Fi's China-based expert, Andrew Liu examines the forces at work and assesses how increasing production costs, cutbacks in output and currency fluctuations are all impacting the market — along with his predictions for 2008.
For Chinese vitamin suppliers, 2007 was a year of recovery and harvest. After the 2006 recession, Chinese suppliers all achieved various degrees of business growth due to the price increase of vitamin ingredients. The increased price category includes vitamins C, B2, B5 and B12, which are all in commercial production and supplied in large volume in China. The price of these ingredients has grown dramatically over the past several months but for vitamins A and E, the growth rate has been relatively smaller. Of all the vitamins, C had the fastest price growth rate last year. This situation reflects a remarkable change in the market because vitamin C accounts for over 60 per cent of total export volume of Chinese vitamin ingredients every year and about 90 per cent of vitamin C used by US pharmaceutical, supplement and drink manufacturers is sourced from China.
The Chinese vitamin C price growth started in January last year. But it had never broken through $4 per kilo before May, since when prices accelerated markedly. Statistics from China Custom showed that the average export price of Chinese vitamin C ingredients reached $5.11 per kilo in May (Figure 1). By August the Chinese suppliers had raised their quotations to $9-11 per kilo or even higher, which was very near the historic peak of 2003. In addition to the four big Chinese vitamin C suppliers, Northeast Pharmaceutical, Shijiazhuang Pharmaceutical, North China Pharmaceutical and Jiangshan Pharmaceutical, many distributors supplying finished goods manufacturers have profited greatly from the vitamin C supply chain. At present, the big four have almost ceased to supply domestic manufacturers and these companies now face high prices and shortages of supply becuase the vitamin C suppliers are all focusing on export business.
Our in-depth analysis revealed four driving forces behind Chinese vitamin price growth last year.
Firstly, the increase in production costs, which constitutes raw materials, energy, labor and transportation costs. All the Chinese manufacturers produce vitamin C through a two-step fermentation approach using corn starch as a raw material. But in China the corn price in summer 2007 was 75 per cent higher than at the same time in 2006. The alcohol fuel projects in China also consumed a lot of corn which exacerbated the tight situation of corn supply to the vitamin industry. So in June 2007 the Chinese government introduced a policy limiting the increasing corn consumption for alcohol fuel projects. But the increased energy price had obviously impacted these manufacturers. The coal price impacted the fermentation power and steam cost and the oil price impacted transportation costs. It is estimated that raw material and energy costs accounted for about 70 per cent of total Chinese vitamin C production cost when it was still under $4 per kilo. So taking labor and transportation costs into consideration, the margin for vitamin C was very small. It has already become one common commodity. Actually the vitamin C price is very much connected with the change in China's macro economy. Since early 2007 the Chinese economy has encountered inflation across the board, led by agricultural products and foods and which is leading vitamin C manufacturers to improve workers' salary.
Secondly, the big players' action to limit output was also one important factor behind vitamin C price growth. Internationally, the vitamin C price is controlled by DSM Nutritional Products and four major Chinese players. DSM's plant in Scotland suspended vitamin C production in May 2007. Northeast Pharmaceutical's facility has only operated at 70 per cent over the past years due to output control strategy and regular shutdown and maintenance. North China Pharmaceutical stopped production for two months in the third quarter of 2007. The government has tightened the environmental policy, which also caused the vitamin C plants to suspend production. All these factors contributed to the reduction in the global vitamin C supply. In May 2007, Chinese vitamin C export volume dropped by 25 per cent. But another view that seems to be more accepted by the public is that the vitamin C players aim to control the price by limiting the output, so that they can claw back profits not achieved over the past few years. The current situation is that the big four Chinese players' capacity adds up to more than 100,000 metric tons, comprising 98 per cent of the domestic market and 60 per cent of the international market.
Thirdly, the growth in demand of vitamin C directly boosts the price. The demand from both domestic and overseas markets has been increasing. But the growth rate didn't exceeded five per cent last year. So this driving force is not as significant as the above two.
Fourthly, the currency revaluation is also one important driving force. Over the past 12 months, the Chinese RMB has been undervalued (upvalued by 6.4% from 7.8:1 to 7.3:1) over five per cent to the US dollar. Almost all of the costs of the Chinese manufacturers are calculated in RMB and they have been increasing. In order to keep the margin, raising the export price is a good solution.
In conclusion, let's forecast the vitamin C situation in 2008. It's likely that the high price will continue and the time consumers have benefited from low-price vitamin ingredients has gone for sure. The high prices will encourage other vitamin C manufacturers like Zibo Hualong Pharmaceutical Co Ltd and Anhwei Tiger Biotech Co Ltd, which had switched to other products when the C market was down, to restart production again. Their action would increase vitamin C supply and relieve the current shortage.
Andrew Liu is the founder & chief consultant of Flacious Consulting, a China-based market research firm dedicated to providing consulting services around sourcing natural ingredients from China and bringing natural products into the China market. [email protected].