Contracts hamper CSM response to price changes

By Jess Halliday

- Last updated on GMT

Related tags: Raw material prices, Cost, Material

Ingredient firms may lack flexibility in the face of fluctuating raw material prices, which can leave them lumbered with contracts at prices less favourable than spot market prices.

Although the price of food commodities have dropped since the high of 2008, there has been criticism that the prices of consumer goods on supermarket shelves have not dropped too.

But 2008 financial results from CSM, released this week, indicate how the high price story can have a longer-term effect on the players in the food supply chain.

The bakery ingredients and lactic acid supplier says it saw raw material price increases of around 19 per cent in 2008, with soy oil, flour and eggs being worst affected. These cost increases were successfully off-set with higher selling prices in the first nine months.

When raw material prices came tumbling down towards the end of the year, the ingredient firm was under pressure to lower its prices. However it had already signed up to long-term contracts to buy its inputs, which committed it to paying prices that were higher than spot market prices.

Auxiliary materials also posed a problem for its Purac business. For instance, the increase in the cost of sulphuric acid in the second half of the year was unexpected and came “at a time that most of the annual contracts with our customers had already been signed”.

“This development had a substantial detrimental impact on our results,”​ said CSM. It does not expect the same story to unfold in 2009, however, since the price of most of its raw materials has now swung into decline.

Problematic potassium

Purac also experienced severe disruption to its potassium supply in 2008 due to a long-running strike at a mine in North America. This caused disruption to manufacture of its preservation products for meat and poultry – and potassium’s popularity in fertilisers left it unable to source additional supply.

After having to declare force majeure​, the impact in the second half of the year – and especially in Q4 – was grave. It amounted to around €2m.

However the situation looks to be back in track, as supply of potassium was back at normal levels by the end of 2008.

Results and savings

For full year 2008, CSM a decrease in earnings (EBITDA) to €133,1m, 13.4 per cent down on 2007 (8.4 per cent in constant currencies). But the sales side is somewhat cheerier, with an increase from €2.48bn to €2.59bn.

The company said that although market conditions are clearly remaining tricky in 2009, “results will benefit from past and present initiatives”.

CEO Gerard Hoetmer said the balance sheet “remains healthy”.

CSM has had a restructuring initiative in place for the last three years, called 3-S. Savings have now actually exceeded the planned level of €110m, to reach €129m.

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