Chinese citric acid producers face up to dumping charges

Chinese citric acid producers are accused of dumping. As the European Commission prepares to rule on the case imminently, it is clear that a decision is long overdue

Sean Milmo/London

CITRIC ACID, which is used mainly as an acidulant in foods and soft drinks, has been a difficult business ever since scores of Chinese companies began production in the early 1990s.

Their number has declined considerably, but the sense that they are distorting the market has not faded. Tension in the industry is building as suppliers and buyers await the European Commission’s imminent decision on an antidumping action against Chinese producers, now a dominant force in the global citric acid market.

Last September, the Commission announced that it was starting an inquiry into a dumping complaint, which is thought to have been made by Jungbunzlauer, the Swiss-based global leader in citric acid ­production. Demand for the acidulant has been strong, and prices have risen steeply in ­anticipation of stringent antidumping duties that the Commission could impose on Chinese producers.

The Commission must reveal by early June what measures, if any, it is taking.

“The antidumping move by the European Commission has had a big impact on the market, especially in Europe,” says John Hus, vice president for Asian supplies at Barentz, a Dutch food ingredients distributor. “There has been a huge movement in prices, which have gone up by around 30% since last September. Supplies are getting tighter and shipments from China may be temporarily halted until a decision by the Commission is made.”

Experts believe that the Commission could slap antidumping duties as high as 30-40% on at least one of the five leading Chinese producers. Furthermore, the Commission’s measures could be followed by similar action from the authorities in the US, where domestic producers have already filed an unsuccessful petition against Chinese citric acid exporters.

“The big question is whether the Commission has the courage to take the right decision, which is to be tough with the Chinese,” says Leo Hepner, founder of L. Hepner & Associates, a London, UK-based consultancy.

In a study last year of production costs for citric acid, which involves the fermentation of a microbe fed glucose and starch, Hepner’s consultancy found that Chinese producers were selling the chemical at around 25-40% below feedstock costs.

Some executives in the European citric acid market believe that the antidumping investigation could induce a more disciplined approach by Chinese suppliers, who are estimated to have a 50-60% share of worldwide sales of around 1.5m tonnes/year.

China has been steadily building its presence in the world market since the early 1990s, when output from as many as 100 producers in the country was channeled into export sales. The number of exporters was later reduced to 30, and is now at around five large companies, including two Shandong-based producers, RZBC Group and TTCA Biochemistry, and BBCA Group in Anhui.

The top Chinese players have been investing heavily in state-of-the-art fermentation, purification and water treatment equipment much of which has, ironically, been provided by Western companies.

“The Chinese are now producing high-quality citric acid from modern plants, which have capacities large enough to make them highly competitive on the world market,” explains Neil Blackburn, European supplies manager for food ingredients at Univar, a major citric acid distributor in the EU.

“The Chinese way of doing business has been to go for market share with low prices,” he continues. “But the attitude of these big Chinese producers with plants of over 100,000 tons/year capacity is changing. They are run by new owners, are more attuned to Western economics, and want a decent return on investment.”

As a result, Western producers are now facing much tougher long-term competition in their own domestic markets, where despite possible antidumping steps, Chinese producers are likely to increase their share even further over the next few years. In Europe, Chinese producers already account for around 60-70% of sales.

Jungbunzlauer, which has a unit in Austria, with an estimated 200,000 tons/year capacity, could shortly be the last bulk citric acid producer in Europe. Europe’s only other producer, DSM, already has a citric acid production joint venture at Wuxi, China, and the company is looking for a partner in the operation of its plant at Tienen, Belgium, which is reported to be running well below its original capacity of 120,000 tons/year.

“It looks as though it needs a lot of investment to make it internationally competitive,” says one analyst. “DSM may sell it, but not as a citric acid unit.”

UK-based sugar refiner Tate & Lyle last year sold its only citric acid facility in Europe to North Eastern Biotech, a subsidiary of Biotech Consult of Slovakia. Located in Selby, UK, it had a capacity of 40,000 tons/year, but the new owners are not using it for citric acid production.

In North America, domestic production accounts for a larger share of the market than in Europe. Archer Daniels Midland, Cargill and Tate & Lyle each have plants in the US.

IN HIGH DEMAND

The restructuring of Western production has taken place amid a buoyant citric acid market in Europe and North America, with demand for the chemical rising most quickly in segments outside the food and beverages sector. There has been relatively fast growth in detergents and cosmetics and new niches like plasticizers, biodiesel stabilizers and even oilfield chemicals.

“In the food and beverages sector, citric acid has a growth rate of 2-3% in Europe, but because of demand in other markets, and also in high growth areas of Eastern Europe, its overall growth is 3-4%,” says Hus.

However, the market’s growth has not been strong enough to compensate for soaring increases in raw material costs, which have deterred Western companies from investing in new capacity in Europe or North America. The electricity costs of citric acid production, which requires high energy input for fermentation, have also been shooting up.

As for the citric acid-making process being well established, there are limited opportunities for reducing costs – except perhaps by offsetting them through the sale of by-products.

“There could be a lot of scope in the development of by-products,” says Reza Selazade, trading manager at Kasel Chemical, an Austrian-based citric acid trader, with an engineering division that designs and constructs citric acid plants. “It could be possible to have citric acid plants making a relatively large amount of sulfur. This is becoming an attractive proposition because of current high sulfur prices.”

Chinese citric acid producers have themselves had to become more cost-efficient because their raw material and energy prices have been rising steadily to the same levels endured by Western competitors. Their starch and glucose supplies are now more expensive than those of North American counterparts, according to Hepner & Associates.

Now, the Chinese are not only faced with the threat of EU antidumping duties, but also with the possibility that their own government will eliminate a 13% export tax rebate on citric acid.

“If the European Commission doesn’t impose antidumping duties, the tax rebate will almost certainly go,” says Blackburn. “It will be abolished sooner or later anyway because it is the policy of the Chinese government to end these sorts of export incentives.”

Antidumping duties, tax changes and possible logistical disruptions during the Beijing Olympics, and high soft drink sales during a hot summer in the northern hemisphere could precipitate a sudden renewed surge in citric acid prices.

However, once the market returns to comparative normality, the outlook for citric acid prices is still one of a continuation of higher prices.

“For food companies especially, there is no real alternative to citric acid,” says Hepner. “That is why the producers are in such a strong position.”