What’s ahead for Chinese amino acid markets?

ANALYST’S CORNER

What’s ahead for Chinese amino acid markets?

Low soybean meal prices resulting from ample global supplies will likely drive amino acids use downward.

Corn and soybean meal prices have been at high levels this year, live hog prices are following a bullish trend, China is starting to move away from its ‘Covid dynamic zero’ policy, and large new lysine and threonine capacities are set to launch next year. All of these factors are expected to have a major impact on Chinese amino acid markets in 2023.

Chinese lysine and threonine prices started 2022 at high levels, supported by elevated raw material costs, global logistical problems, and the Chinese power shortage. Lysine HCl FOB China prices fluctuated within a range of $1.68-1.85/kg until May, after which they steadily declined, reaching an average of $1.18/kg in September. For overseas markets, falling prices were mainly the result of overpurchasing in Q1 2022.

As many overseas purchasers have been hesitant to book material for delivery in Q1 2023, stock levels are set to drop, meaning that “a bullish market is likely to appear just as everyone has become accustomed to the bearish market”, a Chinese source said.

In the Chinese domestic market, average lysine HCl prices were within a range of CNY 13.15-12.15/kg from January to the beginning of May, after which they too followed a downward trend.

Most Chinese amino acid producers enjoyed good profit margins in H1 2022. This was partly because soybean meal prices started increasing from January, which boosted demand for amino acids in the domestic market, according to a Chinese producer.

CORN AND SOYBEAN MEAL

Given that fermented amino acids in China use corn as a feedstock, rising corn prices, together with lower lysine and threonine prices, squeezed producers’ profit margins in H2 2022. However, continuously high corn prices would normally be expected to cause a rise in amino acid prices, according to the same Chinese source.

Corn prices in 2022 were already high, while planting costs for corn in China (such as land rents, labour, seeds, and fertilizer) are all increasing. The producer said it expected average corn spot prices to rise by CNY 100-200/tonne in 2023.

Another Chinese source said that domestic Covid lockdown rules have eased and logistics have improved, meaning that farmers could sell more corn. The source suggested that spot prices for

Meihua’s new capacity would be equivalent to Europe’s consumption for a whole year; where would they find this market next year?

ANALYST’S CORNER

corn could drop by a further CNY 100/tonne at most, because Chinese stocks are at 200 million tonnes compared to the normal level of 800 million tonnes. If prices were to drop any further, the government would quickly take action to build up its corn stocks, the source predicted.

Although soybean meal prices have been dropping since mid-November, they have remained at historically high levels. Average spot prices for soybean meal in 2022 were around CNY 4,600/tonne but were expected to drop to CNY 3,800-4,300/tonne, a third Chinese source said. Soybean meal spot prices were in a range of CNY 3,000-3,500/tonne at the end of 2020. Lydia Ma

The same source said, “It’s not normal to have soybean meal prices so high, so a price drop is expected; the soybeans are growing well in Argentina and Brazil, and the US bean harvest is almost complete. I have heard the harvest rate is said to be higher than ever... I think this will affect a part of amino acids usage.”

An EU premixer said that it did not think valine and tryptophan intake in Asian formulas would be high, as soybean meal prices in China had dropped significantly in the last 2-3 weeks.

“It seems [soybean meal prices] will keep on dropping, therefore the intake of specialty AA is going to be lower. We do not expect the market will purchase at [the current] high prices in Asia,” it said. “For January shipments, maybe prices will still remain high, but afterwards we are expecting to go fast to previous levels for valine and tryptophan in China.”

However, the Chinese government’s policy of low-protein feed is likely to continue giving support to specialty amino acids demand.

MEAT MARKET

In terms of Chinese downstream markets, live hog, poultry, and aqua replenishment have all increased in H2 2022, meaning that demand for amino acids is expected to be higher in 2023 compared to 2022, a fourth Chinese source said.

Another source said that overseas amino acid stock levels remained high due to supply exceeding demand, but the domestic market was performing well because of better breeding industry profits.

The most actively traded pig futures on the Dalian Commodity Exchange settled at CNY 19,485/tonne ($2,796/tonne) on 8 December for January delivery, compared to CNY 12,820/tonne ($2,011/tonne) on 15 March for May delivery. NEW CAPACITIES PLANNED FOR 2023

Notwithstanding these drivers, large-scale capacity increases planned for next year are causing a great deal of uncertainty in the amino acids market. One market source said that “normally Q4 is peak season, but in the current year, the prices were on a downward trend due to the producers’ sales strategy differences and the expectation of new capacity launching, such as GBT and Yufeng on lysine, and Meihua and Fufeng on threonine.” GBT, which stopped production in 2019, is expected to restart with a capacity of 360,00 tonnes/year of lysine sulphate and 80,000 tonnes/year of lysine HCl. Yufeng Industrial is planning to start up 500,000 tonnes/year of new lysine capacity.

Meanwhile, Fufeng is set to complete its addition of 50,000 tonnes/year of threonine 70% capacity in 2023, while Meihua is planning to launch 250,000 tonnes/year of new threonine capacity.

Industry sources expressed the view that it would be impossible for the market to absorb such a large increase in output next year, so the new capacities’ utilisation rates are expected to be low.

“Meihua’s new capacity would be equivalent to Europe’s consumption for a whole year; where would they find this market next year?” a Chinese producer said.

“It will take time for new entries to get into the market and build up a customer base,” another Chinese producer predicted.

CHINA COVID UPDATE

China has been relaxing its famously-strict anti-Covid policies since December 7.

Feed additive market sources said that logistics and production were no longer being impacted, and people could travel freely once again.

This was a departure from the situation observed from October to 5 December, when many cities entered lockdown or ‘silent mode’, especially in North China, Henan, Hebei, Sichuan, Chongqing, etc. Major cities like Beijing and Shanghai also saw more stringent Covid control policies being implemented.

Sources reported during this period that production and logistics were being impacted, but it was hard to measure to what extent as policies varied from village to village, city to city, and province to province.

By Lydia Ma, analyst