14 July 2003 00:00 [Source: ICB Americas]Spurred by the growing power of customers and shrinking margins, manufacturers of food hydrocolloids are consolidating, particularly in the larger, more mature markets. In general, prices are not moving, say observers, but there are segments of strong growth such as xanthan and pectin.
In the US, functional starches comprise the largest segment by far, followed by gelatin, xanthan, carrageenan and pectin. Other hydrocolloids with an important role in foods include alginates, guar gum, locust bean gum and gum arabic. Growth varies, driven by each hydrocolloid's ability to interact with the many ingredients in a food product to improve its appearance and texture by gelling, thickening or emulsifying. An important growth driver is therefore the increasing consumption of processed foods, itself driven by convenience. At the same time, hydrocolloids are increasingly being used to make up for the change in "mouthfeel" that comes when fat or sugar is left out of diet products. They are also seeing use as sources of fiber, another benefit to health conscious consumers.
The largest markets are dominated by a small number of multinational players, with consolidation a recurring theme over the past decade, driven by increasing competitiveness and a consolidating customer base. "You get fewer and fewer customers, and those you have become bigger and bigger," observes Hans Henrik Hjorth, president, texturantal ingredients division, at Danisco, which supplies alginates, pectin, carrageenan and locust bean gum. "That means you get more pressure on your pricing, which you must put back on yourself in terms of improving your costs, and one way to do that is to be an active participant in the corresponding consolidation of the industry, which we clearly intend to be."
In general, prices for hydrocolloids are not moving, says Dennis Seisun, president of IMR Research, a San Diego, Calif.-based food hydrocolloids consultancy. "Hydrocolloid buyers have benefited from the extremely stable historical price of texturizing," he observes. "Dollar per centipoise, this is one of the best deals that food manufacturers have had in a long time, 10 to 20 years."
The value of the US market for functional starches used in food is $270 million to $290 million, according to IMR's First Quarter Hydrocolloid Report (www.hydrocolloids.com). Supported by wide use in prepared foods, dairy products, meat products and coated foods, the market value of functional starches is growing at 0.8 to 1.2 percent. The largest producer is National Starch, followed by Staley (a division of Tate & Lyle) and Cargill. Both Staley and Cargill have made moves to enter the xanthan market, which is less mature and features higher margins (see below).
In the US, gelatin follows functional starches with a market value of $130 million to $150 million, growing at 1 to 1.2 percent, according to IMR. Consolidation in the market has left three major producers: DGF Stoess, Rousselot and PB Gelatin.
Based in Eberbach, Germany, DGF Stoess AG is the global leader with 28 percent of the market, by its own reckoning. In 2002, the company produced 75,000 metric tons of gelatin, of which 63 percent was edible, while 23 percent went to pharmaceuticals and microcapsules, and 14 percent to photographic products and other specialties. Revenues totaled 500 million ($575 million).
The company has become a global player by making several key acquisitions since 1990, when it acquired Gelatine Products of the UK. Extraco (Sweden), Kind & Knox (US) and Dynagel (US) followed as the decade progressed. In 2002 DGF also acquired seven Leiner Davis companies in Brazil, Mexico, South Africa, New Zealand and Australia for A$190 million ($130 million). It is an indication of how concentrated this market has become that the US Federal Trade Commission allowed DGF Stoess to take only 60 percent of the Leiner Davis business.
The third largest player, PB Gelatin, took the two remaining Leiner Davis facilities in April 2003 for A$115 million ($78.5 million). Located in the US and Argentina, they added 15,000 metric tons, bringing PB Gelatin to 37,000 metric tons per year. A member of the Tessenderlo Group, the company also has facilities in Belgium, Germany and the UK.
Rousselot is the second largest player. Formerly SKW Gelatin and Specialties, the company was itself acquired from Degussa by the Sobel Group in early 2002 for 265 million ($305 million). (Degussa notably retained the balance of its texturants business.) Production was subsequently moved from Delft, the Netherlands, to Rousselot, France. Last year's revenues totaled roughly 260 million across all segments.
