Serving a changing market
Month Day, Year
by Mike King
The fundamentals driving grain demand in Asia are not difficult to identify. The continent’s growing middle class has broadening dietary appetites. Wheat flour products now happily co-exist alongside traditional rice-based meals and this has meant huge increases in noodle and bread demand. And cakes and flour-based sweets have also been transformed into everyday consumer items available at almost every retail outlet.
As a result of this evolution in taste, the need for imported grains has never been greater. Industry forecasts point to accelerating consumption in the future, and this is having a major impact on the milling sector which is rapidly gearing up to meet higher demand.
In a recent interview with World Grain, Greg Harvey, managing director and chief executive of Southeast Asian milling giant Interflour Holdings and stalwart of the Asia Pacific grains sector, mapped out the changing face of the Asian market with a rare clarity.
Taking Indonesia as an example, Harvey noted that at the end of the 1990s only a handful of companies offered milling capacity in Indonesia — four in Java and one in Sulawesi, with Bogasari perhaps the best known. The number of mills operating now has swollen beyond recognition and even more capacity is still being built. A similar process is under way in other parts of Asia, including Vietnam and Malaysia.
“Indonesia now has nine million tonnes of milling capacity available and usage is currently 7.2 million tonnes,” he said. “Malaysia has 2.2 million tonnes capacity and usage is about 50%. And in Vietnam there is about 2.5 million tonnes of capacity and usage is about 1.5 million tonnes.”
Given it usually takes around two years to build a sizeable mill, it is not uncommon for a gap to develop between capacity and demand in markets where forecasts indicate long-term growth.
“Many businesses extrapolate the growth trend out 5 to 10 years and are building capacity ahead of the demand curve,” explained Harvey. “This consists of growth within existing players in the flour industry, and new milling capacity from new players, typically with links to downstream processing and retail or to stock feed milling. This decentralized industry structure is based around manufacturing locations and transport economics, with capacity now being built closer to market as trucking costs have risen and delays due to congestion have become more of an issue.”
As competition has increased, this has dented the profit margins achieved by many milling firms, although they are still doing better than most growers. Harvey said the gross margins of a typical Asian flour mill was now down to 15-20% compared to 25-30% a decade ago. This is now impacting on the type of grains millers require as they attempt to trim costs.
Although Australian wheat varieties, particularly Australian Hard Wheat, Australian Prime Hard and Australian Soft Wheat, remain the key ingredients in noodle flours in Southeast Asia, millers are also now experimenting with alternative origin cargoes with low protein sourced mainly from the Black Sea. These can enable cheaper grist, making it popular among millers supplying Asia’s noodle wheat market.
Harvey believes growers have much to gain from understanding and reacting to these demand changes to ensure they are producing the most profitable varieties for the fastest growing markets. And he called on Australian producers, which have a major freight advantage on rivals in Southeast Asia, to innovate on wheat variety end-product performance. High yielding Australian Standard White or even feed wheat could be used profitably to make cheap bulk flour for 2-minute noodles, but was not currently widely available, he said. Australian Hard wheat offered good water absorption, while Australian Club wheat soft varieties that could be blended or substituted for Soft Western White would also appeal to Asian buyers.
“There is a general movement towards higher ash, lower gluten products – optimizing extraction and using less expensive wheat,” he said. “These cheap general purpose flours, or 2-minute noodle flours, have tight margins on sales but give bulk efficiency to a flour mill. But we do sometimes struggle to send these messages back to growers.”
Harvey said that although not always the best match for product quality, Australian wheat was, however, consistently available and offered reliable quality parameters across a gluten range of 23%-32%, enabling usage in a wide range of applications, and especially in the two-minute noodle market, a staple of many Asian diets.
But in other markets Australian growers could improve performance. In bread sectors, for example, North American varieties have long held sway in Asia.
“Bread flours are a different story to noodles and is a big area of opportunity for Australian producers,” he said. “Apart from Australian Prime Hard, Australian wheat is not typically price competitive with Dark Northern Spring or Canadian Western Red Spring.”
He also told Australian producers they could do more to convince Southeast Asian customers they would be able to meet increasing demand from Asia by boosting output and by understanding the importance of front-end December to April shipments post-harvest before Black Sea harvests became available later in the year.
“Australia also needs to remain cost competitive, offer supply chain flexibility and evolve a structure that allows price signals both up and down the supply chain,” he said.
Interflour’s growth strategy
Interflour Holdings is owned 50/50 by Australia’s CBH Group and a consortium of Chinese investors. It currently has seven mills as well as a range of supporting ports, malting plants and research centers spread across Southeast Asia (see map), plus a flour mill in Turkey. Total annual milling capacity is around 1.5 million tonnes, making Interflour one of Asia’s largest millers.
In 2012, Interflour completed the expansion of Interflour Vietnam Limited and acquired Intermil Un in Turkey, as well as starting operations at Cai Mep port in southern Vietnam 80 kilometers southeast of Ho Chi Minh city in 2010 as part of its ongoing expansion in one of Southeast Asia’s fastest growing markets. The terminal offers draft of 14 meters, can handle vessels up to 75,000 dwt and is supported by a coastal vessel loading facility that is capable of accommodating coastal vessels up to 7,000 dwt, which leads to a waterway network that provides hinterland links.
The move was part of the company’s long-term goal to drive total group capacity up to 10,000 tonnes per day by 2017.
“We’ve got committed projects to expand in Malaysia; we’re building in the Philippines; and we’ll be entering Thailand with 500,000 tonnes of capacity,” said Greg Harvey, managing director and chief executive of Southeast Asian milling giant Interflour Holdings. “And we’re building a malting factory in Vietnam near Ho Chi Minh, at Cai Mep. It’s linked to the port, and we already have a flour mill there.”
As far as additional expansion is concerned, Harvey said Interflour was well placed to invest and acquire flour mills as they come up for sale, although he ruled China out of company plans. “If the industry consolidates then we’ll see what happens, and that goes for ports as well as mills,” he explained. “We will have organic growth, but if any acquisitions come up then we’ll always look long and hard at them.”
The Flour Fortification Initiative
The growing awareness of how different foods impact health is something the grains and milling industry is now addressing. And Greg Harvey, managing director and chief executive of Asian miller Interflour Holdings, is leading from the front in his role as chairman of the board for the Flour Fortification Initiative, a global public, private, and civic partnership aimed at encouraging the addition of vitamins and minerals to wheat flour, maize products, and rice.
Harvey told World Grain that some 2 billion people, 30% of the world’s population, were now anemic, mainly due to iron deficiency, while an estimated 300,000 neural tube birth defects occur every year globally. “Most of these could be prevented,” he said. “Vitamin and mineral deficiency contributes to more than one-third of all deaths in children under age 5.”
He said fortifying grains with iron improves iron status, which in turn helps children develop physically and mentally. “Iron is also critical for productivity and the health of a pregnant mother and her unborn child,” he said.
“Every year, an estimated 38,417 serious birth defects such as spina bifida are prevented globally where flour is fortified with folic acid. That’s an average of 105 healthier babies a day.”
Comparing the cost of fortification with the cost of treating children with spina bifida, countries report a cost-benefit ratio of at least 1:12.
“In three consecutive sessions, the Copenhagen Consensus panel of leading economists ranked providing vitamins and minerals among their top three most cost-effective investments,” he said. “Fortifying wheat, rice and maize flour is the most economical way of getting fortified products to emerging markets where they are needed most.
“As an industry it’s our moral obligation to do something about this. And as industry we need to engage in the regulatory process globally to ensure the rules are practical. Fortification is done in the mill, so we need to have a voice.”