The distortion between high production costs and low sales prices can be depicted in relation to four products: citric acid, penicillin G, vitamin C and vitamin B12. Until the late 1990s these products were produced and marketed by Western companies in the U.S., Europe and Japan but in recent years Chinese companies have captured a major share of these markets. In the following section we have compared the production costs of these products with their current [2007] and historic [1995] sales prices.

The key to low-cost citric acid is availability of cheap carbohydrate feedstocks particularly glucose and starch hydrolysates, produced by U.S. starch companies [corn wet millers]. In the mid-1990s Chinese companies became involved in citric acid originally using surface fermentation but eventually adopting the more efficient submerged fermentation process of U.S. and European companies. The feedstock used by Chinese companies is more expensive compared with that available to U.S. companies.

Production involves a fermentation stage when the strain is grown on the carbohydrate feedstock followed by precipitation and crystallisation of citric acid. We have analysed the production costs based on carbohydrate feedstocks at prices ranging from $165- 400/ton. The production cost varies from $1.09/kg with low- cost carbohydrate feedstock [from a U.S. corn wet miller] to $1.44/kg for a feedstock bought on the open market [e.g. as in China]. The 2007 sales price of Chinese citric acid is $0.9/kg, clearly below the production cost, even when a low-priced carbohydrate feedstock is used.

Antibiotics were produced in China during the 1980s, originally for first-generation antibiotics including tetracyclines and streptomycin, aminoglycosides notably gentamicin, amikacin, kanamycin, as well as macrolides including erythromycin, spiramycin and midecamicin. The technology and strains used in these processes were copied from U.S., European and Japanese patents. Based on Italian technology, Chinese companies subsequently became involved in the production of penicillins together with semi-synthetic derivatives ampicillin, amoxyxillin and cephalexin. A large proportion of their antibiotics were exported to Western countries at prices well below those of Western producers. It is inconceivable that Chinese production economics are superior to traditional Western antibiotics companies. Hence the low sales prices must be attributed to a desire to capture a major market share even if this involves fixing the sales price below production cost. The decrease in Chinese antibiotics prices has led to the withdrawal of most U.S., European and Japanese producers from this area. Today over 80% of global antibiotics production comes from China.

As with citric acid, the production cost of penicillin G can be reduced with a high-yielding strain fermented on low-cost carbohydrate feedstock [i.e. glucose]. We have calculated the production cost of penicillin G at the highest productivity available to be $8.9/kg. However the sales price of Chinese penicillin G is $6.5/bou [$11/kg] indicating that pen G is sold below its production cost.

During the 1990s Chinese producers became involved in the production of many vitamins including A, B1, B2, B6, B12, C and E.

Vitamin C production was developed by Western companies during the 1930s based on the Reichstein process starting from glucose converted by a 5-stage synthesis to ascorbic acid. Based on this process the production cost of vitamin C has been estimated at $5-6/kg. Since 1995 the Bejing Institute of Microbial Fermentation developed an alternative production route based on the fermentation of sorbitol [derived from the feedstock glucose] to 2-ketogulonic acid, which in a final stage is converted to ascorbic acid. The production cost of vitamin C by this process is estimated at $4-5kg, but the current Chinese sales price is around $3.5/kg - lower than the production cost.

Vitamin B12 is produced by fermentation on a carbohydrate feedstock [glucose]. A precursor 5,6-dimethylbenzimidazole is added during the fermentation process. Chinese companies became involved in vitamin B12 during the late 1990s. The production is estimated at $3.5-4.5/g. The 2007 sales price is $2.5-3/g demonstrating that vitamin B12 is sold below production cost.

In the following table current 2007 prices of various food and pharmaceutical ingredients produced by Chinese companies are compared with 1995 prices (by European & U.S. companies) demonstrating the drastic price decline which has forced many Western companies to cease production and rely on products bought-in from China.

Prices of Food & Pharmaceutical Ingredients 1995-2007

products	[$/kg] prices 1995 (U.S. & Europe)	[$/kg] prices 2007 (China)
erythromycin base	110	65
oxytetracycline	16	8
amoxycillin	65	22
lactic acid	2.2	1.1
citric acid	2.5	0.9
vitamin C	15	3.5
lysine	2.5	1.2
xanthan	12	4.5
coenzyme Q-10	3,500	600

The Flip Side

The Chinese chemical and pharmaceutical industry created during the past 20 years was established as part of a strategy to industrialise the Chinese economy. This phase has been described as 'early capitalism' with emphasis on the rapid establishment of factories and plants for the production of a wide range of products. To ensure that these products penetrate global markets sales prices were often fixed below prices pertaining in Western markets, regardless of whether these are lower than the production cost.

In furtherance of this objective Chinese authorities have overlooked many factors which are of maximum importance in Western industrial countries. These are the following:

Intellectual property The production processes of most food and pharmaceutical ingredients are based on patents assigned to the company that developed or invented the processes. During the lifetime of a patent [about 20 years] no company is allowed to copy the process unless a license has been obtained from the patentee. Chinese companies have copied processes developed and patented by Western companies. Even if the Western patentees sues Chinese companies for infringement the local courts will counter that as every Chinese company is state-owned and it is impossible to sue the Chinese government.

Price cutting/ production cartels To attain a significant market share in Western countries food and pharmaceutical ingredients made by Chinese companies are generally sold below the production cost of Western companies - known as dumping. As a rule the authorities assign several companies to produce a specific product for sale at an arranged price, known as price fixing.

The practice of price cutting [dumping] and price fixing is prohibited in every Western country and any company engaged in this practice is subjected to heavy fines by their government and by international bodies such as WTO and GATT. It is odd that Chinese companies are never criticized or fined by these international bodies.

