Why companies in the chemicals industry are mixing

AS SPRING arrives, 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 fertilisers and to be weeded by hand, both costly. French farmers use more chemicals than anyone else in Europe: 65,000 tonnes of pesticides alone each year.

Even the smallest of vine-growers has an interest in a series of takeovers proposed between their chemicals suppliers. After a decade without any big deals, since 2015 three mega-mergers, collectively worth around $240bn, 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 chemicals firms, in a $130bn 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 $66bn; and ChemChina, a Chinese giant, offered $43bn in cash for Syngenta, a Swiss biotech firm. ChemChina plans to merge with a local rival, Sinochem, to create a firm with revenues of $100bn or so.

Dealmaking has now spread from agrichemicals to the rest of the industry, particularly to “specialty” firms that make chemicals for niche uses. On May 22nd Clariant and Huntsman, whose products include additives for pesticides, agreed a $14bn merger of equals. Bigger still is the latest bid by PPG of America, a specialty maker of paints and coatings, for AkzoNobel of the Netherlands, a rival which owns Dulux paint. On May 24th, Praxair and Linde, two industrial-gas firms, agreed the terms of a merger of equals worth $70bn.

The main impetus has been a dramatic slowdown in the growth of demand across all types of chemicals, says P.J. Juvekar of Citigroup, a bank. In the 2000s sales expanded at a rate of 6-7% a year, but last year the industry grew by just 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, says Kurt Bock, CEO of BASF, a German chemicals giant. The average cost of developing a new active substance has shot up from $150m in 1995 to over $500m in Europe today; most of that goes on testing for safety. Over the same period, the number of potential compounds that have to be synthesised and tested for each new substance, in case they are harmful, has risen from 50,000 to over 140,000, a process that can take as long as a decade. To account for longer and more costly development cycles, firms need enough financial heft to be able to have more projects on the go.

More stringent regulation throughout the EU has reduced the number of pesticides farmers are permitted to use, from nearly 1,000 in the early 1990s to around 400 today, notes Robert de Graeff of the European Landowners’ Organisation, a trade group. If greater scale means that firms feel able to invest the larger sums of money needed to develop new products, his members would approve.

But farmers are also fearful. They don’t want to become overdependent on a set of seeds and chemicals made by a single firm. All three of the mega-mergers are between one firm focused on seeds and another on agrichemicals. Many farmers are worried this will mean they will be forced to use pesticides made by the same firm that produces the seeds they buy. Roger Johnson, president of America’s National Farmers Union, says that his members don’t like any of the mergers. More consolidation may also mean that chemical firms can charge higher prices, he fears, and face less pressure to develop new products.

But all the deals should pass regulators. The EU has signed off on the Dow-DuPont and ChemChina-Syngenta deals; it is now almost certain that the deals will go through, says Mr Juvekar. Bayer is in talks with regulators about Monsanto; analysts again reckon that a deal will proceed.

Regulators’ relaxed stance is likely to stimulate still more activity. The ease with which ChemChina’s purchase of Syngenta was approved may embolden more Chinese firms to go for Western chemical companies in the future. The current series of deals—though huge—looks like the start of a bigger wave, says Florian Budde of McKinsey, a consultancy. Farmers are likely to have more to worry about.