Casings: China growth drives global market

The Chinese are eating more sausages than ever before. Demand for collagen casings is booming, both in China and other emerging markets, as food habits become increasingly globalised. China is now the world’s biggest purchaser of collagen casings for use in sausage manufacture and the biggest global consumer, per capita, of pork.

According to the Earth Policy Institute, the increasing westernisation of the Chinese diet means the country now consumes 71 million tonnes of meat per year – more than double that of the US.

Viscofan is not the only European casings giant to stake a claim in China. Collagen casings manufacturer Devro, headquartered in Scotland, opened an office in Beijing in 2011, and has strengthened its sales team in Hong Kong.

China is “hugely significant,”​ says Vince Minchella, UK area manager for Spain-based Viscofan. “If you look at any emerging market, as they move away from extreme poverty, they move from a starch-based diet to more protein, and the cheapest form of introducing protein is through processed meat, so products like sausages play a role. In China, consumption habits are imitating the West, so hot dogs, sausages and processed meats are all becoming more popular.”​

Devro chief executive Peter Page has predicted China will represent half the global market for edible collagen casings by 2015. “Demand is being driven by economic expansion and an increase in meat consumption, particularly in the form of processed products,”​ he states in Devro’s 2012 annual report.

This is good news for an industry that has been buffeted by rising costs and difficult trading conditions in some more established markets. Inflation in raw material costs has forced casings companies to take a hit on profit margins and seek new ways of cutting costs. The cost increases have been significant, and across nearly all parts of the industry.

Natural and artificial​

The casings market is made up of two distinct product types – natural and artificial. Natural casings are made of the intestines of cattle, sheep or pigs, and tend to be used for premium sausages. Advocates claim they have a texture and bite or ‘knack’ that cannot be replicated with an artificial product. Although there is no official data covering the whole market, industry leaders say the natural casings market is about twice the size of the market for artificial casings.

Artificial casings are made from either collagen, cellulose or plastic, and can be edible or – in the case of plastic and the thick cellulose casings used on salamis – inedible, designed to be peeled off and thrown away. Viscofan estimates the global artificial casings market grew 6% between 2011 and 2012, an increase in the rate of growth compared to the previous five years.

Collagen casings are mainly produced from beef or pig hides and the bones and tendons. The collagen is processed then extruded through a die, dried and shirred on to short sticks that contain up to 50 metres of casing. Making sausages with collagen casings is much cheaper than with gut casings because of ease of use in manufacture and lower labour requirements. Cellulose is similarly processed into a paste and extruded into clear, tough casings.

Viscofan is the world’s largest producer of cellulose casings, as well as having a significant collagen business and also producing plastic casings which are used on black puddings and some 4x4 processed deli meats. Devro is one of the largest suppliers of collagen casings and has manufacturing sites in the UK, the US, the Czech Republic and Australia. It also manufactures a small quantity of plastic casings. Devro sells casings to food manufacturers in many markets, and to local distributors in some markets. Devro sells to over 2,000 customers in more than 100 countries.

Cost increases​

Both the natural and artificial casings industries have endured significant cost increases. In the artificial market, cattle and pig hides, the raw material from which collagen is extracted and processed, rose in price during 2012. Devro attributed these cost increases to a reduced supply of cattle hides in Europe and the Americas, and a higher demand for raw collagen from China, principally for gelatine manufacture.

There has also been competition for collagen from other industries, such as the cosmetics industry. Hide costs are expected to continue to increase in 2013.

As well as the raw materials, other input costs have also risen. “In the meat market in general, inputs are increasing, raw materials are increasing, energy is increasing, and grain prices are increasing,”​ says Minchella, who acknowledges some of those price rises have been passed on to customers. “We are constantly committed to find new efficiencies and new technologies to limit the impact of those rises, but obviously there are some pressures on prices.”​

In the natural gut casings market, reduced sheep slaughterings around the world have reduced availability and pushed prices of gut up, according to Denmark-based DAT-Schaub, the biggest supplier of natural hog casings, and a major supplier of sheep casings plus all types of artificial casings. “Combined with some uncertainty about sales of sheep casings, this resulted in a nervous market with some sales difficulties.”​

Sheep prices are still high, meaning casing prices are unlikely to come down soon. For DAT-Schaub this bolstered sales figures, despite the increased costs.

One area that saw price reductions was the hog casings market. Here prices reduced globally in 2012, according to DAT-Schaub. While this was good news for sausage manufacturers, it was bad for DAT-Schaub, especially as Danish hog slaughterings were down, meaning it sold reduced volumes at lower prices.

Margin pressure​

These increased costs have put pressure on margins at the main manufacturers. At Devro, while 2012 sales increased 5.9% to £241.1m, pre-tax profits declined 6% to £40.8m, with margins reduced by 5% to 17.9%. Likewise, Viscofan has taken a hit on margins in the past year, down one percentage point from 68.6% in 2011 to 67.6% in 2012. At Viscofan, costs during 2012 rose 16.1% to €243.4m.

DAT-Schaub managed a slight increase in profit margin, with sales up 17.6% and profits up 18%. “We have had our challenges, but our comprehensiveness in the production and strong position globally has resulted in a continued positive development,”​ says managing director Jan Roelsgaard.

It is a challenging market to work in, Minchella says. “Anything associated with food is difficult when you have inflationary pressures. It always means things can be quite volatile, and we are constantly looking to improve efficiencies.”​

However, as global demand for meat grows, there are still plenty of opportunties for casings manufacturers. Buoyed by China’s growth, the casings industry is now setting its sights on other emerging markets and Viscofan will open its first collagen extrusion production plant in Latin America in Pando, Uruguay, in 2014.

In Latin America, sales of edible collagen casings grew 30% over the past year, the company says. This is far higher than the 7.8% growth it saw in total global markets. Africa also has great potential as the next big market, Viscofan says.

Future demand​

Looking to the future, China presents an interesting challenge for the casings industries. It may be the biggest market in the world with huge potential for boosting sales, but it is also a highly competitive, low-cost market.

Devro alludes to these challenges in its annual report. “We continue to review our options with respect to China,” the report states. “It remains a large and growing, but low-priced market, where we are currently developing strategic sales and customer relationships.”​

Blair admits Devro is ambivalent about its future in China. “Not a huge amount of our sales are in China at the moment,”​ he says. “It is the single biggest market in the world, so of course it is of interest to us. We have an office in Beijing, an office in Hong Kong, but we are considering what is the best way forward.”​

Blair says that while China is a profitable market, there are higher-value markets Devro would like to pursue to maximise returns on its products. “There are more profitable and better-priced markets,”​ he says.Time will tell if Devro decides to maintain its presence there.

According to Minchella, Viscofan is more certain about its future in the country. China is of strategic importance he says, despite the fact it is a low-cost market. “It is very early days, but it is important to have that footprint in China,”​ he says.