Domestic MSG Industry Suffers A Lower Profit Level in 2011
Summary: Domestic MSG industry suffers a lower profit level in 2011 than 2010, majorly due to the significant increase in raw material cost.
Tags: MSG, monosodium glutamate, Meihua Group, Fufeng Group, raw material cost, glutamic acid, GA, fertilizers, threonine, corn oil, branched-chain amino acid, chicken powder, starch sweetener Based on the 2011 annual report of Meihua Holdings Group Co., Ltd. (Meihua Group) and the Announcement of Annual Results for the Year Ended 31 Dec. 2011 of Fufeng Group Limited (Fufeng Group), top 2 monosodium glutamate (MSG) producers in China, as well as CCM International's latest report, Production and Market of Monosodium Glutamate (MSG) in China, published in Feb. 2012, it's found that China's MSG industry suffered a lower profit level in 2011 than 2010, majorly due to the significant increase in raw material cost, according to CCM Internationalâ€™s April issue of Corn Products China News. In fact, the gross margins of Meihua Group and Fufeng Group both saw a decrease in 2011 over those in 2010, majorly caused by the poor performance of their MSG businesses. Specifically, the gross margin of Meihua Group's MSG and GA (glutamic acid) business declined to 22.8% in 2011 from 32.9% in 2010. And that of Fufeng Group's MSG segment including products of MSG, GA, fertilizers, threonine, corn oil, branched-chain amino acid, chicken powder, starch sweeteners, etc, also declined to 16.1% in 2011 from 22.7% in 2010. (TABLE) As a matter of fact, the larger increase scale of raw material cost than that of MSG price is the key factor for MSG's lower profit level in 2011. In line with Fufeng Group, its average sales price of MSG only rose by 1% to USD1,250/t in 2011 over that in 2010 (FIGURE), while the average market price of MSG's key raw material, corn starch, grew by 16.5% to USD494/t in 2011 according to CCM International, resulting in the profit decline in its MSG business. But actually, MSG's demand in 2011 performed well in accordance with CCM International's MSG report: its domestic apparent consumption volume enjoyed a 4.3% increase to over 2 million tonnes compared with that in 2010. In the mean time, its export volume also saw a 40.0% increase to about 290,000 tonnes. So it's believed that there were other reasons to explain the small increase scale of MSG price, such as Fufeng Group's low price strategy.
In accordance with Fufeng Group's claim, it intentionally adopted low price strategy in 2011, in order to accelerate the elimination of small and inferior MSG producers in order to further increase industry concentration and Fufeng Group's market share in the industry. As Fufeng Group is the largest MSG producer in China, together with its 30% market share in domestic MSG industry in 2011 as it claimed, Fufeng Group's low sales price restrained the overall average market price of MSG to head up. Therefore, small producers without cost advantage were driven to suspend or even stop production for the low profit. And in fact, through this low price strategy, MSG's sales volume in Fufeng Group enjoyed a 25% increase in 2011, amounting to 615,630 tonnes compared with that in 2010. Fufeng Group believes that the company will enjoy absolute competitive advantages and maintain its leadership in domestic MSG market in the future, because the company's annual MSG production capacity will increase to 1 million t/a by Q2 2012. And the company plans to keep adopting the low price strategy in 2012, trying to further increase the company's market share. All in all, it's believed that MSG's industry concentration will keep increasing, with market share focused in several leading producers, like Meihua Group and Fufeng Group. By then, MSG's profit will increase to a reasonable level and become relatively stable. Besides, governmental restriction can facilitate the progress. In view of MSG's high pollution and overcapacity situation, Chinese government has encouraged to increase the product's industry concentration through eliminating inferior capacity in 2010 and 2011. Actually, in 2010, about 234,000t/a of MSG capacity was eliminated by government, accounting for 8.2% of the total capacity all over the country. Moreover, according to the 2011 edition of Guideline Catalogue for Industrial Restructuring (the Guideline) published in April 2011 by the National Development and Reform Commission, MSG industry will maintain being restrained from 2011 to 2015. Source: Corn Product China News 1204 http://www.cnchemicals.com/Newsletter/NewsletterDetail_6.html
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