Lactic acid producer Purac has said price increases for its product have not been enough to offset the cost of raw materials and energy.
The firm revealed at a management meeting yesterday that innovation was needed in processing to try and boost profits.
Lactic acid, a natural organic acid present in milk, meat, and beer, is used extensively by the food industry as a flavour agent, preservative, and acidity adjuster in foods.
While demand for lactic acid was still strong, with net turnover between 2003 to 2006 increasing from €257.5m to €295m, worryingly operating profit shrank from €50.1m to €27.3m.
Despite profits being down, Purac said the potential for market expansion is significant.
Managing director Fabrizio Rampinelli said: "The larger part of the addressable market is currently untapped and fits into the trend of sustainable renewable natural solutions."
In 2005 Purac signed a €98m deal to build a new plant in Thailand to take advantage of projected double digit growth in lactic acid in Asia. The firm forecast the lactic acid derivatives market will continue to grow by more than 10 per cent annually in Thailand.
This deal was yesterday heralded by Rampinelli as a move which shows "cost leadership."
The expansion will provide the firm with a lactic acid capacity of 100,000 tons undiluted, and 15,000 tons for the sodium/potassium lactate.
The Thai location gives Purac ample local supplies of sugar, the key raw material used to produce lactates and lactic acid. Thailand produced some 47.8 million tonnes of sugar last year, of which Purac is likely to use about 170,000 for its needs.
Purac, a division of Dutch ingredients firm CSM, has had to hike prices for lactic acid several times in the past few years in a bid to pass the rising cost of production on.
While lactic acid production from China has increased competition, Purac said this was more at the expense of its competitors rather than for Purac. Export subsides out of China were lowered in July, the firm said.
To combat competition Purac will "manage lactic acid production on an absolute lowest cost level"
Innovation for lactic acid in process technology is needed to progress and meet a return on sales of up to 20 per cent by 2009, the company said. Last year, return on sales was just 9.2 per cent.
In 2005 Purac raised prices for its range of lactic acids twice in six months as raw material and energy costs increased. It said prices for its lactic and gluconic acid products will rise by 5 to 10 per cent from 1 November 2005.
Lactic acid applications include improving dispersion and whipping properties in dry egg powder, cheese spreads and salad dressings.
The Purac range, from €0.70 to €3 a kilo, spans food and feed grade to the higher pharma grade.