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| Citric Acid May Turn Sour for Chinese Producers |
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Citric acid is a sour agent, mainly used as an additive in food, medicine, chemical products. China is now the largest producer and exporter of citric acid, but its citric acid industry is also facing industry, exporting and regulatory risks.
The domestic citric acid industry
China has dominated global citric acid production and exportation for many years. The country produced 760,000 tons citric acid in 2007, with an export volume of 708,300 tons, equivalent to more than 90% of national total output, hence heavy reliance on the export market. China's citric acid export accounted for more than 60% of global citric acid trade total.
Global annual citric acid demand amounts to about 1.3 million tons, and it is growing at 3-7% per year. And as living standards continue to improve in China, its domestic citric acid demand is also growing.
Citric acid consumption in China is primarily in the food and beverage markets, accounting for 70% of total consumption nationally. The remaining 30% is shared by pharmaceutical products, cosmetics, cleaning detergents and industrial uses. However, domestic citric acid market only consumes a small proportion of national output, and the majority output still goes to the international market.
Industry issues in China
Export price. Due to the limited domestic demand and rapidly rising production capacity, most citric acid has to be exported to the international market. This has resulted in low-price competition among some exporters, causing significant disruption to the international citric acid market. Most citric acid products from China belong to the low-end range, therefore their prices are $93-177/ton lower than the international average prices. Although China's citric export has been growing year by year, the export prices it could fetch have been reducing, with average unit price down from $1062/t in 1997 to the record low $650/t in 2003. Due to raw materials price increase, most citric acid producers started to put up their prices since 2004, with Chinese export price coming back to average $747/t in 2005. |
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Small operators. There are almost 100 citric acid producers in China, but less than 20 companies possess annual production capacity over 10,000 tons. Most small companies use outdated production techniques, causing significant environmental pressure. A lot of the liquid wastes generated from citric acid production processes are hard to be treated, and the resultant environmental damage is hindering the industry's sustainable development.
Overcapacity. The rapid growth in China's citric acid production capacity in recent years is now causing a serious supply surplus. The low equipment utilisation rate of below 60%, coupled with laggard technological innovation and fierce international market competition, has resulted in declining industry profitability. Although the situation of overcapacity has somehow eased since 2006, the industry is still prone to high capacity growth.
Anti-dumping investigations. China's citric acid exports are often affected by anti-dumping investigations in foreign markets. Between 2000 and 2007, Chinese citric acid products have been subjected to a series of anti-dumping investigations by the US, Thailand, Ukraine, South Africa and the European Union.
RMB appreciation. Continued appreciation of the Chinese currency RMB is another negative factor for citric acid exporters. For importing countries, RMB appreciation will cause non-controllable price increases, hence affecting their demand. And for Chinese exporters whose sales are based on foreign currencies such USD, the rising RMB will further squeeze their profit margins.
Policy risks
Food processing restrictions. The State Development and Reform Commission of China had stated in September 2007 that between now and 2010, the corn processing industry will be rationalised to lean towards products such as starch sugar and polyol, which are in supply shortage in China, and restrict development of corn-based citric, lysine, which are export-oriented and surplus products. Therefore the near-term development of citric acid industry is affected by regulatory restrictions.
Energy conservation and emission control. In 2007, the Chinese government issued mandates to eliminate outdated citric acid production capacities which are not compliant with environmental protection standards or exceeding legal emission limits. The mandate is to be executed on a staging basis between 2006 and 2009, with a target of 33,000 tons, 20,000 tons, 19,000 tons and 8,000 tons for each year.
Investment risk
According to public data, there were 17 large (above 10,000 tons p.a.) citric acid producers in China, with a total production capacity of 800,000 tons, and responsible for 760,000 tons output in 2007. On one hand, the overcapacity situation will lead competition for raw materials among producers. On the other hand, the commodity nature of Chinese citric acid products and the lack of premium products will inevitably lead to vicious price wars between producers.
In addition to overcapacity, Chinese citric acid's high reliance on the international market is also an issue. If importing countries start to adjust their citric acid policies, or the Chinese government starts to reduce citric acid exporting volume, the outlook for Chinese citric acid companies will certainly be affected. And the rising RMB is also a negative factor for exporters.
Due to the environmental pollution by citric acid production processes and increased requirements on energy conservation and emission control by the government, those smaller citric acid producers may be facing an even higher policy risk.
Produced by www.chinabizintel.com; Source: www.chinairn.com
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