Thursday, October 27, 2011

Apple Juice Under Pressure

More cracks are appearing in China's rock-bottom-price-export juggernaut. Apple juice, which came out of nowhere to dominate the world market during the last decade, is losing its competitiveness due to a surge in apple prices.

The Consumers Daily reported the story about rising apple costs on October 25. According to the article, the price of apples used for making juice is up to 1400 yuan (US$220) per ton, which translates to a raw material cost of US$1430. (It takes 6.5 tons of apples to make 1 ton of apple juice concentrate for export.) Adding the cost processing, fuel, transportation and steel drums there is no room for profit at the current FOB export price for juice concentrate of US$ 1850 per ton. "Processors would rather stop production than lose money."

One processor said the raw material price went up to 1600 yuan (US$250) per ton in the last couple of days. The break-even price for juice is US$2200 per ton with this level of raw material cost. Chinese juice is losing its competitiveness versus European juice. Poland's cost of apples for juice raw material is US$175 per ton.

An industry spokesperson said juice concentrate manufacturers are facing a short supply of fruit, operating at only 40% of capacity. One processor said his company thought they could operate at full capacity during October but are actually only at 60% due to the short supply of fruit.

Some see a consolidation on the horizon. Small processors are having a hard time staying in business. If large processors can survive, there may be many acquisitions and mergers.

Keep in mind this is not the first time Chinese apple prices have surged. There was a similar crisis in 2007. There was also an apple bubble a year ago which popped by early spring of this year. Still, raw material costs do seem to be on the upswing in the apple juice business over the last few years.

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