Citric acid pricing pattern due for upward turn
Gordon Graff -- Purchasing, 7/13/2006 2:00:00 AM
Buyers of citric acid report that the prices for this vital food and beverage additive have held fairly steady over the past year. But rising energy and raw materials costs, along with a robust global demand, look to push citric acid tags into a higher regime, say industry analysts.
In the 1990s and early 2000s, China ramped up its citric acid production facilities, exploiting its abundant reserves of grain, which is a raw material for citric acid. As a result, China now produces some 35-40% of the world's citric acid supply, according to Ulrich März, an analyst with BCC Research. The big build-up of production in China caused citric acid prices to fall due to a worldwide oversupply of the chemical.
Since 2003, however, the excess citric has induced a wave of rationalization by producers outside China, with major industry players like Archer Daniels Midland (ADM), Tate & Lyle and Aktiva AS trimming their citric production. In the latest move, ADM announced in late 2005 that it would shutter its citric acid facility in Cork, Ireland.
Consolidation of the industry has also occurred within China itself. März says the 100 or so citric acid producers in that country in 2000 dropped to only about 25 by 2005. And only a few of those 25 are "major producers," he adds.
The cutbacks have helped swing the supply/demand ratio of citric acid back into balance. In its 2005 annual report, U.K.-based Tate & Lyle credited rationalization by citric producers, coupled with a healthy demand, as the main factors that allowed it to boost its selling price for the chemical by 8% in 2005.
More than 90% of the citric acid made in the U.S. comes from the fermentation of corn-derived glucose or dextrose. Other fermentation feedstocks include cane sugar, sugar beets and molasses. The largest Chinese producer of citric is Ahui BBCA Biochemical. Outside China, the citric field is dominated by such giants as ADM, Tate & Lyle, Jungbunzlauer, DSM, Cargill, and Israel's Gadot Biochemical Industries. Annual worldwide production of citric acid is in the 1.4 million tons range, estimates BCC Research.
Over the years, global demand for citric acid has consistently grown between 3-4% annually by volume, estimates März. But that rate is edging toward 5% or higher. Jungbunzlauer's product manager for citrics, Monika Wallner, agrees with the 5% figure for overall citric market growth, but says the expansion varies by region. "We're seeing slower growth in Europe and North America," she says, "and stronger growth in Asia, particularly in China." Population expansion and increased purchasing power of consumers are the main reasons behind the bright picture for citric in China, she adds. Eastern Europe is also seeing above-average increases in citric acid demand, says März.
Beverages accounted for 50% of global citric acid usage in 2004, according to Tate & Lyle, and foods another 19%. Detergents, had a 15% share of the market, followed by pharmaceuticals and industrial applications, each with an 8% share.
Prices of citric acid have recently rebounded after falling or stagnating for several years. Since the beginning of 2005, several citric producers, including Tate & Lyle, Jungbunzlauer and DSM, have announced hikes in prices ranging from 8% to 15%. But producers are not entirely satisfied with their price gains. Tate & Lyle's 2005 annual report, for instance, noted that its higher rate schedule was counterbalanced by higher energy and raw materials costs. At Jungbunzlauer, Wallner also cites the negative impact of rising production costs for citric. She says that the "competitive environment" has prevented her company from boosting tags for citric "to the levels that we would have needed."
Despite the recent price increases announced by large-scale producers, many consumers of citric acid have yet to feel the impact. Purchasingdata.com, for instance, shows a relatively flat pattern for citric prices over the past year (see chart).
At Suzhou-Chem USA, a Wellesley, Mass.-based chemical distributor that is a subsidiary of China's Suzhou Fine Chemicals, Joan Ni, who purchases chemicals for the company, says that citric prices "seem to be pretty stable." Meanwhile, at another chemical distributor, ProFood International, Kathy Lin, who handles sales and procurement for the Naperville, Ill. company, says that over the past year "we've seen a little bit of an increase in the prices of citric acid we buy, but it's nothing dramatic."
Lin finds that prices of citric acid tend to be uniform, whether the product originates in the U.S. or China. März confirms that Chinese citric acid is no longer priced substantially below that produced elsewhere, as it was just a few years ago. There are several reasons for this, he explains. For one thing, China's excess reserves of grain for citric production have disappeared, forcing it to import grain from the U.S., Argentina and Brazil, and to pay hefty premiums for these imports. (Corn prices, says März, are now at a record $110/ton). He also notes that escalating energy rates have had the same impact on Chinese citric producers as on producers in other countries.
März advises purchasers of citric acid to brace themselves for further jumps in rates, and not just because of costlier energy. Ambitious biofuels programs, which aim to convert grain into ethanol, are now picking up steam in both Europe and the U.S., he points out. The biofuels industry "will boom over the next few years," says März, resulting in a net grain shortage that will drive up grain prices worldwide. As a result, März forecasts that the next few years will see citric prices jump by at least 5% to 10% annually. "And they could shoot up by well over 10%," he adds, "if grain harvests are poor."
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