European companies that use fermentation for industrial applications are
currently finding it very difficult to secure the supply of raw materials –
sugar and derivatives – at competitive (world market) prices. This is due to
the EU’s revised sugar policy. Since the introduction of this policy in 2006,
the gap between the EU price and the world market price for industrial sugar
has increased strongly. Currently the price in the EU market is 1.5 times the
world market price. In addition, the new sugar regime has led to decreasing
availability and hence major price increases for important sugar-related raw
materials such as the by-product molasses.
The European fermentation sector, which includes companies such as DSM, Purac,
Evonik (previously Degussa), Jungbunzlauer and Ajinomoto, converts industrial
sugars into high-added-value vitamins, antibiotics, food additives such as
citric acid, enzymes, amino acids and bioplastics. In this sector, the Dutch
company DSM holds a leading position in vitamins, penicillin and food
additives, a substantial part of which are (still) produced in the Netherlands
and other European countries. A number of direct comparisons have shown that
fermentation processes are more efficient than conventional chemical processes
in terms of energy and water use, number and volume of solvents used and waste
volumes. The “bio-based economy” has already started, for the fermentation
sector currently accounts for 5% of overall chemical production, with a real
chance of doubling this figure within the next five years.
However, the current high sugar price is a major barrier to the further
development of fermentation business or even the continuity of the existing
activities; the industry has to buy sugar at much higher prices that its
competitors outside Europe, who compete in the same global market – a market
that is moreover confronted with aggressive and sometimes even
anti-competitive pressure from other countries, in particular from Asia.
Companies are closing in Europe, measures will come too late
If
no action is taken soon, the industry will have to wait until 2014 to get a
level playing field, when the global sugar market is envisaged to be
completely liberalized. It cannot wait that long. Already, manufacturing
operations are being closed and relocated to countries outside Europe. Recent
examples explicitly linked to too high raw-material costs are the closure of
the Tate&Lyle citric acid plant in the UK in early 2007 and the closure of the
Purac lactic acid plants in the Netherlands and Spain, announced in October
2007. Other parties are reconsidering their current fermentation activities
and investment plans in Europe.
Contradictory
A price increase for industrial sugar seems to be
contradictory to the aim of the EU sugar reform that was introduced in July
2006. This aim was to drastically lower the minimum guaranteed price for sugar
from 600 to 400 €/ton in the period 2006-2010, in anticipation of the
envisaged free global market for sugar (2014). However, this price cut is
currently being applied only to sugar used in the food industry, which
accounts for the bulk of EU sugar, but not for industrial sugar, which
represents about 3% of the total.
Industrial sugar has become more expensive... How come?
The
European sugar market is divided into quota sugar and out-of-quota sugar,
which includes industrial sugar. For quota sugar there is a minimum guaranteed
price, but not for out-of-quota sugar: this can be sold to the industry at
freely negotiable prices, hence lower than quota sugar. Obviously, for sugar
producers the margins on quota sugar are more attractive. The European sugar
market is fully isolated from the rest of the world because imports are
subject to very high duties. Due to the fact that there is insufficient
competition between suppliers and the industry is effectively prevented from
importing (raw) sugar from outside Europe, there is a major and structural
difference between the European and the world market sugar prices.
What needs to be done?
In drafting its new sugar regulation,
the European Commission stated that a competitive sugar-consuming industry is
in the EU’s interest. The view that the fermentation industry is the backbone
of the emerging bio-based economy is shared by the European Commission as well
as national governments, e.g. the Dutch. The EU sugar regulation includes a
provision to the effect that extra measures will be taken to achieve the
aforementioned goal. It specifically mentions duty-free imports and production
refunds. Although effective measures are badly needed, they have not been
taken until now.
And what will happen if no action is taken?
If industrial sugar
does not become available at world market prices soon, the ongoing plant
closures and the current reluctance among companies to make new investments in
the Europe will cause this region to lose its current leading position in the
world. Without a healthy bio-based industry there will be no bio-based economy.
The European Commission and the EU Agricultural Council (i.e. EU member
states) need to take action now and remove import barriers for crude sugar in
order to restore fair competition in the sugar market. The only thing they
need to do in order to make this happen is to apply the EU directive to the
letter! Only then will Europe and the Netherlands have a fair chance to
develop a bio-based society.
