Hong Kong, August 21 - Fufeng Group Ltd (0546.HK: Quote, Profile, Research), China's largest producer of food additive MSG, expects a marginally better second half after a plunge in first-half profits due to surges in corn prices and tough competition.
Li Xuechun, Fufeng's chairman, told Reuters on Tuesday the company should benefit from Beijing's policy of curbing a rapidly expanding, increasingly overcrowded corn processing industry because it would whittle down demand for the grain.
"It's been our hardest time," Li said. "The production and operation situation for the second half of this year will improve slightly."
During the first half, the additives maker saw its net profit shrivel 71 percent to a mere 32.81 million yuan ($4.32 million) -- despite a 36 percent rise in turnover.
It blamed sharp rises in corn prices and surprise capacity expansions by fellow corn processors, such as Global Bio-Chem Technology Group Co. Ltd. (0809.HK: Quote, Profile, Research) or Xiwang Sugar Holdings Co (2088.HK: Quote, Profile, Research), for squeezing margins on glutamic acid, a raw material for monosodium glutamate, by as much as 53 percent, to 11.1 percent.
A surge in Chinese pork prices also triggered additional rises in corn prices in 2007's second quarter, because farmers were then encouraged to buy more grain for pigs.
Fufeng's share price has plunged 61 percent since it listed in February -- the sharpest fall among similarly hard-hit processors Xiwang and Global Bio-Chem.
GROWING ALARM
Li estimated the company had expanded its market share to about 30 percent of China's glutamic acid demand as it ran its plants at near-full capacity despite tough competition.
Alarmed by record corn prices in China, Beijing introduced a series of measures to curb corn processing industries, including the fuel ethanol sector, late last year.
In June the government said it would also shut smaller MSG plants, targeting capacities below 30,000 tonnes a year.
Beijing's efforts, including curbing exports of the grain, have helped stabilise domestic corn prices in past weeks ahead of China's harvest of its 2007 crop, which is expected to hit a record 149 million tonnes.
"We're happy to see a speed-up in the industrial consolidation...due to the supportive government policy," Li said, adding the firm had already closed many small plants. Plus, the company has seen a pickup in prices for glutamic acid and MSG itself since late June.
Li said Fufeng, headquartered in Shandong, should rake in the profits from an expansion into Inner Mongolia, one of China's largest corn and coal producing provinces.
It has helped Fufeng slash costs for coal by more than 20 percent during the first half, which would more than offset higher expenditure on transportation.
Li expects savings in transport costs in the second half as Beijing is encouraging shipment via rail.
Also, moving from Shandong -- where processors competing for corn were concentrated -- to more remote Inner Mongolia would help diminish competition for the grain.
Fufeng plans to complete a second phase of expansion in Hohhot, the capital of Inner Mongolia, next year. Its annual capacity for MSG would then reach 225,000 tonnes, up from 75,000 tonnes now.