Overcapacity in China, pain in API exports

Business Club March 30th After years of rapid development, China has become the world's largest producer and exporter of bulk pharmaceuticals. It can produce more than 1,500 chemical raw materials and has a production capacity of more than 2 million tons, accounting for about 50% of global production. More than one. In recent years, the export of APIs has been growing at a double-digit rate, and exports accounted for more than 50% of the total medical insurance product exports. Although the first negative growth in raw material drug exports was caused by the international financial crisis in 2009, it recovered strongly in 2010. However, analysing the export data found that the growth in the export volume of many categories was at the expense of the price - such growth is worrying.

In the 19 categories of imported APIs in 2010, the average export prices of the cardiovascular system drugs, vitamins, lincomycins, digestive drugs, central nervous system drugs, and sulfaamides were lower than the same period last year. The average export prices of glycosides, chloramphenicol, and other western medicine raw materials were lower than the low base in 2009, and the increase rate did not exceed 5%. The average export price of the entire APIs only increased by 1.87% year-on-year, showing export prices. The export growth of raw material medicines in China has become a major constraint.

In 2010, various types of labor, raw materials, energy, and transportation costs rose. The appreciation of the renminbi further increased the cost pressure on the production of APIs. However, the export prices of APIs did not increase. On the one hand, the financial crisis has caused the decline in purchasing power in major markets and the reason for fierce price competition. On the other hand, China's bulk production of bulk drug products has had to export its international market at a low price for finding a way out. This is a reason that should not be overlooked.

Once upon a time, Chinese companies took advantage of the cost advantages of manufacturing in China, forcing the international giants to withdraw from some of the bulk raw material products, thus making China's many bulk APIs take up a larger share in the international market. Such as VC, the export volume in 2010 almost met all the needs of the international market; saccharin, China's output accounted for more than 80% of the world's total output, and 70% to 80% for export; Paracetamol accounted for about 40% of the international market share ... ... It is common sense that with a high market share, there should be a pricing right, and it will be able to sell a good price. However, the prices of these products exported by us in the international market have fluctuate around the cost line. The reason is that excess capacity is undoubtedly the culprit. Such as penicillin, the total annual global market demand is only 560,000 tons, while China's annual production capacity has exceeded 100,000 tons; 7-ACA global annual demand is 4,000 tons, China's annual production capacity reaches 7,000 tons; VC global annual consumption is 11 About 10,000 tons, China's Northeast Pharmaceutical, North China Pharmaceutical and other five companies' production capacity reached 120,000 tons, and other companies under construction and proposed production capacity will reach 100,000 tons. It can be said that many of China's bulk APIs and intermediates have serious excess production capacity, and this situation also has the tendency to spread from old to new generic APIs.

Due to overcapacity, production companies have to adopt a strategy of low-price competition to seize the market in order to recoup their investment and maintain their operations. They have given up the pricing power that should have belonged to us to international buyers, but they have to be on the cost line. Struggling nearby, sometimes even falling into a losing business. Manufacturers of penicillin, VC and other products have tasted this bitter fruit more than once.

Overcapacity has always been a sharp sword hanging over the top of China's raw material pharmaceutical industry and has become a major pain in the export of APIs. The damage caused by overcapacity is serious. On the one hand, it seriously wastes the country’s limited energy and resources, and even trades for a modest profit at the expense of the environment. On the other hand, the cyclical fluctuations in market prices and periodic low prices caused by excess capacity. The sales disrupted the order of export operations not only because the company’s self-opportunity price seriously hampered the healthy development of the industry, but also caused huge losses for vicious competition and it was difficult for the company to sustain its development.

There are many reasons for excess capacity. First of all, there are many politicians and lack of strong coordination. Taking VC as an example, the three ministries and bureaus of the country can issue production licenses: the State Food and Drug Administration issued a production license for pharmaceutical VC, the Ministry of Agriculture issued a VC production license for feed, and the National Quality Supervision and Inspection Bureau issued a VC for food additives. Production License. Although it seems that the division of labor is clear, all VC produced are original powders. There are no strict boundaries in the international market. Due to their respective approvals, there is no coordination with each other. As a result, the quantity of licensed production greatly exceeds the demand in the international market, resulting in overcapacity. Buried the bane.

