China's grip on key food additive
Vitamin C prices have spiked this year. China controls 80 percent of the market.
New York and Beijing — A sharp rise in the international price of vitamin C is focusing fresh attention on the risks of the world's growing dependence on China for essential food supplies and additives.
China, which exports more than 80 percent of the world's ascorbic acid – also known as vitamin C and a key food preservative – appears to have cut production over the past several months, pushing prices up by more than 200 percent to a four-year high.
Customers have scrambled for supplies of the additive, found in thousands of processed foods from fruit drinks to organic hamburger rolls, from applesauce to granola.
The production cutback follows a Chinese government drive to enforce pollution limits on chemical and pharmaceutical companies, sources in the vitamin industry say. The four biggest Chinese vitamin C producers are also facing a price-fixing suit in a New York court. Since January, prices have risen from $3.40 a kilo to $11 a kilo, according to industry sources.
The reduction in world supply comes in the wake of a series of scandals surrounding Chinese food and drug exports, some of which have been found to be tainted by poisonous chemicals. The Chinese have charged that US exports are tainted and have banned some of them as well. In the wake of the scandals, President Bush on Wednesday appointed an imports safety panel that will report to him in 60 days.
Though there appears to be no reason to believe that Chinese vitamin C is contaminated, the sudden shortage highlights another cause for concern over America's growing reliance on Chinese food imports. Only one Western company, DSM of the Netherlands, still makes ascorbic acid, concentrating production in Scotland since shutting down its US plant two years ago. Chinese firms have driven all other competitors out of business.
"They have virtually captured the lot, unbeknown to most people," says Leo Hepner, a London-based management consultant to the food and pharmaceutical industry. "It puts us in a very difficult situation if, say, they stopped making it."
Even some nutrition experts are surprised to learn that most of the world's vitamin C is produced in China. "We may need to figure out how it can be made closer to home," says Mara Vitolins, director of public health at Wake Forest University Baptist Medical Center in Winston-Salem, N.C. "Our own food supply is sort of vulnerable."
Ascorbic acid export figures released by the Chinese Customs Administration show that exports dropped by 24 percent in May 2007 from the month before, from 6,537 tons in April to 4,857 tons. That was 14 percent below the monthly average for the first six months of 2006.
Production has fallen, say manufacturers, because they are now being forced to abide by environmental standards that were applied only sporadically before.
"Some vitamin C producers have stopped production" to limit the waste water emitted, explains Kong Tai, former CEO and now board member of Jiangshan Pharmaceutical, one of the four big producers. "In some areas, the authorities limit the total amount of annual pollutant emission, so if you have reached that ceiling you cannot go on producing."
"The government has gone from turning a blind eye to complete panic and has blitzed the largest companies they can find and told them to do something quickly," adds David Townsend, the representative in China of DSM, which manufactures vitamins other than vitamin C in China.
"The vitamin C companies have been caught up in this," he adds.
The Chinese may also have cost pressures. One of the base materials for ascorbic acid is corn-based. The US cash price of corn is up 44 percent this year, a result of increased use for ethanol. Corn starch is used to make a form of glucose, some of which China imports to make vitamin C. China imports some of this base material. "The Chinese are not insulated from it [the price rise]," says Mr. Hepner.
Pollution controls and corn prices may not be the only factors in the rise, however. Within the industry, says Mr. Townsend, "it is widely known that prices of the companies here tend to be very similar and price hikes tend to occur at the same time. Certainly there is something going on … that leads to pushing prices up."
The four major Chinese vitamin C producers are currently facing an antitrust suit filed in the Eastern District of New York by two US companies as a class action suit. The suit alleges the four Chinese companies have established a cartel that "has affected hundreds of millions of dollars in commerce in products found in nearly every American household."
Among court documents are records from the China Chamber of Commerce of Medicine & Health Products Importers and Exporters citing how manufacturers were able to reach a self-regulation agreement to control the quantity and pace of exports "to achieve the goal of stabilizing and raising export prices."
The chamber makes no secret of its intentions on its website, where its regulations are posted. Among the organization's purposes, it says, is to "coordinate the import and export price" of pharmaceuticals "according to government authorization or the common requirements … of member companies."
"If they are selling in China it is not an issue, but they are selling most of their production on the international market, so they fall under different jurisdictions," says Townsend.
The Chinese companies named in the current antitrust case and a Chinese ministry have asked the judge to dismiss the lawsuit. That motion is pending.
The plaintiffs' lawyer, William Isaacson of Boies, Schiller & Flexner in Washington, says the current tightening in supplies "is the same conspiracy that is addressed in our lawsuit and it's obvious it's continuing."
"I know nothing about the current situation," says Joel Mitnick, a lawyer representing the Chinese Ministry of Commerce and a partner at Sidley Austin, a law firm. He says the allegations in the lawsuit concern actions taken several years ago. Stephen Bomse of Heller Ehrman in San Francisco, a lawyer for the companies, had no comment.
Ironically, the Chinese became the dominant exporters of vitamin C only after the US Department of Justice charged six Western companies with price fixing in 1999.
The so-called "vitamin cartel," which supplied 75 percent of the world's vitamins, was convicted and ordered to pay $1.5 billion in fines and restitution. Some executives received jail sentences. One of the largest fines was against Hoffmann-LaRoche of Switzerland. It eventually sold its vitamin subsidiary to DSM.
Until two years ago, DSM produced ascorbic acid in New Jersey. But the market was flooded with Chinese-made vitamin C. The price dropped to as low as $2 per kilo. DSM shifted its production to Scotland.
While the firms of the "vitamin cartel" colluded, the Chinese vitamin C industry was growing. Chinese leaders decided decades earlier that increased production of vitamins was critical to their countrymen's health. Chinese manufacturers were then well placed to take advantage of the breakup of the vitamin cartel, says Peter Kovacs, formerly CEO of NutraSweet Kelco and now a consultant to the food industry. They moved into the world market, taking market share by cutting prices, he says.
The quick shift this year in the ascorbic-acid market is having a ripple effect on some distributors. For example, the Shanghai Solidarity Chemical Industry Co. stopped dealing in ascorbic acid in May because the price was so unstable.
"Producers won't give you a price," says Bruce Yin, the firm's export sales manager. "If they sign a contract today at one price and then the price rises, they need to re-set the price, so lots of distributors are not doing [vitamin C] business anymore."
DSM, the only Western producer, says its Scottish factory can't keep up with demand. "We're getting all kinds of calls from people we have never dealt with," says Alexander Filz, a spokesman in Basel, Switzerland. "Something dramatic is going on."