FBA Issue 34: September / october 2010

 

 

 

 

An essential nutrient for humans, vitamin C is widely used in food products, animal feed and cosmetics. It was among the first batch of western medicines that China obtained its independent intellectual property rights. Due to an entrenched price war, international vitamin C markets have been on a downward spiral since 2004. Initially, this saw prices plummet from US$5.70/kg to US$3/kg within a year.

 

While scores of foreign companies either stopped production or retreated from this loss-making industry, China strengthened its production capacity over the years. This coincided with the rise of several pharmaceutical giants including Northeast Pharmaceutical Group, North China Pharmaceutical Corporation (NCPC), China Shiyao Pharmaceutical Group Co.,Ltd. (CSPC), Aland Co Ltd, and Shandong Zibo Hualong Pharmaceutical Group. Their combined output of 100,000 tonnes account for 90% share of the world market.

 

With their lower cost base, these companies overwhelmed foreign competition. Nevertheless, the ensuing mass exodus of foreign enterprises failed to lift the vitamin C market out of its doldrums. Chinese companies felt the pinch following a US antitrust probe into the country's industry, with Shandong's Hualong Pharmaceutical Group and Anhui Tiger Biotech Co., Ltd, a wholly owned subsidiary of BBCA Group Corporation, among the first few to halt their vitamin C production lines. The likes of giant enterprises such as Hebei Welcome Pharmaceutica Group, a subsidiary of NCPC, Aland Co Ltd and CSPC followed suit shortly after.

 

This eventually led to a supply dearth of around 30,000 tonnes in the global market in 2007, rallying vitamin C prices for the first time since 2004 from RMB30/kg in January to RMB40/kg by April. Prices shot up one month later when an international major producer disclosed that it would stop production. At that time, China's four vitamin C giants were practically out of stock, with massive orders lining up to be delivered only after July.

 

In April 2007, Northeast Pharmaceutical Group Co Ltd (Dongyao Group) officially transferred the controlling stake of its vitamin C line to its mainboard-listed subsidiary Northeast Pharmaceutical Group, which handed the loss-making line to the former 10 years ago. The vitamin C line had doubled its production capacity to 23,000 tonnes within a decade.  Meanwhile, Zibo's Hualong Pharmaceutical Group and Anhui Tiger Biotech, which had ceased their production at the end of 2005, quickly resumed operations upon the market's recovery.

 

The enormous supply gap occurring during the height of global economic prosperity in 2007, lifing prices to hit an unprecedented RMB130/kg during the first half of 2008. Its strong market position was undeterred even during world financial crisis that sent most Active Pharma Ingredients (API) markets tumbling in mid-2008.

 

High prices of vitamin C had brought fat profit margins to a number of China's major producers. According to NCPC financial reports, their gross profit margins swelled to around 60% in 2009, compared with 22.56% just two years before.

 

Vitamin C's three-year high industry boom, with sales revenue more than doubling its production costs during business peak, appeared irresistible to investors.  New businesses sprung up rapidly, while existing companies scrambled to resume or expand their production.

 

According to the China's NDRC, by 2008, vitamin C output in China had reached 126,000 tonnes, which essentially more than covered estimated total global demand of 120,000 tonnes.

 

In November 2009, a joint venture between Heihe border Economic Cooperation Zone and China Zenith Chemical Group to build a 25,000-tonne vitamin-C plant rekindled market tension over the dangerous, emergingsupply glut. Due to indiscriminate and vastly unchecked industry expansion in recent years, China again faces a severe case of oversupply. China's total vitamin C production capacity will reach 180,000 tonnes by the end of this year and 200,000 tonnes by 2012. - These are levels nearly double total world demand, NDRC reports showed.

 

While overall prices remained relatively high in 2009, with growing overcapacity, a tendency to edge downwards was inevitable. According to eFeedLink statistics, prices of vitamin C fell for the first time during the 43rd week of 2009, with those of 98-percent products plunging from RMB90-100/kg, a seemingly unwavering position it had withheld for almost 10 months, to RMB60/kg in recent weeks.

 

 

During a government press conference held in December 2009 themed "Prevention of overcapacity by promoting healthy industry development," NDRC deputy director Li Ningning had expressed grave concerns over the unbridled expansion of the country's vitamin C industry, as growing output from various enterprises is forecast to surpass global demand by 2012, triggering vicious competition among local exporters and severely undermining China's competitiveness in the world market, leading to possible industry-wide losses.