Second, the short-sighted behavior of companies chasing high profits has exacerbated the seriousness of overcapacity. Penicillin industrial salt is a typical example. From the end of 2006 to the first three quarters of 2007, stimulated by factors such as environmental shutdown and production restriction, the export price of penicillin industrial salt surged. The profit-driven production of penicillin industrial salt rapidly expanded to an annual production capacity of 85,000 tons, and the international market year The total demand was only 60,000 tons, and the overcapacity was about 40%. As a result, the export price of penicillin industrial salt fell to the bottom again at the end of 2007. In spite of stimulated factors such as rising prices of raw materials, environmental protection stops for the Olympics, and limited production prospects in the first half of 2008, export prices showed a recovery rebound, but the export volume continued to shrink, stockpiles weighed heavily, and companies digested inventory to make export prices fall sharply. The prices of its downstream products, amoxicillin, have also been falling. In 2010, VC re-enacted this scene, forcing the country to introduce policies to govern. In fact, many profitable products have experienced this kind of situation. "High prices - capacity expansion - low price competition - corporate elimination", this bizarre circle prevails in many bulk products in China, and only saw short-term high profits, but no Risk is an important and direct cause of this phenomenon.

Third, the low technical threshold and easy production capacity replication are also one of the reasons for excess production capacity of some products. In general, the R&D capacity of new drug companies in China's bulk drug companies is relatively weak, and it is difficult to open a large gap between the technical level of enterprises. Frequent flow of talents among enterprises has resulted in the similarity of products among a large number of companies, and it is difficult to develop the production capacity. Higher product concentration. With products with higher technical thresholds, even if the profits are high, the production capacity will generally not expand rapidly. Such as VE, due to high barriers to entry, there would be no case where VC and penicillin saw profits as good as they did.

The overcapacity is the long-standing problem of China's raw material medicine industry. If this problem is not solved well, it will be difficult for the raw material medicine production and export to develop healthily. Solving this problem requires multiple parties to work together. First of all, the government should increase its efforts to adjust the structure of the raw material medicine industry, limit or prohibit expansion of production capacity and investment in overcapacity products, combine environmental protection and resource protection, formulate overcapacity elimination targets, gradually eliminate backward production capacity, and guide the raw material pharmaceutical industry. healthy growth. In fact, the government has already taken action in this regard. For example, in 2005, the “Guidance Catalogue for Industrial Structure Adjustment” included VC and penicillin APIs as restricted items; in 2006, they were listed in the Catalogue of Prohibited Land Use Items (2006). Version); In 2008, VC was included in the "Ministry of Industry and Information Industry "Guidance Catalogue for Industrial Structure Adjustment (2008 Edition) "National Restricted Investment Projects, etc., but from the perspective of capacity expansion of VC and penicillin APIs over the past few years, the country's restrictive policies Obviously it has not been well implemented, so the government should strengthen its policy implementation.

Secondly, industry organizations should strengthen industry early warning and self-discipline in the industry. On the one hand, they should track and analyze the production and export of bulk products, promptly warn about overcapacity products and their impact on industrial development, and help enterprises accurately grasp the market supply and demand conditions to avoid blind investment and expansion. Overproduction of products; on the other hand, they must actively initiate industry self-discipline, coordinate enterprises to balance market supply, prevent market prices from rising and falling, and prevent low-priced competitive sales from impacting the industry's operating order.

Third, enterprises must have a strategic vision for long-term development. They should not just stare at the immediate interests. They must comprehensively grasp the current situation and trends in market supply and demand, select key development products from the perspective of sustainable development of enterprises, adopt differentiated development strategies, and strive for technology. The brand, quality, and other aspects have opened up the gap with similar companies, avoiding homogenization of the number-scale competition in order to enhance the company's core competitiveness and market influence. For products with excess production capacity, they must be digested through various means such as developing downstream products, improving quality, increasing high-end users, or converting, cutting production, etc., and try to avoid low-price competition sales so as not to harm themselves and endanger the industry.

The problem of overcapacity of APIs is a long-term accumulation of dysentery. Solving such problems cannot be accomplished overnight. However, as long as all parties reach consensus and work together, there is hope for resolving problems, and at least it can reduce the impact and harm on the development of the industry. We expect more companies to reach a consensus, and also look forward to the country's forthcoming VC governance measures to open up a new and successful way to curb the overcapacity of APIs.