Vitamin C, lysine still blight BASF margins

By Jess Halliday

- Last updated on GMT

Related tags Basf Vitamin c Nutrition Vitamin

BASF's fine chemicals division is bolstered by higher sales volume
of aroma chemicals and vitamins A and E for animal nutrition, but
the pressure over vitamin C and lysine has not abated, dragging
down the division's profitability.

Sales in Q1 2006 were up 13 per cent on the same three months of 2005 to €448m, but earnings (EBITDA) were well below last year - down to €40m from €50m.

The company pointed out in the Q1 results, released today, that the division's earnings were nonetheless significantly higher than in Q4 2005, when EBITDA was -€7m. But then too the lower earnings were checked by higher sales of some products (sales were up 11 percent to €483m).

And the same delicate balancing act was seen in full year 2005, when sales were up 3 per cent to €1,7bn but EBITDA plummeted from €97m to €22m.

Along with the vitamin C and lysine price pressure, BASF cited higher raw material costs, for example for crude sugar, as another factors affecting margins.

In 2005 BASF initiated a restructuring programme in an effort to improve margins for the division. The most significant measure so far has been the closure of the plant in Grenaa, Denmark, which has helped reduce fixed costs in the vitamin C.

The closure did not come as a complete surprise, since the group announced a €26 million charge for restructuring of its vitamin C operations last August but declined to reveal at the time what this would be for.

Prices for vitamin C have been falling ever since Chinese companies began making it several years ago, and the market is now shaped by five Chinese players.

BASF is not alone in introducing cost-cutting measures to lessen the pinch. This time last year DSM closed its manufacturing plant in Belvidere in New Jersey, leaving it with reduced yet more efficient capacity at what is now the last remaining European plant in Dalry, Scotland.

BASF's primary source of vitamin C is now Asia.

In January it bought the final remaining stake of its vitamin sales and marketing joint venture with Japanese firm Takeda, but Takeda, Japan's largest pharmceutical maker, still owns the vitamin production plants that supply jv and supplies BASF with about 12,000 metric tons of vitamin C under a special agreement.

BASF is still a significant supplier of carotenoids and other vitamins used in food, and continues to produce powder formulations of vitamins and carotenoids and microencapsulated food ingredients at its other Danish plant in Ballerup.

The fine chemicals division is set against a rosier overall picture for the German group, which said its full year 2005 results were the best in its history.

Sales for all divisions were up 24 per cent in Q1 to €12.5bn and EBITDA increased 19 per cent to €2.4bn.

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