FBA Issue 5: November / December 2005
Moving into restructuring
by Jason JIANG
HIGH profit margins, rising demand and the lowering of barriers to entry have encouraged the phenomenal growth of feed-grade lysine production in China, to the detriment of prices. But with supply outstripping demand, many producers have found themselves in the red as prices continue to hit new lows earlier in the year.
As of September 2005, there were 15 feed-grade lysine producers in China with a total production capacity of 537,000 tonnes--289,000 tonnes for 98.5-percent lysine and the remaining 248,000 tonnes for 65-percent lysine (L-lysine).
Reacting to the dismal market, lysine producers in China have chosen to reduce or suspend production altogether. Some of these companies, at the time of writing, included Huaxing Medicines Factory, Nanyang Pukang, Green Gold, Juhua and Pinyuan. Production at Star Lake¡¯s newly completed lysine facility has also been put on hold.
At Anhui¡¯s BBCA Group, production was slashed by a third, from 90,000 tonnes a year to 30,000 tonnes, and part of its existing facilities converted to food flavourings manufacture. Also succumbing to the competition was the Fujian-based Maidan Group, which announced the closure of one of its production lines. Among the few that have resolutely maintained output levels are the Hong Kong-listed Global Bio-Chem, Chuan Hua-Ajinomoto, Fujian Daquan, Golden Corn, CJ (Liaocheng) and Ningxia Yipin.
After developing at breakneck speed in 2005, China's lysine producers are pressing on the brakes or exiting altogether as the industry enters into a period of restructuring.
Too fast, too many, too small
China's lysine market has fallen victim to the swift entry of too many producers during the expansion years of 2002-2004. Eager to cash in on the boom, these smaller-scale producers have inadvertently flooded the domestic market to excess.
Domestic production capacity of lysine witnessed a phenomenal five-fold increase in a span of two years: from 90,000 tonnes at end-2002, to 180,000 tonnes and 460,000 tonnes by 2003 and 2004 respectively. Actual or realised output in 2004 was 150,000 tonnes, almost triple that of 2002 output of 53,000 tonnes. In contrast, domestic demand growth was a moderate 33.3 percent (from 135,000 tonnes in 2002 to 180,000 tonnes in 2004) which could only signal a market moving into gross oversupply.
In a span of two years, China's lysine market had moved from excess demand to a supply glut. Where imports were necessary at the start of the decade, domestic producers of the amino acid soon found themselves offloading stocks as prices tumbled.
Beginning end-2003, lysine prices in China started on a steady descent. Prices of imported lysine fell from a high of RMB55/kg in 2003 to RMB34/kg by March 2004. But the worst was hardly over. Prices for imports slid even further to its lowest at RMB12/kg in 2005 while that for locally-produced lysine dipped to RMB11/kg. Considering that the average cost of lysine production in China is RMB13/kg (with the exception of larger-scale, more efficient producers like Global Bio-Chem and Yipin) most producers are already operating at a loss at current price levels.
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