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Raw material & supply markets VI

Supplying manufacturers in the nutrition industry with raw materials and specialty ingredients has been a challenging business these past few years. Various factors have conspired to reduce growth rates of supplement sales to consumers to the low single digits. 

At the same time, pressures from imported supply have tipped the balance of power at the raw material end of the supply chain towards the community of manufacturing customers in an evolving game of supply and demand. Suppliers themselves have also had to evolve rapidly from mere purveyors of raw materials into providers of proprietary, value added ingredients with the burden of scientific proof of product efficacy falling principally to them as well.

It is little wonder that the supply segment has seen a number of mergers, divestitures and outright closures or bankruptcies as the segment has gotten squeezed from both ends. Vitamin supply leader Roche was sold by its Swiss chemical company parent to DSM. One Japanese vitamin supply leader, Takeda, sold to BASF in 2000, and another, Eisai, closed its U.S. operations in 2001. U.S. herbal supply leader Hauser reorganized and is now part of BI Nutraceuticals. Other past top 20 herbal suppliers Quality Botanical Ingredients (now owned by publicly traded Health Sciences Group), Schweizerhall (Aceto), SKW Trostburg (Degussa) and Flachsmann (Frutarom) have traded or found new corporate parents since NBJ last published a ranking of top suppliers in 2002.

But in spite of a sustained period of difficult market conditions, suppliers are generally optimistic that they have seen the worst of supplydemand imbalances and price depressions in vitamins and botanicals and have invested carefully to be more competitive in the future.

"Our revenues have decreased slightly over the last couple of years as we have rationalized our product listing and streamlined our business," said Melanie Pessetti, director of marketing for A.M. Todd Company, one of herbal supply's leading companies. "We believe the changes we have initiated will ensure that we are a stronger supplier and enable us to offer better value to our customers.... We expect to see growth in the next few years." For the traditional, now 'commodity', herbs the business has become "increasingly price sensitive with increasing supply pressure from India and China.... On the other hand, customers continue to look for new and innovative ingredients that will give them a competitive edge in the market and are interested in science -not folklore-to back up their claims."

Supply Business Reaches $3.2-Billion

The business of supplying manufacturers of dietary supplements and functional foods with raw materials and specialty ingredients in the United States in 2003 amounted to $3.16 billion, according to detailed research by NBJ. This figure does not account for the supply of ingredients for natural personal care products, nor the cultivation and processing of farm goods for natural & organic foods, which together amount to nearly another $3 billion.

The growth and decline of revenues in this supply category is somewhat reflective of the roller coaster that companies have been on since the mid 1990s. Supply for supplements grew annually in the high-teens until 1998, but by 2000 sales had slipped to negative 1%. Unfortunately, noticeably lower volume increases weren't enough to counteract the freefalling prices that had started to take hold a couple years before, particularly in vitamins. Total supply sales continued to fall in the 0-2% range in 2001 and 2002, again with prices being the most significant factor and fall-offs in vitamins and herbs outweighing sales gains in supply for specialty supplements. Further pressure was applied to the market as a number of manufacturing ompanies honed their supply ordering and inventory systems.

The balance had indeed tilted away from suppliers, and for the years 1998-2002, growth rates of consumer sales of supplements exceeded growth of supply sales to supplement makers by three to five percentage points every year. Price was again the culprit, with most of the blame going to Chinese imports, according to suppliers. Vitamin C, which went for $10- 14 per kilo at its peak around 1995, is down to $4-5/kilo today with specialty grades from European leaders going for $5.50/kilo and Chinese supply going for $3.50/kilo. Likewise in vitamin E, synthetic sells for $15-17/kilo today and new supply starting to come in from China is purported to be going for $9-10/kilo.

