These days, the hills of Languedoc in southern France turn green with the leaves of grapevines. This is helped along by chemicals—lots of them, confides a winemaker based near the town of Thuir in the Pyrenees. In their absence vineyards would need natural fertilizers and would have to be weeded by hand, both costly. French farmers use more chemicals than anyone else in Europe: 65,000 tons of pesticides alone each year.
Even the smallest of vine-growers has an interest in a series of takeovers proposed between their chemical suppliers. After a decade without any big deals, since 2015 three mega-mergers, collectively worth around $240 billion, have been proposed. When they were first announced, many doubted that regulators would allow the mergers because of competition worries. If all three proceed, as now seems likely, four companies will produce 70% of the world’s pesticides instead of six today.
The first mega-merger, announced in December 2015, was between Dow Chemical and DuPont, the world’s fourth- and fifth-most-valuable chemical companies, in a $130-billion deal. It was the largest-ever tie-up in the industry, and triggered other liaisons. Within a year Bayer, a German agrichemicals giant, agreed to merge with Monsanto, an American seedmaker, in a deal worth $66 billion, and Chem China, a Chinese giant, offered $43 billion in cash for Syngenta, a Swiss biotech company. Chem China also plans to merge with a local rival, Sinochem, to create a company with revenues of $100 billion or so.
Now dealmaking has spread from agrichemicals to the rest of the industry, particularly to “specialty” companies that make chemicals for niche uses. Recently, Clariant and Huntsman, whose products include additives for pesticides, agreed on a $14-billion merger of equals. Bigger still is the latest bid by PPG of America, a specialty maker of paints and coatings, for Akzo Nobel, a Dutch rival which owns Dulux paint. Also, Praxair and Linde, two industrial-gas companies, agreed on the terms of a merger of equals worth $70 billion.
The main impetus has been a dramatic slowdown in the growth of demand across all types of chemicals, said P.J. Juvekar of Citigroup. In the 2000s sales expanded at a rate of 6% to 7% a year, but last year the industry grew by only 2%, with demand from China very weak. Executives are hoping to use scale to cut costs.
The soaring cost of developing and testing new chemicals is another factor, said Kurt Bock, CEO of BASF, a German chemical giant. The average cost of developing a new active substance in Europe has shot up from $150 million in 1995 to more than $500 million today, with most of the increase going for safety testing. During the same period, the number of potential compounds that have to be synthesized and tested for each new substance, in case they are harmful, has risen from 50,000 to more than 140,000, a process that can take as long as a decade. To account for longer and more costly development cycles, companies need enough financial heft to be able to have more projects on the go.
More stringent regulation throughout the European Union has reduced the number of pesticides farmers are permitted to use, from nearly 1,000 in the early 1990s to around 400 today, noted Robert de Graeff of the European Landowners’ Organization, a trade group. If greater scale means that companies feel able to invest the larger sums of money needed to develop new products, his members would approve.
Farmers also are fearful, however. They don’t want to become overdependent on seeds and chemicals made by a single company. All three of the mega-mergers are between one company focused on seeds and another on agrichemicals. Many farmers are worried that they will be forced to use pesticides made by the same company that produces the seeds they buy.
Roger Johnson, president of America’s National Farmers Union, said that his members don’t like any of the mergers. More consolidation may also mean that chemical companies can charge higher prices, he fears, and will face less pressure to develop new products.
© 2017 Economist Newspaper Ltd., London (May 27). All rights reserved. Reprinted with permission.
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