Citric acid firms raise prices as supply shortage threatens market

The world's major citric acid producers have warned that unless reasonable price increases can be successfully implemented this year, the market will face further consolidation and potential supply shortages.

Indeed, major US player Cargill will today announce price hikes for its 2007 contracts, set at $0.08 per pound more than its 2006 agreements.

And European citric acid leader Jungbunzlauer has also confirmed that it is "seriously looking at" price hikes for its upcoming contract negotiations.

Hit by high energy and raw material costs coupled with the ongoing threat of cheaper Chinese production, US and European citric acid firms have found themselves increasingly squeezed into an unprofitable market, where increased costs cannot adequately be recovered through price hikes.

And this has resulted in many producers being forced out of the picture.

Just last year, US ingredients giant ADM closed its citric aid plant in Ireland, leaving a 60,000-ton hole in European supplies. Solaris also closed a factory in India earlier this year. And in 2003, Aktiva bolted up its plant in the Czech Republic, while a Quimixa Mexama plant in Mexico - belonging to Tate & Lyle - also closed in recent years.

Even the Chinese are starting to feel the pressure. After China first entered the citric acid market some 15 years ago, the country had around 200 plants of various sizes churning out the ingredient. But heavy consolidation has resulted in only around 20 being left today, with these producing 35-40 percent of the world's citric acid supply.

Last year, attempts by the market leaders to raise their prices were not as successful as expected, as an undervalued Chinese currency ensured aggressive pricing remained in place.

But the current situation will not hold for much longer, warns the industry.

According to Cargill, with firms dropping out of production and reinvestment not occurring in the market, supply will soon become a major issue.

Last year was "too close for comfort," said the company, and "everything is now pointing to a supply shortage".

Other industry experts agree. "It is only a question of time before other factories will close," one source told FoodNavigator-USA.com, adding that they are expecting "further consolidation in the West. It's a very difficult situation and it will be very difficult for Western producers to survive."

And if some of these firms are forced out of the picture, Chinese supplies will unlikely be able to compensate for the hole left in the market, or may not be able to offer the same grades, qualities or services that some food and beverage manufacturers require.

Beyond the increases announced today to its customers, Cargill said it may also consider mid-year spot market price hikes, depending on the success of its 2007 contract increases.

Citric acid is one of the most widely used food acids by today's food and beverage industry, with over 70 per cent of the world's 1.4 million ton market propelled by this sector.

Strong demand for the ingredient is particularly driven by sports drinks, ready to drink teas and functional waters, which have seen high consumption levels over the past year.

Largely produced by mould fermentation of sugar solutions, citric acid production is energy intensive. But steep energy costs, particularly related to oil that currently stands at around $70 a barrel, have multiplied costs for citric acid producers. And as more and more corn gets poured into ethanol production, manufacturers are also having to contend with raw material pressures.

Currently, Europe is left with only three citric acid factories, the largest of which is Jungbunzlauer's plant in Pernhofen, Austria. But although this plant has a capacity of 150,000 tons per year, market pressures have meant that it is not currently running at full capacity.

DSM's citric acid facility in Tienen, Belgium, is Europe's second largest producer, with a capacity of around 100,000 tons per year. The third, much smaller, plant in Selby, UK, is operated by Tate & Lyle.

In the Americas, Tate & Lyle operates two more factories, in Dayton, Ohio, and Santa Rosa, Brazil. It also has a joint venture in Cali, Columbia.

Other factories include ADM's plant in Southport, North Carolina, Cargill's plants in Eddyville, Iowa and Uberlandia, Brazil, and Jungbunzlauer's plant in Port Colborne, Canada.

But although the remaining producers are concerned about the market situation, they remain hopeful that a re-evaluation of the Chinese currency will lead to prices increasing to "reasonable" levels, and gradually allow the market to get back into balance.

"We'd prefer to look on the positive side, and think that things will return to a healthier level, which will allow us to grow with the market place," said Cargill.