THE strategic review that Nufarm's new chairman, Donald McGauchie, is leading after a string of profit downgrades and a 68 per cent share-price slide should conclude that Nufarm chose the wrong horse last December when it dumped Chinese state-owned Sinochem in favour of Japan's Sumitomo group.
The wrong horse obviously in that even after it lowered its takeover offer price by $1 a share in December, Sinochem was still prepared to take every Nufarm shareholder out at a price of $12 a share.
Nufarm closed at $3.61 yesterday.
But wrong also because the decision to walk away from Sinochem and introduce Sumitomo as a 20 per cent shareholder via a $14-a-share tender offer to shareholders kept Nufarm and its shareholders in a war that it has little hope of winning without extremely heavy restructuring.
Nufarm's biggest problem is that it is a manufacturer of glyphosate, the world's weedkilling chemical of choice, at a time when China has emerged as the dominant, lowest-cost manufacturer of glyphosate technical 95, the crystalline feedstock of all liquid glyphosate formulations.
Nufarm imports its technical 95 from China, and then formulates it into glyphosate 450, the most common form of the weedkiller.
Nufarm also completely manufactures other agricultural chemicals here and overseas, including the number two weedkiller in the world, 2,4-D.
But the new global price leaders in the herbicide market are smaller companies that import either fully formulated glyphosate 450 weedkiller or 2,4-D weedkiller directly, most often from one of about 20 export-quality factories in China.
Their edge has actually improved after China's decision earlier this month to end a 9 per cent tax rebate on exports of glyphosate technical 95, the feedstock that Nufarm imports.
That is because the glyphosate technical 95 export price took the rebate into account, and should rise now that the rebate is gone.
There was no tax rebate for Chinese exports of glyphosate 450, so the cost base of Nufarm competitors that are bringing in the finished product has not changed.
Nufarm has manufacturing facilities around the world that are under pressure from the new-generation production that is coming out of China. And by shunning the Sinochem offer, it elected to stay under pressure. It has laid out plans to pump up the sale of non-glyphosate lines that account for about two-thirds of revenue. That makes sense, and it will probably be endorsed by the review.
But glyphosate is crucial to Nufarm. It accounts for about two-thirds of herbicide sales globally, and its future is assured, because the big genetically modified crops are designed to be glyphosate-resistant.
All of which makes last December's decision both curious and challenging. If the board had accepted Sinochem's $12-a-share offer, shareholders would have received a handsome goodbye payment and Nufarm would have had a secure future, not as a manufacturer of the world's most popular weedkiller, but as a leading distributor of it. Sinochem would have pushed its own, low-cost glyphosate production out to the world through Nufarm's undoubtedly comprehensive sales and distribution network.
Sumitomo does not offer the same option. There may be some gravy for Nufarm if Sumitomo introduces the Australian group to the heavily protected Japanese agricultural market.
But Sumitomo is actually smaller than Nufarm in the glyphosate business, and cannot act as Nufarm's new low-cost glyphosate maker. The Australian group has to come up with a plan to solve its glyphosate dilemma.
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