Gelatin is fundamentally different from other hydrocolloids in that it is an animal product, most commonly derived from the skin and bones of cows and pigs. These origins have always been an issue for vegetarians, but the general public, particularly in Europe, also took note when Creutzfeldt-Jakob Disease was traced to the consumption of beef from cattle with bovine spongiform encephalopathy (BSE, also known as mad cow disease) in the mid-1990s.
The issue has died down, assisted in part by a study begun in 1999 by the GME (Gelatine Manufacturers of Europe), under the auspices of the European Commission, and released in late 2001. Researchers at three international research research centers found that processes commonly used to remove or inactivate BSE pathogens were "extremely effective," according to the GME, confirming the results of other studies. "Even when the gelatin manufacturing process is applied to raw materials artifically infected with BSE, the study shows that no residual infectivity can be found in the gelatin with the most sensitive detection methods," a spokesperson said at the time.
More recently, the GME has had to address concerns regarding the presence of residual growth hormones, after stories appeared in the press regarding their use in feed, illegal in the European Community. The GME noted that in the event of contamination, the amount present in an animal would be extremely small, since it is rapidly eliminated.
While BSE and adulteration with hormones are not an issue for plant-based hydrocolloids, the influence of genetically modified organisms (GMOs) is. So far this affects only xanthan gum, a fermentation product typically obtained from microorganisms nourished with corn syrup. GM corn has penetrated deeply into the US market, where GMOs are widely accepted. In the European Union, however, they are regarded with deep suspicion, and a 1998 moratorium on the approval of new biotech products has effectively prevented the importation of GM corn and derivative products, such as xanthan gum made with GM corn syrup.
The Bush administration has moved to bring the issue before the World Trade Organization. If a trade war results, the xanthan market would be damaged, says IMR's Mr. Seisun. However, a trade agreement would not eliminate the GM issue, he notes. "Consumers are still going to be very concerned, and whatever the legislation is, the supermarkets in Europe are going to be very shy of using GM products."
Manufacturers are listening carefully to the market. "It's becoming more and more important to supply non-GMO xanthan, which we do out of a plant in the UK," says Jack Koberstine, senior vice president, business management and commercial at CP Kelco. "We've ramped up production there this year, and we're starting to see inquiries from US companies manufacturing in the US and exporting to Europe." To satisfy such customers, CP Kelco is exploring the possibility of producing non-GMO xanthan in the US. Rhodia, on the other hand, has patented a process for manufacturing a GMO-free product that uses only raw materials not involved in GMO discussions, according to Rhodia's Jutta Schock, product manager/asset manager hydrocolloids North America.
IMR estimates the size of the US xanthan market (in food) at between $220 million and $250 million, with strong growth of 5 to 5.5 percent. Mr. Koberstine puts market growth at 5 to 7 percent. Ms. Schock agrees, and estimates the market's volume at 10,000 metric tons. She attributes xanthan's strength to its functionality. "It has such a wide range of applications, as well as conditions," she notes. "It is very, very stable, and cold-applicable, so you don't have the restriction of hot application."
CP Kelco is the largest producer of xanthan, followed by Rhodia, Jungbunzlauer and ADM, according to IMR. CP Kelco, which has three xanthan plants of its own, has negotiated an early exit from a contract with an external manufacturer that was to have run until 2009. Production from that facility is to fall off dramatically beginning next year. The transition will, however, be seamless, says Mr. Koberstine, who notes that CP Kelco will ramp up its own capacity in the UK as the contract is phased out. A new wastewater treatment system at the Okmulgee, Okla., facility will allow increased production there, also.
Degussa is another notable producer, and Staley and Cargill have announced plans to enter the market. Staley plans to build a plant at its site in Decatur, Ill., with phase one due for completion next year. Full-scale capacity will be added in phases, depending on market conditions. Cargill is forming a 50/50 joint venture with Shandong Huanghelong Group (SHG) of Zibo, Shandong Province, China, in which Cargill's contribution will be "large-scale fermentation expertise, quality assurance methods and procedures, and worldwide market access," says a spokesperson, while SHG brings "a cost-effective manufacturing base, technology, and in-depth knowledge of operating a business in China."
