10 April 2000 00:00 [Source: ICB Americas]By Jennifer Ouellette
Prices in the often volatile menthol market continue to decline after spiking sharply last fall. Several brokers anticipated a rebound in the first quarter of 2000, but to date, that has not occurred.
The continued squeeze is largely due to uncontrolled speculation in India, the world's dominant menthol supplier. A new crop in June and July, as well as capacity additions for synthetic menthol, could further flood the oversupplied market, although farmers are likely to plant fewer acres of menthol this spring.
Menthol prices have dropped by at least $1 since the start of the year, and they are hovering at $13 to $15 per kilo, according to an industry consultant. He adds that he would not be surprised if they decline to as low as $10 by next fall.
But the market is notoriously difficult to predict. "What's out there is pure speculation. You never know which direction the market is going to take," a major producer cautions.
"You almost have to be clairvoyant to predict the menthol market," the consultant agrees, citing the difficulty in acquiring accurate information about how much menthol is being planted in India and China. "My anticipation is that it will continue to slide, although I don't know how rapidly it's going to fall."
The producer says that if the market follows historical trends, lower prices could cause farmers to plant fewer acres of natural menthol and turn to other crops, reversing the oversupply and causing prices to rebound.
"When menthol moves, it's usually very volatile," the consultant notes.
In the menthol market, very slight supply changes often result in sudden shifts in pricing. It is not unusual for a mere 5 percent shortage to result in a doubling of the price. Last fall, prices spiked to $26 per kilo when China made several high-volume purchases of Indian material. Over the last 20 years, menthol prices have seesawed from $4 to $44 per pound, and in 1996-1997, a shortage in supply caused prices to skyrocket to $100 per kilo.
In recent months, the Indian menthol market has been rocked by fallout from last fall's uncontrolled speculations, which caused prices to double in less than three weeks before drifting down again in October. That downward trend has continued, and prices are at a 13-month low.
In addition to sellers desperately offering lower and lower prices, some resellers are still carrying relatively expensive stock from China, purchased when Indian prices were at their highest.
"The resellers and speculators in India have not only lost a lot of money, they have also lost confidence," says a broker who represents Indian menthol suppliers. A new crop, albeit lower, is expected in June and July, so "the circumstances are perfect for a desperate market."
But relief may be at hand. The broker reports that planting for the 2000 crop began three weeks later than usual, and acreage appears to be reduced.
"If a lower planting is in fact achieved, the same might result in helping prices improve to a healthier level," the broker says. Customer interest also appears to be reviving at current prices, with China purchasing Indian filtered menthol and natural menthol crystals for processing, repackaging and exports.
Jindal is the world's largest menthol producer. Its main plant is in Bombay and has a capacity of 2,500 metric tons. The company recently announced it will build a new plant with 4,000 metric tons of capacity, slated to come on in 2002. However, that project is unlikely to lead to significant additional volumes, since Jindal's existing plant will be mothballed for use as a stopgap facility if more plants are needed. The main impact will be felt by the smaller Indian producers that manufacture about 30 tons per year. Some of them may even be squeezed out of the market.
The world's current demand for menthol is about 12,000 metric tons, with India accounting for around 7,000 metric tons. Last year, China produced 3,500 metric tons of menthol, but that country has been reducing its domestic production, and the broker projects a further reduction of about 20 percent this year.
In the US, half of menthol consumption is for mentholated cigarettes. Nigeria and the Philippines are said to be the only other countries whose inhabitants smoke menthol cig-arettes. For the remainder of the world, menthol is consumed primarily in toothpaste, mouthwash and analgesic balms, with 20 percent going into peppermint flavoring.
"It's not a very big market," says the consultant. "Ninety-five percent of menthol in the US is consumed by only eight companies."
Once a dominant global supplier of menthol, South America has been steadily moving out of the market. This is partly because of industrialization and associated deforestation, which has caused many of its inhabitants to migrate from rural areas to the cities.
As a result, a region that once supplied 3,000 tons of menthol per year has reduced its output to about 30 tons, derived from their own peppermint oil. The rest of South America's menthol output is primarily Indian menthol that South American companies have recrystallized.
The result is a sharp price differential. One dealer reports that he recently sold Indian menthol at $26 per kilo, and South American menthol at $45 per kilo. "Brazilian menthol has reached the point where it's no longer a commodity," he says. "It's a specialty."
China dominated the menthol market from the 1980s through 1995, but since then, increased industrialization has limited its already scant arable soil. With Wrigley, Colgate-Palmolive and Procter & Gamble building plants in China, the country is moving into finished goods and buying menthol from other countries, particularly India. China has even begun recrystallizing Indian menthol and reselling it overseas. A tobacco company notes that more than half of all samples it examined from China were actually recrystallized Indian menthol.
While natural menthol from India and China serves as the market's main pricing driver, synthetic menthol has historically kept pricing stable. Because synthetic menthol plants run continuously, these producers, including Takasago and Haarmann & Reimer, offer long-term contracts to protect customers against extreme price fluctuations.
However, synthetic menthol is a much smaller market because of the flavors industry's preference for natural products. More than 90 percent of flavors are natural, compared to 50 percent 40 years ago.
"Natural is in, synthetic is out," says the consultant. This is even true of cigarettes. Both R.J. Reynolds and Brown William-son have recently introduced natural menthol cigarettes.
Takasago produces roughly 300 metric tons of synthetic menthol annually, and Haarmann and Reimer produces about 1,100 metric tons at its Bushy Park, S.C. facility.
However, H&R just finished building a new menthol plant that is now on stream. An industry observer estimates the facility's capacity at 1,200 to 1,500 metric tons. The extra menthol will need to find an outlet in an already saturated market.
This increase will be partially offset by China's reduced production, but H&R also lost a major customer, Procter & Gamble, which used to buy roughly 300 metric tons of synthetic menthol annually, but is now moving into natural menthol as a flavor ingredient.
"I think it all falls on H&R's lap," says the consultant. "If they're aggressive about selling their increased production, they'll drive the market price down. If they just sell judiciously, the market should remain relatively stable."
DRAGOCO has completed a comprehensive renovation and expansion of its production facilities in Holzminden, Germany, officially inaugurated in March. The DM 52.6 million ($25.7 million) project is the largest single investment ever undertaken by the company. The new fragrance production facilities include reactors, distillation and photo-oxidation equipment.
TECHNOLOGY FLAVORS & Fragrances posted 1999 sales of $14.7 million, up from $13.8 million in 1998.
IAL Consulting (www.ialconsultants.com) has published a market research report on the global flavors and fragrance market.
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