Karlshamns expects considerable growth potentials from new EU regulations

Karlshamns expects considerable growth potentials from new EU regulations On 25 May the Council confirmed the recommendation previously issued by the European Parliament, to the effect that other vegetable fats may now replace up to 5% of cocoa butter in chocolate products sold within the European Union. - This new legislation is a very positive development for Karlshamns AB, as the market for cocoa butter replacers is thereby considerably expanded, says Chairman of the Board Jan Ohlsson from Nordico Invest. Karlshamns is now preparing for the consequences, reviewing how the company's production capacity for speciality fats may be further improved. Harmonisation of the European chocolate standard means that free trade between the member states is now guaranteed, while it is now also possible to replace up to 5% of cocoa butter by other, clearly specified and EU approved, vegetable fats. - We have many years of experience of these speciality fats (CBE, Cocoa Butter Equivalents), says Karlshamns' Sales & Marketing Director Johan Sandberg. The new 5% rule is expected to have effects on several other markets as well - such as South America, Asia, Central and Eastern Europe, where similar proposed bills are already being prepared. - The majority of the international chocolate and confectionery industries have already realized the advantages of speciality fats, Johan Sandberg continues - technical and economical benefits as well as potential quality improvements. The most important areas of improvement are the shelf life, melting properties, heat resistance and oxidation stability of the chocolate products. On a longer term, this ensures the customer not only a wider freedom of choice and improved quality, but also the lowest possible price. For further information, see enclosure or please contact Chairman of the Board Jan Ohlsson, tel +46 8 - 440 38 11 Sales & Marketing Director Johan Sandberg, tel 73 - 973 56 05 Acting President Jan Elmeklo, tel 73 - 973 53 16 Karlshamns is one of the world's four leading producers of advanced vegetable speciality fats. Karlshamns delivers speciality fats all over the world, and is market leader in Scandinavia and Eastern Europe. The food industry is Karlshamns' major customer segment and Sweden is the single largest market. www.karlshamns.com Enclosure Serving a global market Chocolate makers set strict demands for fats Consumers want chocolate products to taste good, stay hard at room temperature but melt quickly when eaten. A bar of chocolate, for example, should not melt in the hand but it must melt quickly in the mouth. High value-added speciality fats give chocolate its melting and solidification properties. Chocolate makers also want fat to crystallise quickly in a melted state so they can avoid expensive investments in cooling tunnels in the production process. Alternatives to cocoa butter The traditional source of fat for chocolate is cocoa butter. Milk chocolate also includes different amounts of milk fat. With certain exceptions cocoa butter has the attributes that producers and consumers seek. But cocoa butter is a relatively expensive raw material and prices vary considerably. In the chocolate making process cocoa butter must be tempered and it is not completely stable during storage. Karlshamns and other producers have therefore developed several vegetable alternatives to cocoa butter, so-called CBA fats (Cocoa Butter Alternatives) which include CBE (Cocoa Butter Equivalents), CBS (Cocoa Butter Substitutes) and CBR (Cocoa Butter Replacers). By completely or partly replacing cocoa butter with these alternatives, chocolate makers can achieve economic and process benefits as well as better quality of the end product. There are several technical advantages to be gained by completely or partly replacing cocoa butter. These are mainly connected with the durability of the product, better melting properties, improved heat resistance and better bloom stability during storage. Unlike cocoa butter, CBS and CBR fats do not require tempering during production, making the process easier and more reliable. For these reasons, chocolate made using alternative fats is especially suitable for small volumes, such as bakeries and in the home, where production is not on a scale to warrant an investment in a tempering machine. These fats are used primarily in fillings and coatings for chocolate bars. Cost savings In addition to their non-tempering requirement, the great advantage achieved by replacing cocoa butter with CBS and CBR fats is that prices of the raw materials are considerably lower than the prices of cocoa butter. Additionally, rapeseed, palm and soya oil, which are the raw materials for CBR fats, are traded in large volumes on world markets. Competitors and sales The Karlshamns Group is one of the four leading producers of specialty fats worldwide and is the market leader in the Nordic region and Eastern Europe. The other three leading players are Loders Croklaan (Unilever), Aarhus Olie and Fuji Oils. The most important customers in the speciality fats segment are in the chocolate and confectionery industries, which account for three thirds of the company's sales volume. In addition, the Group's speciality fats are developed and sold to the cosmetics industry and, to an increasing extent, the pharmaceutical industry. The Group's sales of speciality fats amounted to 92,000 tons in 1999, an increase of 16% from 79,000 tons in 1998. The European Council approved chocolate directive It took the commission and the Council nearly two years to find a compromise which could be accepted by a majority of member states. The discussion started some 25 years ago and it was therefore a historic day when on May 25 the Council finally took the decision to change the chocolate legislation. The main features of the directive are as follows @ For domestically produced chocolate each member state is free to decide about the use of up to 5 % vegetable fat * Free movement of goods is secured. This means that also member states that do not permit the use of vegetable fats in domestically produced chocolate, must provide for unhindered imports of chocolate with vegetable fat from other member states * To secure information to the consumer, labelling showing that the product "contains vegetable fat" will be required in addition to the list of ingredients * A limited number of raw materials and processing methods are approved for use in chocolate Member states are now required to incorporate the new directive into their respective national legislation within 36 months of its entry into force. This is how it affects Karlshamns Johan Sandberg, Karlshamns' Sales & Marketing Director, comments on the significance of the new chocolate directive: Sales of CBE fats will increase -The new legislation will of course entail increased use of CBE in Western Europe for several reasons, related to economic, technical and quality aspects. For chocolate producers in the EU, the new law also involves a greater freedom in recipe formulation. Harmonisation means that different recipes are no longer needed for different markets, and producers no longer need to use excessively costly recipes in order to meet regulations on markets that do not permit 5% CBE in chocolate products. Other countries will follow -The new 5% rule in the EU will have consequences beyond the EU borders. Countries within Central and Eastern Europe are likely to follow and introduce a similar rule very soon, mainly because these countries now enjoy extensive and increasing trade with the EU. Furthermore, they have already begun preparing for entry into the Union. - In Australia, the Australian Food Authority has recently produced a proposal which will be under public scrutiny for the next six months. A parallel process is under way in New Zealand. The proposal in the Australia/New Zealand market area gives fat producers greater freedom as regards raw ingredients and processes compared to EU law. -Within Mercosur too (Brazil/Argentina/Uruguay), a finished legislation proposal very similar to the EU's is already under consideration. Chile is closely linked to the Mercosur countries, and has also completed a harmonising proposal. -Many of Asia's largest chocolate producing countries already have chocolate standards that provide extensive freedom in using fats other than cocoa butter. In these countries, the chocolate standards focus more on e.g. minimum cocoa solid content, rather than the exact amount of vegetable fat that may be added. Consumers will win -The way I see it, the whole world now seems to be approaching a general liberalisation and harmonisation of its chocolate standards. This increases the opportunities for free trade, and therefore for increased efficiency. Perhaps in the long term, the EU legislation will simply become the norm for the rest of the world. A lot points to this. In the end, the big winners will be consumers, as they will have greater freedom of choice and improved quality at the lowest possible prices. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/2000/06/28/20000628BIT00480/bit0001.doc http://www.bit.se/bitonline/2000/06/28/20000628BIT00480/bit0002.pdf