THE FIRST THING to stand out for visitors reaching the Xiamen facilities of EcoGreen Fine Chemicals Group Ltd (HK: 2341) is how unlike a traditional factory complex it seems, being very easy on both the eyes and olfactory.
Not only are the grounds and buildings more like a university campus than a chemical plant, but there is a feeling that one is strolling through a forest of pines as nearly everywhere resin from the conifers can be whiffed, and it quickly becomes clear how this company now supplies a quarter of the world's supply of Dihydromyrcenol, a key intermediate chemical in the production of countless household items.
And firmly positioned midway along the production chain between gum turpentine harvesters and retailers of everyday items like instant noodles, shampoos and pharmaceuticals, it is all the more noteworthy that EcoGreen attaches so much importance to quality and cleanliness, given its relative anonymity as an intermediates producer – ensconced between forester and FMCG retailer.
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But as management explained during our six fund manager-strong Aries Consulting and Financial PR-sponsored tour of their Fujian province facilities recently, last year saw increased raw material cost pressure, so other than accumulating more upstream forestry assets the only other way to bring relief to tighter margins was to boost selling prices.
And this could only be successfully argued with buyers of fine chemicals after demonstrable improvements in quality and efficiency at the production level, tasks which our group generally felt EcoGreen was achieving on an impressive scale.
Therefore, the fact that EcoGreen has been able to increase selling prices some 20% in the first quarter of this year portends much healthier results going forward.
Peer and Client
Representative of the complex associations up and down the production chain in this industry, EcoGreen’s top client is also one of its biggest industry peers– International Flavors & Fragrances (NYSE: IFF).
EcoGreen Chairman and President Yang Yirong told us that having peer companies wear two hats – one as industry peer and another as client – is more often the rule than the exception in this business.
“Our major partners are also our clients. The huge players like IFF, Givaudan and Symrise are so big that some overlap and competition is inevitable. But quite often, these big players begin as simply rivals and then end up as our clients.
“This is because we are a lower cost, more efficient and competitive producer for key intermediates, so they end up coming to us for supplies,” Mr. Yang said.
Indeed, industry trends bear this out.
The company said that some of the world’s top producers of intermediate fine chemicals in the flavors and fragrances industry – including IFF and Givaudan -- have been leaving the production of building blocks in the industry to those peers like EcoGreen to provide key components such as Dihydromyrcenol and Isobornyl Acetate more affordably and efficiently.
In fact, EcoGreen now supplies a quarter of the world's total supply of Dihydromyrcenol.
This is why EcoGreen put both quality and cost control as the highest priorities, as without them, giants like IFF would not be ceding it certain product categories in the substantial and ever-growing China market.
“We do go after the best staff in our recruiting, drawing from the best universities in China. But at the same time, we are able to save costs, especially of late, as our new capacity expansions are all more or less up and running at full bore,” Chairman Yang said.
He added having IFF and Givaudan as major clients was no small feat, as these US and European firms regularly review their key suppliers and rate them on aspects including quality, customer focus, cost savings, innovative solutions and technology.
Broken down by the numbers, the world’s top flavors and fragrances players and their respective global market shares are: Givaudan (19.1%), Firmenich (13.6%), IFF (11.6%), Symrise (9.8%) and Takasago (6.3%).
The top ten account for 72.5% of total global market share in 2009 compared to 70.7% a year earlier.
So the market is consolidating, and this meant fewer firms were getting a piece of the huge pie, an industry that was worth 20 bln usd last year.
That made it all the more important for EcoGreen to bolster its supplier relationships with key players like IFF, Givaudan, Firmenich, Symrise and others.
Chairman Yang added that the company could also save investment capital normally earmarked for R&D expenses due to the unique nature of the industry.
“We are focused on boosting efficiency and cutting costs in order to be versatile enough to satisfy all the requirements of our customers. In fact, there is not a huge need for the discovery or invention of new intermediates, and hence large R&D budgets are not necessary. Most of the innovation in this industry is on the technical and efficiency improvement side."
He pointed to one of the world’s largest consumer goods firms in the world, and also a growing client of Ecogreen: Procter & Gamble (NYSE: P&G).
"P&G can produce hundreds of products, so we have to be very flexible and diverse to meet their ever-changing supply order requirements.”
And after a long inspection of EcoGreen’s sprawling campus-like plant made it quite clear to our group of fund managers from across Greater China that the firm was sufficiently equipped with the right tools to meet a very wide range of order specifications.
Forest Bump
EcoGreen has solid relationships with its tenant farmers on its pine forest assets as well as with all its upstream suppliers, and is undergoing a process of fine-tuning management and ownership there as well as carrying out a resource management campaign to further ease upstream raw material cost pressure.
The gum harvesters also benefit from the renewable aspect to collection, as trees can produce a lifetime of output which also helps the farmers earn a very honest day's wages, creating a truly environmentally and economically sustainable win-win relationship.
Gum from pine forests is tapped and bled from the trees (without felling them, Chairman Yang was eager to point out) for supply to EcoGreen which processes into gum turpentine, rosin and other downstream fine chemicals.
Traditionally in China, forest asset owners have let the tenant farmers handle the tapping.
“We generally leave the forest farming work to the rural laborers as they know how to do it best,” he said.
However, given sharp increases in raw material costs last year, EcoGreen is rightly trying to readjust its ties to upstream suppliers to ease margin pressure down the line.
This is being accomplished via more scientific resource asset management which will not only better contain upstream costs but also result in a more healthy bottom line.
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Chairman Yang is currently in discussions for a more formal arrangement with significant forestry assets in the provinces of Fujian, Yunnan and Jiangsu.
Analysts have forecast that if all these negotiations pan out successfully, EcoGreen will have locked up deals which cover some 60% of its total raw material needs.
The negotiations are expected to be finalized sometime this year.
“We get preferential rates for our forestland. And as raw material prices are set on a long-term basis, usually 6-12 months, we have to strategically plan ahead. Better controlling our resources is a top priority for EcoGreen,” Chairman Yang said.
See also: ECOGREEN: Boosting production capacity 50% with new technology