Within the past 10 years many European, U.S. and Japanese companies have been forced to withdraw from the food and pharmaceuticals ingredients business because of their inability to compete with Chinese cut-price products. It may be argued that this type of competition reflects liberal capitalism 'red in tooth and claw' leading to survival of the fittest, with distinct cost benefits for Western purchasers. But are Western companies prepared to become entirely dependent on importing products and ingredients from China?

Many people are beginning to realise that Chinese industrialisation has brought in its wake rampant environmental pollution and minimal safety standards in industrial plant, which would never be tolerated anywhere else. 'Der Spiegel' in an article 'Choking on Chemicals in China' [28/11/05] comments that the water emergency in Harbin, an industrial city of 3.8 million, comes on the heels of an environmental catastrophe with as yet unforeseeable consequences. About 100 tons of toxic chemicals have been floating down the Songhua river ever since an explosion in Jillin in 2005, released highly toxic benzene compounds. At least five people were killed and dozens injured in this accident and the slick, slowly travelling down river toward Russia threatens the drinking water supply for more than 10 million people between the northeast Chinese city of Harbin and Khabarovsk, Siberia.

The U.S. magazine 'Chemical & Engineering News' [26/09/05] in an article 'Tempers flare in China ' describes the severe environmental pollution suffered by the residents of the village of Huaxi in the city of Dongyang led them to combat riot police. 'We're fighting for our lives' one shop owner insists when recalling the events. She and her neighbours explain that before the protests they had become seriously worried about their children's health and could no longer grow rice and vegetables in the nearby plots.

'Der Spiegel' [ditto] asserts that the negative consequences of the [Chinese industrial] boom are devastating. Five of the world's 10 most polluted cities are in China. More than two-thirds of the Chinese rivers and lakes are turning into sewers and more than 360 million people have no access to clean drinking water. A toxic soup splashes through the country's waterways, while people living along the banks die from cancer at above-average rates.

Chemical & Engineering News [ditto] adds that the responsible practices of foreign companies at times appear too advanced for China. A large multi-national company was told by local government officials that it would be unwise to explain to people living next to its new plant what the facility makes and how it does it.

The situation regarding air pollution is just as bad, according to a Chinese environmental engineer [Der Spiegel, ditto]. Because energy is so scarce, the Chinese are now burning anything that looks like coal and because filters are not in compliance with international standards, emissions of sulphur and nitrogen oxides are 'a dimension higher' than in other industrialised nations. Half of all coal power plants violate environmental regulations.

The use of cheap child labour in Chinese factories and plants is common. This practice, condemned by the United Nations and all Western governments, may be one reason why labour costs in Chinese plants are at such a low level.

The European Union legislation REACH which will come into effect in 2007 stipulates that health and safety data must be provided by importers and manufacturers of 30,000 substances including ingredients used in food/pharmaceutical products. In the light of the REACH legislation it is foreseen that European importers of food and pharmaceutical ingredients must supply the following detailed information about Chinese plants where these products are made:

• their exact location and evidence that this is the real production plant - not a well-designed 'show' plant used as a 'stand-in' for the actual plant;
• documentation relating to its design and safety aspects;
• evidence that waste streams [gases, liquids, solids] are treated in accordance with international standards;
• evidence that the plant accords with REACH directives, that there is rigorous coding/labelling of ingredients to ensure immediate recall if a contamination problem is detected;
• evidence that child labour is not employed anywhere in the plant.

• As a result of massive investment over the past 20 years, China has established numerous plants producing virtually the entire range of food and pharmaceutical ingredients.
• These products are sold to Western companies at prices which usually fall below their production cost. This has been illustrated by assessing the production costs of four products: citric acid, penicillin G, vitamin C and vitamin B12 and comparing them with their sales prices. We have also given the current 2007 sales prices of other food and pharmaceutical ingredients compared with 1995 prices, showing that prices have declined continuously over that period.
• The sale of a product below its production cost [dumping] is strictly prohibited in Western countries. Many Chinese production processes are based on Western patents which have been infringed without obtaining a license from the owners.
• Chinese plants are designed with little consideration for safety i.e. prevention of explosions. Effluents from Chinese plants are frequently discharged into the nearest river without treatment; waste gases are discharged to the atmosphere without prior filtration. The avoidance of waste treatment reduces the production cost but results in severe pollution affecting the health of workers in and surrounding the plant. Child labour is known to occur in these plants.
• As a consequence of their cut-price sales policy Chinese producers have gained a major share of global markets for food and pharmaceutical ingredients. Many established Western companies have withdrawn from production, because of inability to compete.
• It is unwise and dangerous for Western producers to cease production of food and pharmaceutical ingredients and become entirely reliant on Chinese imports, as any one of the following cenarios may occur:
  • Chinese producers may decide to imitate the cartels of OPEC with oil or Gazprom with gas and unilaterally raise prices for Western purchasers who by then will be unable to turn anywhere else.
  • How will Chinese plants deal with the new European Union REACH legislation which must be complied with by Western companies importing products from China?
  • What happens if Western governments insist that Chinese companies exporting to Western companies must guarantee that their plants are designed in accordance with international standards for the treatment of liquid and gaseous wastes and comply with safety standards?
  • The worst-case scenario may occur if Western producers became entirely dependent on imported Chinese products which then turn out to be contaminated due to their use of untreated water or trace metals resulting from the absence of waste treatment.

To ensure the survival of the Western food and pharmaceutical industry it must be in the strategic interest of Western companies not to place all their eggs in one basket. They should ensure that food & pharmaceutical ingredients continue to be produced in Europe and the U.S. by companies who were originally involved in this area. These companies must be encouraged to further develop their technology. This will act as a safety belt in case of monopolistic price rises of Chinese products or a reduction in the capacity of Chinese plants that fail to attain REACH or international standards.