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How regulatory and economic change in China is impacting the global API market
In 2017, China began cracking down on manufacturing pollution, leading to the closure of hundreds of thousands of factories across the country. Now, reduced production and increased costs are driving up Active Pharmaceutical Ingredient (API) prices for companies around the world, forcing buyers to look elsewhere and build contingency plans for their API supply chains.
When China’s General Secretary Xi Jinping took office in 2013, he vowed to take a hard line with polluters across the country, ushering in a new era of environmental control. In 2017, that began in earnest when the government began more strictly enforcing Environmental Health and Safety (EHS) regulations throughout China.
Across all manufacturing industries, the disruption caused by this surge in regulatory pressure has been huge – with around 40% of all factories across 30 provinces being interrupted by increased inspections. Hebei, Guangdong, Beijing, Shandong, Jiangsu, Henan and Shanxi make up the most heavily affected regions, with Eastern China subject to tighter EHS regulations due to its high population.
For thousands of manufacturers, those interruptions have taken the form of everything from government-enforced modernisation of equipment and processes, to widespread permanent factory closures. In Hebei province alone, more than 69,000 factories have been shut down by environmental enforcement officials since 2017.
These closures have had a major impact on numerous manufacturing industries, but the Active Pharmaceutical Ingredient (API) market has been hit particularly hard. An estimated 145 API manufacturers have completely closed down as a result of these changes, with further closures likely in the near future.
Additionally, many of the small and medium-sized raw material manufacturers in the region have been affected – jeopardising the supply chain continuity of many of the remaining API manufacturers.
Three big changes lead to one global problem
Chinese manufacturers account for around 40% of global API production. So naturally, the increased enforcement of environmental regulations in China is having a major impact on global API supply chains, with some pharmaceutical companies not able to source the volume they need to maintain current levels of drug production.
Beyond that, closures are creating monopolies for the supply of some APIs in China, with manufacturers gaining newfound bargaining power that they’re leveraging by driving prices up. For example, the price of the chlorphenamine API shot up 57 times in August 2018 due to there being only one local supplier. However, thanks to government intervention through the enforcement of a large fine, prices were soon driven back down to regular levels.
The same monopolistic practices are also happening amongst manufacturers of API raw materials, increasing costs for API producers. Many API price rises can be directly attributed to these cost increases, and despite efforts by the Chinese government to curtail this activity, little progress has yet been made.
Finally, the rise in enforcement of environmental standards is forcing many Chinese API manufacturers to modernise their processes and update their equipment to reduce pollution – and in some cases, even shift their entire manufacturing operations to less populated areas. These long overdue modernisations are extremely costly – an impact that’s being passed on to API buyers around the world.
All those shifts have come together to put massive pressure on API prices. Supply is lower, remaining manufacturers have more power to raise prices as they wish, and many of those still fully operational in the market have had to absorb huge costs to continue their operations.
For the global pharmaceutical buyers that rely on APIs from China, this increase in costs is putting pressure on their own profitability. A number of large pharmaceutical buyers from India – one of the largest importers of Chinese APIs – have already noted a 300-500 point drop in gross margins as a result.
Now, it’s up to those companies to consider how sustainable China-based sourcing strategies will be moving forwards. The cost increases alone are worrying, but once you factor in the other competitive pressures being felt in the country, the picture becomes a lot more complex.
Regulatory disruption is just one part of an increasingly complex trade environment
These API-specific challenges are being compounded by a number of other broad economic issues – most prominently, the ongoing trade war between China and the USA.
While the trade war doesn’t directly impact APIs, it does affect the trade of chemicals – driving up the costs of raw materials and increasing relative manufacturing costs. As of 1 October 2019, the US has imposed a 25% tariff on chemicals imported from China. The tariff increase has forced buyers to look for alternative suppliers, and suppliers have also started looking for new export markets.
On top of that, rising wages in line with China’s economic growth pose a further threat to the costs of API production – and by extension, the prices charged to importers. Alone, this wouldn’t be an issue, but when considered alongside the other drivers of rising API prices, it paints a picture of a market where costs will only continue to increase.
Pharmaceutical companies prepare their Plan B
To help us better understand the options available in the global API market, and identify which nations are best positioned to deliver APIs reliably in light of turbulent Chinese market conditions, The Smart Cube recently conducted an API trade benchmarking study.
Using data from the World Economic Forum, The World Bank and global reports from Deloitte on ease of doing business, regulatory conditions, and other industry and region-specific parameters, a number of other countries emerged as potentially viable options for those re-evaluating their API sourcing strategies. The countries considered for benchmarking were China, India, Indonesia, Japan, Malaysia, Philippines, South Korea, Singapore, Taiwan, Thailand and Vietnam.
In current conditions, China scored 3.4 out of 5, reflecting that even in light of these dramatic shifts, supply cuts and price rises, it’s still a viable option for API importers. However, Singapore, Japan, Taiwan and South Korea all scored very similarly.
Despite high API prices in some of these countries, they offer a safe and stable sourcing environment in the short-term. In the long-term, buyers might want to look towards India, Vietnam, Malaysia and Thailand, who are all investing heavily in building their API production capabilities.
As pharmaceutical companies reassess their API supply chains to ensure they can continue operating in the event of further disruptions in China – and avoid the risks posed by monopolistic suppliers – we recommend they look to options in these nations first. However, it should be noted that at this time, this should be done purely as a precautionary measure, as China remains the true powerhouse in the global API market.
If you’d like to learn more about how The Smart Cube can help you better understand your markets and the forces influencing them, please don’t hesitate to speak to us. Whatever market or commodity you’d like to get ahead of, we can help.
Ankita has over eight years of experience in life sciences business research and consulting, and currently works with the Life Sciences sector of The Smart Cube. She has supported multiple clients across the pharmaceutical, biopharmaceutical and healthcare sectors in strategy and procurement studies – including supply market intelligence, market sizing, competitive intelligence and supplier benchmarking. Outside work, Ankita enjoys reading, watching movies and spending time with her family.