Gelatin Prices Benefit From BSE, Energy Costs

26 March 2001 00:00  [Source: ICB Americas]

By Lisa Jarvis

Gelatin prices are rising after a period of softness as raw material and energy costs come under pressure. The market, already affected by the BSE scare, will likely get even tighter as the outbreak of foot-and-mouth disease in Europe makes raw materials even scarcer. In addition, the industry is restructuring, with one leading producer expanding its holdings while another is up for sale.

Gelatin prices are significantly higher after a period of weakness. They are now resting in the $2.20 to $2.60 per pound range, depending on Bloom strength, according to San Diego, Calif.-based consultancy Industrial Market Research (IMR) International. The increases are the result of a combination of rising manufacturing costs, improved demand and more competition for an already limited supply of raw materials.

This is a significant improvement from the pricing trough of just a year ago. "In January 2000, prices were well under $2 per pound, in the $1.60 to $1.80 per pound range," says Denis Seisun, analyst at IMR. Prices eroded due to oversupply and a drop-off in demand from some sectors.

The primary driver behind price increases has been the recent spike in both raw material and energy costs. With energy prices skyrocketing, gelatin producers are being hit both on the manufacturing side and the distribution side. "Our energy costs are up over 200 percent, so we have to endeavor to pass some of that along to our customers," says Mr. George Masson, president of SKW Gelatin and Specialties Unit in the US.

Perhaps more importantly, government action and consumer concerns over bovine spongiform encephalopathy (BSE) have tightened the raw material supply, resulting in higher gelatin prices. A year ago, "there was ample supply of raw materials, but right now they are being used by other applications and it is harder for gelatin producers to get them," adds IMR's Mr. Seisun.

The European market, as the biggest producer, has been most directly impacted as consumers in the food sector turn away from acid bone gelatin to porcine sources. BSE has also limited cowhide availability, putting more pressure on the raw materials market. As a result, gelatin raw materials prices have risen rapidly.

In October 2000, regulations were implemented in the European Union that call for the removal of any animal tissues likely to be infected with BSE used in gelatin manufacture. The tissues in question, called specified risk materials, include the skull and spinal cord of cattle. Starting in April, the rules will be extended to imports to Europe, which will affect US producers.

The European legislation to exclude bovine vertebrae in gelatin will essentially make bovine bone-sourced gelatin impractical, unless it is sourced from the US or another category I or II countries. But at the same time, competition for pigskins has heightened as new applications emerge. For example, Eastern European countries have turned to pigskin as a more affordable source of protein, adding to the tightness.

"It's a true supply/demand situation where you have a finite raw material envelope and additional people competing for it. Over the last 18 months, it has had a dramatic effect in Europe, causing raw material costs for pigskin to skyrocket," adds Mr. Masson.

The situation will likely worsen with the recent outbreak of foot-and-mouth disease in Europe. With the movement of animals and raw materials being restricted or blocked in Europe, availability of raw materials will be further limited. Raw material costs will likely continue to rise, which will inevitably be reflected in higher gelatin prices.

Though the US has not fallen victim to either BSE or foot-and-mouth disease, the US Food and Drug Administration and USDA have followed European legislative moves closely and have taken measures to prevent similar outbreaks here. BSE has had the greatest impact, because while the US edible gelatin market does not depend on bovine acid bone or some of the other sources popular in Europe for gelatin production, it does import bovine hide gelatin for edible and pharmaceutical applications.

On the demand side, producers are seeing a rebound in gelatin demand after a period of softness in the pharma sector. The health and nutrition side of the soft and hard capsule business experienced a slow period, but appears to be picking up.

Despite improving demand, however, the industry is undergoing some restructuring. In February, one of the leading gelatin producers, DGF Stoess AG, entered into an agreement to acquire Leiner Davis Gelatin, the global edible gelatin business of Goodman Fielder Limited, for $170 million. The Goodman Fielder gelatin unit includes the Hormel business the company bought several years ago.

The addition of Leiner Davis will move DGF into the number one position in the gelatin market, with one industry source estimating it will bring their total capacity to almost 75,000 metric tons. The acquisition will expand DGF's global network, gaining production sites in Australia, New Zealand, South Africa, the US, Mexico, Argentina and Brazil, as well as broaden the company's product range. DGF was neck-and-neck with SKW, which has roughly 50,000 metric tons of gelatin capacity, for the leading spot in the gelatin market.

SKW has announced it will sell its gelatin business due to the recent merger of SKW with Degussa-Hüls, which created what is now called Degussa. The companies have outlined a divestment plan for nine businesses, including the gelatin unit, as part of their integration effort. The industry is waiting to see who will pick up the business, with some sources suggesting it's up in the air, as DGF would be an unlikely candidate after the recent Leiner Davis purchase.

The global gelatin industry, valued at $1.2 billion in 1999, is expected to grow at a modest 2 to 3 percent per year, according to Gelatin Manufacturers Association statistics.

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