Fufeng shrugs off rising costs

PUBLISHED : Monday, 08 January, 2007, 12:00am
UPDATED : Monday, 08 January, 2007, 12:00am

Mainland's largest glutamic acid producer is confident it can maintain profit margins despite soaring corn prices

Fufeng Group, China's largest glutamic acid producer, faces the challenge of maintaining its profit margins in light of soaring prices of corn, which accounts for 50 per cent of its production costs.

The group's annual glutamic acid production capacity now stands at 280,000 tonnes following the opening last month of the first phase of its production plant in Hohhot.

The 658,235 square metre facility has an annual production capacity of 120,000 tonnes.

Fufeng Group also has plants in Shandong and Shaanxi.

Glutamic acid, which is made from starch, is a key ingredient in food additives such as monosodium glutamate. Fufeng controls 20 per cent of the mainland market for the product.

Chinese corn prices have risen to 1,500 yuan per tonne, a level not seen since 2004.

Most farmers have decided to defer their corn sales in hopes of higher prices.

However, Fufeng chairman Li Xuechun played down the impact of corn prices on profit margins, saying prices of its products have room to rise to cover increased production costs.

He forecast a 'modest' rise in glutamic acid prices, which at present range from 7,000 yuan to 8,000 yuan per tonne.

Mr Li said corn prices would probably decline after the Lunar New Year next month as most corn purchasers had already stopped placing orders.

'Farmers cannot keep their corn indefinitely,' he said.

Fufeng Group said it generated a net profit of 237 million yuan last year on turnover of 1.2 billion yuan. Glutamic acid accounted for 58 per cent of turnover and xanthan gum generated 5 per cent.

The company also makes fertilisers and starch sweeteners.

In a bid to expand its production capacity, the group hopes to tap the equity market.

Mr Li, who owns more than 60 per cent of Fufeng Group, expressed interest in floating the company on the Hong Kong stock exchange, though he provided no details.

According to earlier reports, the company hopes to raise about HK$900 million through an initial public offering.

By next year, the company intends to raise its production capacity for xanthan gum, used as a thickener in sauces and oil products, by 250 per cent to 28,000 tonnes.

It plans to increase capacity for corn starch to 340,000 tonnes from 140,000 tonnes, and for MSG to 225,000 tonnes from 75,000 tonnes.

The company, formed in 1999 with seed money of 1.9 million yuan, became the country's largest glutamic acid producer by acquiring financially troubled rivals.

Mr Li said the continuing market consolidation would eliminate small operators, particularly those with weak management.

Fufeng would continue to seek acquisition opportunities, including buying equipment from loss-making plants at attractive prices, he added.