Citric acid prices are on the upswing while supplies are gradually tightening, note producers and buyers of the chemical. These trends, they say, are likely to continue into 2008, spurred by rising raw materials and energy costs, a healthy demand, and recent shutdowns of some production capacity.

Current one-year contracts for citric acid in the U.S. are in the 57–58¢/lb range. Depending on the supplier and region, that is anywhere from 5–10% higher than a year ago. Citric supplies are now "adequate, but on the verge of being tight," reports Jim Stewart, the North American business agent for Israeli citric producer Gadot Biochemical Industries. And at chemical distributor Suzhou-Chem USA in Wellesley, Mass., manager Joan Ni says there's no shortage of the citric acid she buys, but "it appears to be tighter than last year."

Behind the run-up in citric prices and tightening of supply are several factors.

The stepped-up demand for citric acid, coupled with the underlying raw materials and energy cost pressures, will ensure steadily rising citric acid prices (as much as 10%) through the next year, analysts forecast.

One factor in the steep rise will be the burgeoning biofuels industry. As new biofuel plants come on-stream, the demand for carbohydrates [corn-derived starch] will further increase, leaving proportionately less available for citric manufacturing.

The current boom in ethanol derived from corn and other starchy crops is not only a U.S. phenomenon, but a worldwide one, says Ulrich März, a Germany-based chemical consultant who follows the food ingredients industry. Acreage devoted to corn has not kept pace with this increased demand, so corn prices have gone up sharply all over the world. (Corn is a basic raw material in the fermentation processes used to make the bulk of citric acid.) Trends in corn prices "have a major influence" on citric acid prices, says Stewart.

Another reason for more controlled supply is the consolidation of suppliers. This is particularly true of China, which has about half the world's citric acid capacity.

"A couple of years ago, we counted almost a hundred suppliers of citric acid in China," says März. "Today, there are only a handful of them left," he says, which clearly means less competition in the market.

Also boosting citric prices is what März calls the "globalization of costs"—a leveling of former regional differences in costs of raw materials, energy and labor, that has diminished the ability of China and other Asian countries to undersell citric producers in North America and Europe.

Costs for the energy used in citric acid production have been rising steadily, which have mostly been passed on to buyers. Energy costs are also becoming more uniform across the globe. The once artificially low energy rates in China are now rising to the same levels as elsewhere. For example, a few years ago, when the Chinese government was promoting the Shanghai area as a center of manufacturing, "you could get electricity for almost nothing," says März. That has changed dramatically, he adds. Between June 2005 and June 2007, he says, electricity rates for industry in Shanghai shot up by a factor of six to eight.

Even the traditionally low labor costs in China are coming closer to world norms. Foreign chemical producers who could once hire workers in China for $50/month now must pay them $500–600/month, says März.

Even if the comparative cost structure for citric acid production in China isn't what it once was, it still looks relatively attractive to foreign producers. Gadot, for instance, said on May 1 that it will build a $30 million, 60,000 tons/year citric acid plant in China as a joint venture partner with a Chinese company, Jiangsu Nuobei Biochemical. Stewart says that Gadot's move was motivated by the "lower costs of production" in China, adding that the plant's output will go primarily to North America and Europe.

Meanwhile, citric acid overcapacity has induced such major manufacturers as Archer Daniels Midland, Tate & Lyle, and Aktiva AS to close citric production units in various parts of the world since 2003. In the latest cutback, Tate & Lyle announced the shutdown of a U.K. citric plant on March 31, citing intense competition from Chinese imports and oversupply of citric in world markets as the reasons behind the move.

But that oversupply is "rapidly decreasing," says März, due to a thriving citric acid market, which he says is growing at the rate 3–5% annually. That rate "is extraordinary for a commodity chemical," he says. Annual output of citric worldwide is pegged at about 1.5 million tons by industry analysts.