for its drilling technology as for its fields, he points out. Although that deal now looks questionable with the plunge in oil prices, China is willing to do something similar but much bigger, buying an agricultural company for its technology and not for its farms. 

“ChemChina does not have the money itself. The money is coming from state financial institutions, either directly from the Treasury or from the state bank. You do that when you have a strategically valuable asset,” he says. 

“The reason is that as sensitive as energy is, as important as energy is, agriculture is the king.”

The government recognizes that technology being developed elsewhere could be very beneficial for China, Scissors adds, but would prefer if the technology was developed for China, rather than for someone else and adapted for the Chinese market. 

According to the AEI’s China Global Investment Tracker, China’s agriculture investments around the world jumped from $3.6 billion between 2005 and 2010 to nearly $38 billion between 2010 and 2015. 

Through acquisitions of companies like Syngenta, China wants to ensure that growth in grain production can keep up with demand. 

One of the central tenets of China’s food policy is self-sufficiency in basic grains and since the 1990s, China has aimed to achieve a 95 percent self-sufficiency for its staples.

But with rapid economic growth, one of the world’s fastest rates of urbanization and an increasingly affluent population that has developed a strong appetite for meat, chicken and dairy products, this policy goal has come under pressure.

Although China is gaining ground in wheat and rice self-sufficiency, the scope of commodities covered by the self-sufficiency policy is narrowing, observes Andrzej Kwiecinski, a senior agricultural policy analyst at the OECD. Soybeans have been excluded from the policy, with imports climbing from almost zero in the mid-1990s to over 63 million tons in 2013. (We wrote about Chinese soy in more detail here) China also appears to be reconsidering its approach to corn and is more open to importing greater quantities of the crop, says Kwiecinski.  It transitioned from a net exporter to a net importer of corn by 2007, importing more than $900 million of corn in 2014/2015 

As the purchasing power of Chinese consumers increases and their diets change, the country’s imports of oilseeds, oils, meat and dairy products have also grown. China is now the world’s second biggest importer of agricultural products after the European Union, with imports growing nearly sevenfold from $17 billion in 2003, two years after it joined the World Trade Organization, to close to $117 billion in 2015. 

Imports of agricultural products from the United States alone have surged tenfold since the late 1990s to $25.9 billion in 2015, making the US China’s top supplier of agricultural imports,  ahead of Brazil, Australia and Canada. With US imports of Chinese agricultural products totaling $4.4 billion in 2015,  agriculture is one of the few sectors where the US has a trade surplus with China, according to the US Department of Agriculture. 

As well as ensuring sufficiently strong growth in grain production to limit its dependence on imports, China also needs to reduce the pressure on its own land. 

Although the government has a policy to protect the country’s 120 million hectares of farmland and ensure that such land is dedicated to agricultural production , this is 10 million hectares lower than the cultivated land area that was available in 1997.  Urbanization and infrastructure development will further intensify the competition for land. China’s urban population accounts for 56 percent of the total population, compared to one third in 1996 and this share is projected to reach 60 percent by 2030.

“The amount of land can’t be increased. On the contrary there is the risk that the amount of land allocated to agricultural production will need to decline,” says Kwiecinski. The only way to increase production is to increase yields and the productivity of available resources of land, which means China will need to innovate and gain access to new technology.

Pollution of farmland presents another obstacle. A report issued by the Ministry of Environmental Protection and the Ministry of Land Resources in 2014 said that 20 percent of China’s farmland was polluted, mainly due to industrial activity and the overuse of fertilizer and pesticides. 

China’s agriculture sector, which uses more than 60 percent of the nation’s water supply, will also have to curb its water use as demand from the population and industry grows. Total actual renewable water resources per capita in China amounted to 2,072 cubic meters per year in 2013,  and this is expected to decline to 1,890 cubic meters per year by 2033 when China’s population is expected to reach its projected peak of 1.5 billion.  Water shortages are particularly severe in the North, which accounts for two thirds of China’s agriculture but has only one fifth of its water.  

Given these challenges, China will have to grow more grain per drop and per hectare of land, according to Feng Hu of China Water Risk. A potential benefit of the Syngenta deal is that it would enable China to gain more expertise in growing food with less water and allow it to pursue more sustainable agriculture. 

“This is not only a matter of food security but water security,” he says.

Looking ahead

To some observers, China’s pursuit of Syngenta suggests that genetically modified crops could make a bigger contribution to the nation’s food security in the future. Although China grows GM cotton and also imports GM soybeans from the US and Brazil for use as animal feed, it has banned domestic cultivation and consumption of GM wheat, rice and corn amid widespread public skepticism. 

Still, China has far from ignored the potential of the technology. Sinochem, the government-owned chemicals and oil conglomerate, entered into a joint venture (as a majority partner) with Monsanto in 2001. Through that partnership, the two have sold hybrid (not GM) corn seeds to Chinese consumers, while Sinochem acquired the rights to distribute Monsanto’s flagship pesticide, Roundup, in several Asian markets. 

Shenggen Fan, director general of the International Food Policy Research Institute, believes China’s ownership of Syngenta could increase consumer acceptance of food produced through foreign technology. While there has been resistance from Chinese producers, consumers and politicians to imports of GM seeds developed by foreign companies and conspiracy theories abound about foreign firms trying to monopolize the Chinese market, some of the distrust may disappear if the company is Chinese-owned, argues Dr. Fan.  

ChemChina's Syngenta acquisition, coupled with Monsanto's existing partnership with Sinochem, points to a calculated move by the government. Even before GM seeds have been legalized in China, the country has created national competition in the market, helping assuage fears over the dangers of dependence on one company’s technology. 

China seems to be on the brink of allowing the use of GM seeds, and industry participants, especially Monsanto and Syngenta, are watching those deliberations closely, ready to reap the harvests of legalization.