Herbs have followed a similar trajectory, with prices of high-volume products now in many cases at about half their peak. "In past years the ratio of raw material sales to retail sales was about a six to seven fold increase," said Peter Hafermann of BI Nutraceuticals. "This was at a time when St. John's wort was $75/kg and gingko was $250/kg. I think the number today is more in the range of ten to twelve fold." Hafermann also noted that while commodity prices have indeed fallen dramatically, many suppliers now have particle engineering technology and other value-added components are in better position to command value-added prices.

In 2003, NBJ estimates that the supplement supply market witnessed a modest turnaround, however, as sales gained 1%-not enough to wipe out three years of decline, but at least most suppliers would agree it is a step in the right direction. "Business has been flat the last couple of years," acknowledged Brian McNally, president of Stryka Botanics. "But our 2003 fourth quarter was huge, and we expect significant double-digit growth for us in 2004.... Overall pricing was generally still down most of 2002 and 2003... but during 2004 I expect overall pricing [for botanicals] to be up 3-5% due to weather, supply, demand and other market conditions."

"The price of almost all herbal raw materials has been depressed during the last three years," agreed Edward Lee, president of AIDP Inc. "Most of them have touched bottom. We are seeing an increasing trend for ginkgo and silymarin prices. Stevia price has also increased 150% due to shortage of raw material.... Companies with more resources can work on valueadded products and therefore are expected to achieve good growth while the rest will find it difficult to grow."

A number of herbal suppliers are also distancing themselves from commodity products by moving into food supply or more often into personal care products. "We had better than 10% growth in 2003," said Jennifer Higgins, VP of sales and marketing for Draco Natural Products. Draco has "very few food applications with some beverages," but has positioned for growth "mainly in the supply of botanicals to the cosmetic industry," said Higgins, adding that they have built a brand new facility to keep up with production.

Functional Food Supply Up 8%

Vitamin suppliers have moved much more significantly into food applications. Category leader DSM Nutritional Products has noted decline in demand for supplement supply counter-balanced by increases in food fortification as an early indicator in the rise of functional foods. Number two supplier BASF made a more definitive mark in the functional foods business with its global alliance with food supply leader Fortitech.

Fortitech has grown in excess of 30% per year for some time and will exceed $100 million in sales in 2004, according to Dr. Ram Chaudhari, FortitechÕs senior VP of R&D. While almost half of the business is in infant formula, sales of micronutrients for beverages, baked goods, cereals, bars and other foods has been the strongest growth engine and has kept Fortitech as "busy as it can be," said Chaudhari. The business has laid the foundation for continued growth with the acquisition of an Ashland plant in California at the end of 2003, and the expansion of a BASF facility near Copenhagen specifically for Fortitech.

Chaudhari estimated that about half of Fortitech's food supply business is with the 10 biggest multinational food companies but that small companies really are more innovative and quick-moving in coming out with new functional food products. However, he believes the majority of the market in functional foods will remain in the hands of the large food companies as they ultimately possess the largest advantage of being better suited to carry out the implementation of broad market penetration with their strength in logistics and distribution.

Overall NBJ estimates that the market for specialty ingredients in functional foods in the United States in 2003 was $440 million, up 8% from 2002. Functional food supply was only half that in 1996 at $230 million when, excluding baby formula, the market was mostly vitamin pre-mixes for cereals, baked goods and other early enriched foods. Pre-mixes still account for the largest component of the functional food specialty ingredient supply business at more than 40% of sales, but soy, dairyderived proteins and calcium also represent chunks greater than 10%. Fortitech itself has grown its business in amino acids considerably and is moving into new supply products in omega-3s and prebiotics in food ingredients, said Chaudhari.

With the supply segment serving as the anchor of a growing and dynamic nutrition industry, companies up and down the value chain have a significant stake in the health of ingredient suppliers. As a hotbed of innovation, an originator of science and perhaps the ultimate source of quality and safety control in an increasingly scrutinized industry, suppliers hold many of the keys to future growth. As the nutrition industry continues to mature, cooperation across the board will help all companies in the industry-not to mention the millions of consumers they serve.