Xanthan produced by Chinese companies is gaining traction in the US food market, says Paul Flowerman, president of P.L. Thomas & Co. Inc., a Morristown, N.J.-based supplier of natural gums and other botanical ingredients. "All measures of quality have shown continual improvement during the last two years, and several of the largest users of xanthan have now approved and are using some Chinese origin product," he explains. "Significantly lower prices from Chinese suppliers have been a reality for at least five years, but the market's growing recognition that much of this production may reliably be used in food applications is more recent." Yves Maltete, market manager NAFTA for the Degussa Texturant Systems business line, part of Degussa's new Food Ingredients business unit, agrees that Chinese manufacturers have used low prices to increase their presence in the US. "However," he adds, "inconsistent quality and supply have not convinced a lot of customers yet." Additionally, many Chinese manufacturers currently use ethanol processing, which is not in line with US regulation, according to a source. A GRAS petition has been filed by a Chinese manufacturer and a US company, but the outcome of this petition has yet to be seen.
One manufacturer notes that even if Chinese suppliers have not cracked the food market, their presence in the oilfield and some industrial markets nevertheless frees supply for the food market, putting downward pressure on prices, which have softened dramatically over the last five years. However, prices have "bottomed out," he adds, observing that supply has tightened as demand catches up with capacity. Demand has moreover picked up somewhat in oilfield, according to another supplier. Amid these improved conditions, Rhodia moved to increase prices for all food grades of xanthan by 10 percent on July 1, and CP Kelco has announced an August 1 increase on its Keltrol food grade xanthan of up to 10 percent, depending on volume and grade.
Carrageenan and Alginates
Carrageenan is growing somewhat more slowly than xanthan, 2.5 to 3.5 percent annually in the US, according to IMR, which puts the market's value between $220 million and $250 million. Kelco's Mr. Koberstine puts growth at 3 to 4 percent, while Rhodia's Ms. Schock estimates 7,000 metric tons volume and 2 to 3 percent growth. FMC BioPolymer is the leader in this market, IMR's Mr. Seisun says, followed by CP Kelco, Shemberg and Degussa (the last two tieing for third). Rhodia, through a joint venture with the Chilean producer Gelymar, and Danisco are also notable participants.
An extract from red seaweed, carrageenan is widely used in meats and neutral dairy products-fairly mature markets. One manufacturer, noting that carrageenan has seen some growth as a replacement for gelatin, says that prices have been "trending downward," but a turnaround may be close. FMC BioPolymer's global business manager Herb Sawyer, who puts the global market for carrageenan at about $300 million, says that prices have increased slightly, and another observer says that prices have "bottomed out."
The main driver for carrageenan is its very specific interaction with milk products, according to Ms. Schock. "That makes it very often the first choice for dairy applications." However, hydrocolloids are often used in combination, she adds. "Many combinations, such as xanthan/guar or xanthan/guar/locust bean gum show real synergistic effects, and if they are used correctly in the development of a formulation, they can provide cost savings." This is one advantage of Rhodia's own wide pallette, she says, which collects xanthan, carrageenan, guar and locust bean gum.
CP Kelco is expanding carrageenan production at its facility in Cebu, the Phillipines, where the company makes semi-refined (also known as PES, or Pro-cessed Euchema Seaweed) carrageenan and refined carrageenan (using a gel press). The facility's capacity will increase within nine months. "Investment in Cebu will give us the capabilities for a new product line, the ability to blend types of carrageenan," says Mr. Koberstine. "Any number of new products will come out of the Phillipines."
The US market for alginates, which are obtained from brown seaweed, is about 4,000 metric tons, according to IMR, and growing at 2 to 3 percent. ISP and FMC dominate the market, each with 30 to 40 percent, according to a source. Both entered through acquisitions, ISP of the Monsanto Company's Kelco Alginates division, and FMC of Norsk Hydro's Pronova BioPolymer. Other players include Danisco and Degussa. Chinese companies have made a strong entry into the industrial market, softening prices considerably, but FMC's Mr. Sawyer says prices have stabilized. Both FMC and ISP attempted price increases in October.
