The corn conundrum

The global market for food ingredient commodities made from fermentation of carbohydrate feedstocks - most notably citric acid and ascorbic acid (vitamin C) - has recently become dominated by supplies from China.

Following a period in which several western companies faced legal action for operating illegal cartels in the 1990s in order to maintain prices, rampant supply early in the new millennium, particularly supplies from China, caused prices to plummet.

But now, it seems, the tide has turned again, with prices firming up strongly since the spring of this year. How will things develop and will China maintain its dominance?

About two-thirds of the global market for citric acid, ascorbic acid and isoascorbic acid is accounted for by food industry use, and the citric acid market has the largest share. China now accounts for around 50% of world citric acid capacity and more than 30% of world supply, exporting some 70% or so of its production.

A similar situation exists in international vitamin C supply, where China has again become a dominant producer with only limited domestic usage.

The key to low-cost citric acid and vitamin C is the availability of cheap carbohydrate feedstocks such as sugar and starch hydrolysates, says consultant Leo Hepner. He believes that it is "inconceivable" that Chinese production economics are superior to those of traditional western companies, such as corn wet-millers.

"I don't believe they can produce for less than western companies," he says. Costs must be higher than the cut-prices they have introduced, says Hepner, who believes that the export prices for a variety of food and pharmaceutical ingredients are subsidised by the Chinese government. And he finds it odd that these 'dumping' practices have not fallen foul of international trade bodies.

Surely, China is one of the world's largest producers of grains and has been a major exporter of maize in recent years (almost 150Mt this year), and so must have access to cheap raw materials? It also has a 'soft' currency pegged favourably to the (now weak) dollar.

So surely there is no need for subsidies? And anyway, haven't export prices been rising over the past few months? "Yes," says Hepner. "Now the Chinese have cornered the market, they are beginning to turn the screw."

Pacts between lion and lamb

But is it that simple? A number of western agribusiness companies, for example, have successful joint ventures operating in China, after all. However, Hepner is dismissive of these, dubbing them "pacts between the lion and the lamb" and he does not expect them to last.

"The Chinese will do their best to acquire or misappropriate the expertise and the (western) partner will eventually want to escape," he declares. And he dismisses recent price rises as nothing more than the next stage in Chinese plans to conquer world markets.

Simon Bentley, carbohydrate derivatives analyst at agribusiness consultancy LMC International, has a different viewpoint. He attributes Chinese success in these fermentation derivatives to the fact that the country has big, modern plants in a domestic economy where there is "a lot of investment money" as well as some tax advantages.

"Raw materials costs may be somewhat higher (than in the US and EU), but otherwise the cost structure is very competitive and not heavily controlled by central government," he says. And he adds that there are no transparent subsidies for citric acid and vitamin C, just a good business environment for capital projects.

But the question remains: why are Chinese raw material costs higher when it is a major world producer of grains? "China is a big producer but increasingly moving towards being a net importer, and so prices are at import parity level," says Bentley. He points out that China imports large quantities of tapioca. And its exports of maize, which are subsidised, are falling because of rising domestic demand.

Bentley sees China's dominance in citric acid and vitamin C as a reflection of the success of these new fermentation plants, combined with the fact that there is a wide market for its exports. "Most western companies have now given up trying to compete, and some traditional big players are now buying from China and reselling."

According to Bentley, recent increases in international prices of citric acid and vitamin C are just a reaction to market conditions, where cereals and sugar have been affected by tight supply and increased demand.

"Raw material costs are increasing, plus capacity is tighter following further closures in the EU and US," he says. One of the latest closures is Tate & Lyle's citric acid plant at Selby in the UK, which ceased production in March.

Despite its success on the supply side, there is still a question mark over the quality of Chinese-origin food and drug products, with a spate of high-profile safety scares in recent months, from heart-stopping Viagra and toxic toothpaste to pet foods boosted with a toxic nitrogen compound.

Does China have the winning hand?

These have been so serious that Zheng Xiaoyu, former head of China's State Food & Drug Administration, was executed in August for taking bribes in return for bogus documentation.

As to the acquisition of western expertise, Bentley notes that Cargill, which has successfully established joint ventures in China, is not bringing in cutting-edge research. According to DSM Nutritional Products, which makes both vitamin C and citric acid, achieving western standards for fine chemicals and food ingredients in China will take generations, and will require the transfer of know-how by the western companies involved.

Alex Fitz, head of communications at DSM Nutritional Products says: "We compete with lower-cost producers based on our superior technologies, innovation capabilities, quality systems, traceability standards, our long-standing record as a reliable partner with a unique global supply, sales and support network, and, last but not least, based on our reputation as a value-oriented industry leader."

While the company is continuing with its joint venture plans with North China Pharmaceutical Company over vitamin C (see box), it does not see joint ventures with China as the only way forward.

What next?

Although the recent rises in prices for all agricultural commodities have boosted prices for citric acid and vitamin C, the current weakness of the US dollar means that these increases are less dramatic in other currencies, including the euro. And it is still too early to say whether these price levels will be maintained.

Furthermore, nothing remains static for long: western companies can be relied upon to make innovations in the future, but it is always difficult to predict in advance where these might be.

Take biofuels, for example. They may provide a bonus for agribusiness companies such as Cargill as it develops new uses for the glycerine, the cheap byproduct obtained in biodiesel production.

Last year, Polish researchers announced that they were developing a fermentation process to make citric acid direct from crude biodiesel glycerine,

While not yet fully commercial, the process offers the prospect of making citric acid very cheaply in equipment that could easily be retrofitted to existing or even shut-down carbohydrate based plants.

Meanwhile, DSM says its direct, one-step process for vitamin C is on schedule to become operational between 2009 and 2011 (see box). No decision has yet been reached about its location.

DSM: 'Revolutionising' production?

DSM announced in 2005 that it was negotiating a collaborative joint venture with North China Pharmaceutical Co (NCPC) to produce vitamin C and the antibiotic 6-ALA by NCPC's multi-step fermentation process. At the time, DSM said the venture would be able to produce vitamin C at far lower cost than DSM's own existing multi-step chemical route, until its new single-step process had been fully developed.

DSM has predicted that its direct fermentation technology will revolutionise state-of-the-art vitamin C manufacturing. The company now says that all its research and development milestones have been achieved, and that the new process is expected to become operational between 2009 and 2011.

REACH

Quality standards of western companies, underpinned by good manufacturing practice and hazard analysis critical control point (HACCP) systems, full traceability, technical support and know-how, are taken for granted by customers. The continued success of China's supply engine ultimately depends on compliance with such standards.

In the food sector, however, the EU's newly introduced REACH legislation on the Registration, Evaluation, Authorisation and Restriction of Chemical substances which came into force on June 1, will not be among them. While REACH compliance will apply generally to all chemical products imported into the EU, imports destined for food, feed or medicinal use are exempt from the REACH registration procedure, since they are already subject to other EU directives.