People want their toothpastes, their chocolates, their detergents and even their medicines to be minty fresh – menthol has certainly found usage across product categories and industries, globally. And with India consolidating its leadership position in menthol exports, as well as several menthol-based products, many exporters are now making a shift towards this minty material.
By Anishaa Kumar | January 2018 Issue | The Dollar Business
The ancient Greeks believed that the nymph Minthe was Hades’ lover. They used leaves of the mint plant to perform the last rites of their dead. An aroma that can even overpower death is quite something. In fact, people have never quite gotten over the novelty of menthol. Today, it is ubiquitous – it is in our pastes, creams, powders, cupcakes... well, the list goes on. Derived from the plant Mentha Arvenis, menthol, is finding ‘f(l)avour’ the world over. Currently, India contributes to about 33% of the world’s menthol exports, followed by China. With its usage across sectors, it is not surprising to find that going forward the demand for mint and mint products is expected to increase 3-5% year-on-year [International Trade Centre report]. A study by Allied Market Research too states that the global essential oil market, of which mint oil forms a large part, is expected to grow at a CAGR of 8.7% and become a $11.5-billion market by 2022.
P. Gupta of New Delhi-based JD Chem India, a producer of menthol, states that exporters are attracted towards menthol because of its many uses – from cosmetics to confectionery to pharmaceuticals. Its varied uses makes it an attractive proposition despite menthol exports being a low-margin business.
Indian farmers are in desperate need of training and support to increase the yield of the plant from which natural menthol is extracted.
Mentha is currently cultivated across northern India – from Himachal Pradesh to Haryana, from Uttar Pradesh to Bihar. According to an International Trade Centre report, in CY2015, the total production of the Mentha Arvensis crop in India was around 31,000 metric tonne (MT), which increased to around 35,500 MT in CY2016.
Exports of menthol from India are currently placed under two different HS codes based on the form and grade – 29061100 and 30039021. Explaining the difference, Pankaj Somani of the New Delhi-based Agson Global, says, “Generally speaking, if it is for human consumption it is exported under HS Code 29061100. And, if it is used in the pharma industry, it can be found under HS Code 30039021. Under 2906 falls the natural form of menthol used in non-pharma consumables and under 3003 you will find the crystal form used by pharmaceutical companies. There is not much difference between these varieties. It all depends on what the end product is.”
When menthol is being produced as a pharmaceutical bulk drug it can be found as Menthol IP/EP/BP/JP/USP, etc. The type of menthol and HS code used, exporters say, varies according to clients’ demands. Interestingly, exporters often are unaware of the end use of the product they sell, and the HS code is decided by the importer. That said, India is mostly known for natural menthol that it produces and exports in large volumes.
“The demand for menthol is rising worldwide because of its growing usage in a variety of end-products,” says Himanshu Agarwal, Director of KV Aromatics, an exporter of menthol. He adds that the demand is usually in places where there are manufacturing units for the products they are used in, including China and India which are also major exporters of the end-products.
Coincidentally, China is also the largest importer of menthol with India being its main sourcing destination. In fact, in FY2017, exports to China constituted 24.49% of India’s total exports of menthol under HS Code 29061100. Overall, India is currently the leader in exports under HS code 29061100 (the variety that is used in consumables) and the 10th largest exporter under HS code 30039021 (the variety that is used in pharma products).
If one looks at the exports of menthol over the last five years, the numbers may at first appear to be quite disheartening. Since FY2013, India’s exports of menthol (under HS code: 29061100) has declined by about 52.34%. However, a closer look at the numbers reveal that in FY2017 exports witnessed a dramatic jump – from $144.44 million to $185.91 million, a y-o-y increase of 28.7%. For FY2018, exports of menthol till September 2017 stood at $114.93 million, reporting a 12.55% y-o-y growth. What’s more? The month of September itself saw a y-o-y exports growth of 74.19%.
Overall, India (with 33% share in world exports) maintains its position as the world’s largest exporter of menthol, despite the fluctuations over the years. India is closely followed by China (22%), Germany (22%) and Japan (9%) as the major exporters of menthol in the world. Vaibhav Agrawal, Managing Director, Norex Flavours Pvt. Ltd., a manufacturer of natural menthol, says, “Lower cost of production and a climate suitable for menthol production in northern India, has made India a hub for production of good quality mint oil and menthol. Further, the demand for menthol is price-driven. The demand for natural menthol always depends on several factors including competition from synthetic menthol, inventories in China, etc. As there has been a shortage in the supply and production of synthetic menthol for the last few months, the demand for natural menthol is on the rise.”
Somani too adds that the demand for natural menthol has been increasing for some time now because some plants that were producing synthetic menthol were shut down recently and people went back to using natural menthol. He fears that this trend may not continue for long and when the synthetic menthol plants start producing again, the demand for natural menthol is bound to decline.
Synthetic vs. natural
One of the main reasons for the fluctuation in exports of natural menthol over the years has been the growth in the production of synthetic menthol. According to International Trade Centre, the total global production of synthetic menthol is estimated to be around 15,000-20,000 MT per annum and is expected to rise at double-digit pace going forward. Manufacturers such as Germany-based BASF and Symrise and Japan-based Takasago too have been ramping up their production capacities to meet the rising demand for synthetic menthol and in the process have threatened the existence of producers of natural menthol.