Several producers are also building new capacity to satisfy the market for pectin, which IMR estimates at $220 million to $250 million, growing 4.5 to 5.5 percent per year. Especially well suited for low pH systems, pectin is seeing some of its strongest growth in the acidified drink market.
CP Kelco, the number one player, is expanding capacity for the production of low-methoxyl amidated (LMA) pectin by 15 to 20 percent at Skensved, Denmark, this summer. An expansion at Limeira, Brazil, will double CP Kelco's capacity to produce high-methoxyl (HM) pectin when it comes on line in 2005. "Our work in Skensved helps support the growing demand for LMA pectin, and it brings added capabilities to deliver new, valued-added products to our customers," says Martin Sapone, pectin business director. "Our capacity expansion in Limeira positions us to serve the high-growth regions of our HM business, namely Eastern Europe and Asia." The company also produces pectin in Grossenbrode, Germany.
Danisco, the number two player, is expanding capacity at Smirice, Czech Republic, by 40 percent, says Mr. Hjorth. In Tecoman, Mexico, the company is investing DKK 40 million ($6.2 million) to expand production of low ester pectin (another name for low methoxyl pectin), which is especially useful in jam with low sugar content, fruit blends for sweets, bread and dairy products, and yogurt. Mr. Hjorth estimates growth of the global pectin market at 5 to 6 percent, and Danisco's share at 25 percent.
Neuenberg, Germany-based Herbstreith & Fox, the number three player in pectin, has not announced any recent capacity increases, nor has Degussa. But there is a relatively new player on the scene, Chicago, Ill.-based Citrico. Founded in 1997 as a manufacturer of citrus-based products, Citrico brought its A$46.7 million pectin facility on line in late 2001. Located in Machlin, Germany, it has an annual capacity of 4,500 metric tons, and expansions are planned. Citrico also manages citrus groves and processing operations in Argentina, Mexico and South Africa, an advantage since the company derives its pectin from lemon peel.
Tree Exudates and Seed Gums
Other important hydrocolloids include seed gums such as guar and locust bean gum, and tree exudates such as gum arabic. The availability of these products is highly dependent on the weather. For example, the price of guar, which is produced primarily in India and Pakistan, more than doubled between May and August of last year because of "disastrously deficient 2002 monsoon season," says P.L. Thomas's Mr. Flowerman. "However, the market's eventual recognition that the carryover and irrigated cultivations assured sufficient supplies resulted in some price decline from the highs and a narrow trading range. With the onset of what is expected to be a satisfactory monsoon, prices have currently declined but are still 50 percent above the premonsoon levels of 2002."
Excluding imports to Louisiana and Texas, which go mostly to the petroleum industry, 26,689 metric tons of guar for food, pet food and other industrial applications were imported in 2001, versus 27,865 in 2002. However, 2003 has seen a decrease: in the first quarter, only 4,628 metric tons were imported, versus 6,929 metric tons in the first quarter of 2002. "The 33 percent decrease during the first quarter may be attributed to long positions taken by US importers during 2002 to take advantage of historically low prices earlier in the year or as defensive measures during the 2002 monsoon period," he explains. "We await statistics for verification of our impression that demands remains moderate at best."
Rhodia's Ms. Schock puts growth at about 2 percent. "For guar gum, the main reason for the big volume as well as the growth rate is primarily price," she says. "Basically, guar gum is still the hydrocolloid that gives the highest viscosity per dollar-[although] that though doesn't mean it's the best." Ms. Schock notes that a joint venture in India with Hichem, the growing and processing of guar in Texas and the manufacturing site for guar powder in Europe put Rhodia in a unique position. "The global network really helps to define the best sourcing strategy and minimizes risks," she says. New developments like FiberFIT SF 80 allow guar to be seen not only as a simple thickener but also as a functional ingredient with health benefits, she adds. Other suppliers of guar include Degussa and CP Kelco. Menlo Park, Calif.-based SRI Consulting also identifies Polypro International and TIC Gums as US producers.
