FEED Business Worldwide: October / November 2011
China's hyperinflating B vitamin markets
by HUANG Qisheng in Shanghai, with additional inputs by Eric J. BROOKS
Over the last four years, China's vitamin market has been subject to volatile price movements. This has been especially true of pyridoxal phosphate and biotin, also respectively known as vitamin B6 and vitamin B7. Two years of market stability ended in the second quarter of 2011, when vitamin B7's price more than tripled while that of vitamin B6 jumped by 150%.
Global demand for both vitamin B6 and B7 are around 7,000 tonnes, out of which China accounts for 20% or 1,400 tonnes. Because of the high proportion of production accounted for by China's manufacturers, volatile movements in the country's domestic market profoundly impacts world prices for vitamins B6 and B7.
Industrial accident turns B7 market upside down
Indeed, biotin's price has followed a pattern quite familiar to followers of farm commodities: A spectacular, four-fold price leap starting in the third quarter of 2007, followed by a steep crash in the following year's financial crisis.
Trading around RMB280/kg (US$40.00/kg) in the first half of 2008, increased production in the second half of that year coincided with a serious world recession. Following production capacity expansion by Zhejiang's Shengda, Shanghai's Desano and other companies, prices crashed by more than 75% to the RMB70/kg to RMB80/kg (US$10.30/kg to US$11.75/kg) range. They stayed at this level, near their cost of production, from early 2009 through to the first quarter of 2011.
Nor did this year begin in a promising way. With the early 2011 entry of Kexing Biochem into this line, production capacity of domestic vitamin B7 reached about 250 tonnes. This implied that even if mainstream factories' operated at only a 60% capacity level, it would be sufficient to meet worldwide demand for this supplement.
Because of the increased market pressure, the other producers are forced to follow the lead from the largest producer, Zhejiang Pharmaceutical, which manages to hold market share and maintain profit margins by using technology to cut input costs.
With nothing but endless supply gluts on the horizon, an unforeseen event suddenly turned vitamin B7's market fundamentals upside down: On April 12, 2011, a gas leak at leading producer Zhejiang Pharmaceutical's biotin plant caused a serious explosion, resulting in the hospitalisation of more than 10 workers.
Following the accident, the plant's production was suspended for investigation and rectification works. Government authorities concluded that Zhejiang Pharmaceutical's plant was located dangerously close to employee residences. They ordered it to physically shift production facilities further away from the employees' residential area.
This made it impossible for Zhejiang Pharmaceutical to resume production this year. With the world's largest vitamin B7 supplier suspending production, market fundamentals went from supply surplus to supply deficit overnight. The situation was made worse by the past behaviour of buyers. They had assumed that the vitamin B7 oversupply would persist and had very low inventories to begin with.
This gave Zhejiang Pharmaceutical's competitors the market power to raise their vitamin B7 prices. Having endured two years of flat, low prices in the face of fast rising raw material costs and persistent price inflation, they considered this accident a blessing.
Zhejiang's Shengda took the lead and increased its price by a whopping 129%, from RMB70/kg (US$10.93/kg) to RMB160/kg (US$25.00/kg). It was soon to be followed by other enthusiastic producers. As producers lifted prices, buyers frantically stocked inventories that were low due to earlier lukewarm buying interest. This pushed up the price even higher, to approximately RMB180/kg (US$28.13/kg)
Following the first phase of intensive restocking, between late May and July, the fervent buying interest cooled down, temporarily, while buyers adopted the "wait-and-see" attitude. This was reflected in mid-year's flat market trading and a temporary tapering out of price increases.
Nonetheless, this market tranquillity was short-lived. As buyers started stockpiling their procured vitamin B7, it depleted producer inventories. As a result, the price of 2%-biotin skyrocketed by another 33%, from RMB180/kg (US$28.13/kg) to RMB240/kg (US$37.50/kg) in early August. From the early second quarter to late third quarter of this year, vitamin B7's price zoomed up by approximately 229%.
Granted, vitamin B7's recent market behaviour was more the product of an accident than classical feed market movements. Nevertheless, the last several years has seen B7 track many of the price swings of volatile feed inputs such as corn.
Blackouts, logistical problems disrupt calm B6 market
Such wild market behaviour is usually not the case with vitamin B7's biochemical cousin, vitamin B6. During early 2008's agribusiness commodity bull market, B6 was one of the few vitamin supplements which did not undergo a significant price increase. In late 2007 to mid 2008's commodity boom, it rose mere 9.3% from RMB140/kg (US$20.00/kg) to RMB153/kg (US$22.54/kg). By comparison, vitamin B7 jumped by some 300% over the same time period.
Furthermore, while vitamin B6 did not rise by much during the boom, it never experienced a spectacular price crash in the recessionary years that followed. It fell only 8.5%, from around RMB153/kg in mid 2008 to an average of roughly RMB140/kg in the two years ending in early 2011. By comparison, vitamin B7's 75% price crash was comparable to the steep drops in the cost of corn, wheat or fertiliser.
This steady, uneventful price behaviour was partly due to the supply regulating actions of vitamin B6's largest producer, Zhejiang Tianxin. It uses its large market share to keep supply and demand closely balanced. While such a strategy does not make for exciting rallies, it did preserve Zhejiang Tianxin's large market share and kept prices steady through both booms and busts.
However, after May 2011, Zhejiang Tianxin suddenly raised vitamin B6's price repeatedly, escalating it from RMB130/kg (US$20.16/kg) to RMB390/kg (US$60.94/kg). Other producers were quick to follow on its footsteps, fuelling further increases in the prices. All of sudden, the once sleepy market for vitamin B6 had become more inflationary than its notoriously volatile vitamin B7 cousin! But there was a powerful confluence of reasons stimulating this rally.
First, the electricity pricing system caused many of China's power plants to run losses. They then cut electrical production to minimise deficits. Domestic electricity supply was tight, even in China's largest vitamin production base, Zhejiang Province.
As a result, some vitamin companies received two-third less electricity than what they used last year. Inevitably, vitamin B6 output was decimated. To aggravate matter, central China experienced heavy rains during June 2011, and this delayed Zhejiang Tianxin's deliveries of important vitamin B6 manufacturing inputs. Lacking both electricity and vital inputs to produce more, remaining supplies of B6 were quickly consumed.
Secondly, stable domestic vitamin B6 prices, rising raw materials prices, environmental management costs and labour costs, as well as appreciation of Renminbi have put great cost pressure on producers. Having barely broken even for years amid flat selling prices and narrowing margins, producers were anxious to raise prices and boost their returns.
Third, in recent years, vitamin B6 prices and supplies were so stable that feed mills and distributors tended to maintain a low inventory. When the producers' supply was reduced, prices soared but having little supplies on hand, inventory-tight feed companies.
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