April 2, 2004

 

 

No Definite Clue to  China's Lysine Price Direction in April 2004

 

An eFeedLink Exclusive Report

   

Since the end of February, lysine prices in China have staged an impressive rally on the back of tightening supplies and surging demand. The sharp rise in soymeal prices in China has helped to sustain the rally. Within a month, the transacted prices of imported lysine (delivered-to-feedmill) surged from a low of RMB21/kg to the current RMB34/kg. This impressive 62% increase was certainly not in the expectation of many market participants. Now, market participants are wondering whether the bullish market situation will be sustained in the nearby term.      

 

On the supply side, volume of Chinese local production of lysine has increased compared to the same period last year. Fengyuan Group's lysine production level has hit 2,000 tons per month. Over in Shandong province, Golden Corn's production is expected to resume to normal level in the near future. From available figures that analysts have compiled, China's current lysine production level is 11,000 tons per month, including output of Da Cheng Biochemical's 65%-lysine, calculated on 98.5%-lysine basis. Compared to monthly output of 6,000 tons of lysine in October 2003, the rate of increase in China's lysine production is significant.

 

Into 2004, China's import of lysine has dropped rather substantially. In January and February 2004, only 8,290 tons of lysine was imported into China, showing a year-on-year drop of 5,426 tons. For the March-April period, China's lysine import is expected to rise. However, the increase might not be significant. It is estimated that 5,500 tons of lysine will reach Chinese ports in April.

 

China's lysine export to overseas markets has increased significantly since early this year. This surge in China's exports of lysine was driven by the low price levels of lysine in the Chinese domestic market and the significantly higher price levels in the European market early this year. In February, China's exports of lysine has hit 2,600 tons and it is estimated that exports will reach 3,000 tons each month for March and April. Therefore, it is projected that the supply of lysine in China will be in the region of 13,500 tons for the month of April.

 

There has been a change in the patterns of demand for lysine in the Chinese market this year. Traditionally, the two to three months following the Chinese New Year period is the off-peak season for lysine consumption in China. For this year, the week-long Chinese New Year fell in late January. There is a change in the traditional demand pattern for lysine in China this year. Analysts put forward three factors to explain this change:

• The outbreak of the avian flu early this year has dampened demand for poultry products in China. On the contrary, demand for pork has increased significantly as people made a change in their choice of meat consumption. The rising prices of pork sparked off an interest in increasing volume of hog inventory. This has led to a consequent increase in demand for hog feed, and thus, lysine;
  
  
• Prices of soymeal in China have risen in tandem with the surging prices of CBOT soybean futures in recent period. Currently, ex-factory prices of soymeal have reached RMB3600/ton in parts of eastern China. The surging prices of soymeal have lent support to the prices of lysine in China;
  
  
• Chinese feed millers have inadvertently helped to drive lysine prices higher with their strong buying interest. Most were worried that they would be paying more if they postpone their procurement activities.  

Market prices of live hogs in China have remained high and the profit margins for hog farming have also increased correspondingly. Therefore, demand for lysine is expected to remain high. Although prices of soymeal in China have undergone some minor corrections recently, they are still near historic highs. With prices of soybean remaining at a high level, it is unlikely that prices of soymeal will suffer a sharp downward correction in the near future. High price level of soymeal will in turn provide support for lysine prices.

 

Analysts foresee that the total market demand for lysine in China will reach about 14,000 tons for the month of April. The supply of lysine is expected to be marginally lower than demand in April. Analysts therefore do not expect significant drop in China's lysine prices in April.

 

Nevertheless, uncertainties still exist in China's lysine market. Market participants would certainly concur that prices of lysine are now hovering at a very high level and should an element of uncertainty surface, prices of lysine in China can become volatile.

 

At present, the key uncertainty exists with regards to soymeal prices. If soymeal prices in China were to move higher substantially after this round of minor price correction - which is highly possible - the demand for lysine will be increased correspondingly. Lysine prices in China will be surging to higher levels once again.

 

On the other hand, if prices of soymeal were to continue its downward correction, this will definitely negatively influence China's lysine market. It is a common industry practice for feed millers to stock up at least one month's supply of lysine. If the buying interest for lysine is further dampened by negative market sentiments, lysine prices could fall further. This will create a situation whereby lysine market supplies would exceed demand as feed millers hold back their procurement activities.

 

The other key factor that can affect China's lysine price direction is the sales plans of lysine producers. At present, ex-factory price quotes from local lysine producers are still high and if they continue to maintain at the high level, that is, between RMB32-33/kg, it is unlikely that market prices of lysine will drop any lower.

 

There are some changes in the current lysine supply situation in China since the start of this year. Several major importers in China have limited inventories of lysine on-hand, with stocks mainly in the hands of producers. If for certain reasons, these producers decide to lower their price offers, market prices of lysine in China would also fall in tandem.