P.L. Thomas, which supplies a wide range of gums, is introducing a new guar product, Ultraguar, a rapidly hydrating food grade that develops over 5,000 centipoise within two minutes. "Ultraguar will extend the range of food product applications for guar gum," says Mr. Flowerman. "[It] is an example of the focused innovation necessary if natural gums are to grow beyond the slow expansion of their established usage areas."
Imports of locust bean gum (LBG), which is used almost exclusively by the food industry, fell from 2,670 metric tons in 2000 to 2,346 metric tons in 2001, a figure that, oddly, did not change in 2002. This year, however, imports for the first quarter-usually strongest in anticipation of the ice cream production season-have increased to 741 metric tons, versus 620 metric tons in the year-ago period, says Mr. Flowerman. "The most significant development is the continued, solid and significant market share of Spanish suppliers," he adds. In 2000, they supplied 52 percent of the market; in 2001, 55 percent; and in 2002, 62 percent. During the first quarter of 2003, they supplied 55 percent.
During the first quarter, prices rose. "If we remove the approximately 10 percent of importations for petfood and specialized applications, the average FOB export price rose 5 percent during the first quarter of 2003 as compared to all of 2002," says Mr. Flowerman. "Given the sharp rise in the euro against the dollar during this period, and at an even faster rate during the second quarter, overall LBG prices have surely risen further recently and further upward price pressure may be expected. LBG demand appears to be steady or perhaps a little upward, and we believe it may be characterized as price-demand inelastic for quarterly price increases of 10 percent or less."
Ms. Schock says that the primary attraction of LBG is the texture it provides. "It is really hard to mimic with other hydrocolloids," she notes. "It's not as widely used as others. It's very specific for applications that it is traditionally formulated into, which is very much where it remains."
In addition to Rhodia, Danisco and Degussa are notable producers of LBG, and SRI identifies Chart Corp. as a US producer. Altogether, there are about 12 suppliers, mostly in the Mediterranean area, where the raw materials are available, according to Mr. Hjorth. Danisco is by far the largest LBG producer with a 25 percent market share, he notes, twice as large as the next player. The company is planning to invest in a new oven to expand production to meet growing demand.
Gum arabic has been strong, volumes growing 1,000 metric tons per year between 2000 and 2002, when imports reached 15,000 metric tons. Mr. Flowerman attributes the development to years of verifiable 20,000+ metric ton buffer stocks maintained by the Sudan Gum Arabic Company and remarkably low and stable prices, which have given the market enough confidence to put gum arabic into many new products, especially beverages. He says the present supply season has been disappointing, though the existence of the Sudan buffer stock has kept prices from surging. "Throughout Africa, the tapping and harvesting of the top quality has been much less, and it has recently become very difficult to procure this quality except from the Sudan, which is also somewhat delayed in making shipments," he notes. "In its June 8 market report, the Gum Arabic Company reports purchases during the present season, which is ending, to be just 15,000 metric tons, with 3,000 or hopefully somewhat more anticipated. The buffer stock is still more than 20,000 metric tons, but much of this is already needed to cover open contracts."
It is not clear whether unfavorable natural circumstances or insufficient prices for the collectors and merchants are responsible for the well below average new crop this season, says Mr. Flowerman; it is probably a combination of the two factors. "Efforts by the African producers to raise crude gum prices appear to have been sporadic and unsystematic at best," he adds, "and the demand side has therefore not as yet been tested as to its responsiveness to some price increase. Past customer surveys clearly demonstrate that uncertainty of supply, rather than moderate price movement, is the greatest concern among gum arabic users. All sectors of the industry should have a strong interest to secure any African stocks withheld from the marketplace and to do everything possible to encourage an excellent crop during the season beginning in October 2003."
US producers of gum arabic include TIC Gums, Gum Technology, Frutarom Meer, Colony Import & Export Corp. and Chart Corp., according to SRI.
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