Severe overcapacity in corn starch production leaves the industry mired in difficulty
After the rapid expansion of previous years, corn starch enterprises are currently plagued by severe overcapacity, the corn starch market has entered a downward cycle, and enterprises are struggling on the edge of losses. Overall, most small enterprises lack confidence in continuing in the corn starch industry, and as environmental protection requirements in the Hebei region continue to rise, coupled with tight funds, these shut-down small enterprises are unlikely to resume production.
By contrast, large corn starch processing enterprises have shown stronger resilience, mainly because, on the one hand, large enterprises generally have their own power plants to supply electricity and steam, which helps them reduce production costs; on the other hand, large enterprises also have downstream deep-processing capacity, which supports upstream corn starch production. At present, due to sluggish downstream demand, many large corn starch enterprises have accumulated inventory, and some enterprises say that a loss of 100 yuan per ton is tolerable, and they try to maintain continuity of production.
The reason the corn starch industry has fallen into operational difficulty, apart from environmental pressure increasing costs, can be summarized in three points.
First, corn raw material prices remain high. With many consecutive years of state purchasing and storage, the corn inventory in the state's hands is currently too high; in the 2014/2015 year alone, the temporary state corn purchase volume exceeded 82 million tons, and adding the carryover inventory from temporary state and national reserves of previous years, the corn inventory in the state's hands exceeds 150 million tons, basically meeting one year of domestic corn demand. The huge corn inventory increased agricultural fiscal support while also affecting the amount of corn circulating in the market. After the second quarter of 2014, because corn was mainly concentrated in the state's hands, the grain circulating in the market was relatively tight, and corn prices soared rapidly; in mid-August, corn prices in the Shandong region soared to 2800-2850 yuan/ton, up 500 yuan/ton from the end of March. The excessively high corn prices put the starch deep-processing industry under enormous production cost pressure.
Second, funding pressure has increased markedly. Domestic starch producers are mainly private enterprises, with relatively high financing costs, generally exceeding 8% annualized. The raw material corn has obvious seasonality, and in the past two years domestic corn prices have fluctuated enormously; under funding pressure, it is very difficult for enterprises to build large inventories when corn prices are low, and when corn prices rise they must bear enormous cost pressure, even suffering severe processing losses. Before the first quarter of 2014, domestic corn prices continued to decline, but enterprises could not build large inventories due to funding pressure; in the second and third quarters, domestic corn prices soared sharply, and enterprises suffered extremely large losses, at one point losing 150-200 yuan per ton of corn processed, lasting nearly one quarter.
Third, downstream demand is weak. The main downstream products of starch are sugars, including high-fructose corn syrup, maltose, glucose (solid and liquid), and dextrin. According to figures released by the statistics bureau, the total of solid sugar and liquid sugar in 2012 was 11.46 million tons, consuming about half of the starch.
According to senior researcher Lin Guofa, the current downstream starch product -- sugars -- has already shown overcapacity. At the end of 2014, national high-fructose corn syrup capacity was close to 6 million tons, while 2014 output was only 3-3.2 million tons, with capacity utilization of only 50-55%. Glucose and maltose likewise show a certain degree of overcapacity, while dextrin capacity and demand are roughly balanced and can maintain a relatively high operating rate. Alcohols have gradually shown overcapacity due to capacity expansion in recent years, and because relatively high domestic corn prices have led to relatively high prices, export volumes have fallen back. Among amino acids, lysine has already shown severe overcapacity; corn prices are relatively high, domestic lysine production costs remain high, while foreign capacity is relatively high, making amino acid exports increasingly difficult. In chemicals, the papermaking industry's continued downturn in recent years is unfavorable to starch demand, and slower growth in demand for meat products and puffed foods in the food processing industry is also unfavorable to starch industry demand.
In response to the difficulties of the corn deep-processing industry, the industry believes that consideration could be given to implementing targeted price direct subsidies, and that policy considerations need to balance the interests of farmers and deep-processing enterprises, while also solving the problems enterprises face in obtaining financing and loans. In addition, enterprises should be encouraged to use financial tools such as futures to avoid the risk of price fluctuations in raw materials and products, and to use commodity futures to establish virtual inventories and hedge against downside price risk.