Further, the volatility in prices of natural menthol also has been a major challenge for the industry. “Since this is a commodity that is listed on the MCX, we see a lot of price fluctuations. Every company may have a different profit margin, based on their optimisation of production, but the change in prices play havoc with our profitability. Overall, menthol is one of the most competitive and low profit margin products,” says Agrawal. Currently, exporters say, the profit margin varies between 2% to 5%.
Abhilash Pandey of Ghaziabad-based AOS Products Pvt. Ltd., a manufacturer and exporter of menthol, has a different view on the demand fluctuation of natural menthol. He believes the available supply of synthetic menthol has little to do with the demand for natural menthol as the two products are used in completely different end-products. According to him, the demand for natural menthol is witnessing an upward trend as the demand for non-pharma end-products is on the rise.
Need a Helping Hand
Whatever be the reason for the fluctuations in demand, exporters are in agreement that the government has not been of much help when it comes to promoting menthol. Somani says, “Because we do not contribute sizeable amount of foreign exchange, the government does not listen to us. We have made many presentations to the government, but nothing has been done yet to resolve our issues.”
Some requests made to the government include abolishing the mandi tax and introducing more incentives. “The Chinese government gives better incentives to their manufacturers and exporters compared to the Indian government. If incentives are increased we can survive and fight the competition coming from synthetic menthol. If the prices of synthetic menthol and natural menthol become the same, then people will definitely prefer natural menthol. We are working with different government agencies to engineer better yields from our crop. Once the yield improves, farmers can sell their produce at a much lower rate,” adds Somani. Exporters of menthol, after the recent hike in incentives in the midterm FTP review, receive duty credit scrip of 5% under MEIS and a duty drawback of 1.5%.
The introduction of Goods & Services Tax (GST), according to exporters, has also created new challenges for the industry. Earlier menthol used to attract 5% VAT, but now it’s subject to a 12% GST. Agrawal explains, “Before GST, there was no excise duty on menthol. It was only subject to 5% VAT. Being an agri-product, we were sure that it would attract a 5% GST rate. However, we were shocked when 18% tax was announced. After much lobbying, we were provided a partial relief by bringing the product in 12% tax bracket. This rate of tax is still a burden and has had an adverse impact on the industry. Currently, all the capital that exporters have is deposited as GST with the government. As evident to everybody, the government has not been able to process refunds on time. A high GST rate and no tax refunds have hampered the growth of the industry.”
Pandey concurs and says that in order to encourage the industry and boost production and exports, the government needs to speed up the process of refund. The industry also needs to focus on international food safety standards, GMP compliance, etc., to be at par with global competition. “There is a lack of awareness about the procedures amongst MSMEs,” says Agrawal. Exporters, however, encouragingly say that menthol, compared to most other products, does not present any major challenge when it comes to clearance, certifications, etc.
The demand for natural menthol is growing as it finds use in a variety of consumables and exporters are hopeful that with the right support for the domestic growers, India’s natural menthol exporters will be able to put up a fight against the producers of synthetic menthol. May be it is time for this cool business to mint some money!
TDB: Which are your primary export markets? What factors affect the demand for menthol, the world over?
Himanshu Agarwal (HA): We have been manufacturing menthol for the last 21 years and have been exporting the product since 2003. Our company exports across the globe, to almost 25 countries – including US and EU. The consumption and demand for menthol changes according to the demand for the product in which it is being used as an input. The demand also depends on the the production scenario of menthol in the importing country. After all, menthol is not an end product, it is used as a raw material in many industries.
TDB: After peaking in FY2013, export revenue from menthol witnessed a decline before increasing again in FY2017. What were the reasons behind the decline in menthol exports?
HA: The price of menthol has seen a change between FY2016 and FY2017. The price has actually increased by 50%, and in some cases by as much as 100%, within this year itself. However, the volume has not changed much. After the blast at BASF (the biggest producer of synthetic menthol in the world) plant, there is now more faith in the natural product. While the prices may be higher now, in the coming year, when production rises, the prices will decline.
TDB: How has Goods and Services Tax (GST) affected the industry?
HA: GST has had a big impact on the industry as exporters and manufacturers now have to pay taxes prior to the sale and apply for refunds later. The menthol industry works on long-term commitments. We need to buy raw materials well in advance to be able to meet our long-term commitments. Now, after implementation of GST, when we buy Rs.100 worth of raw material to produce the final product, we have to pay an additional 12% IGST. This has increased our working capital cost as the refund is processed only after exports are done, which may be anything from six months to one year, from the time of buying materials. So, our money is blocked against export orders. Of course, they have postponed the reverse charge mechanism till March 2018, but this is just a temporary relief. Once it is implemented in April, it will become a major concern for exporters.
TDB: What kind of margins can one expect in menthol exports business?
HA: Menthol is a very expensive product. The profit margins usually range around 2-4% like most agricultural products and depend upon factors like the raw material price, global market price, etc.
MD, Norex Flavours Pvt. Ltd.
TDB: Why is Indian menthol popular amongst global importers and what drives demand for the product?
Vaibhav Agrawal (VA): The low cost of production and a climate suitable for menthol cultivation in northern India has made India a hub for production of good quality mint oil and menthol. Demand for natural menthol is price-driven as it is an agri product. The demand is also governed by several factors including competition from synthetic menthol, inventories in China, etc. A recent shortage of synthetic menthol is also the cause for the increased demand.
TDB: Menthol is in the 12% GST slab. How has this affected the industry?
VA: Before GST, there was no excise duty on menthol. It was only subject to 5% VAT. Being an agri-product, we were sure that it would attract a 5% GST rate. However, we were shocked when 18% tax was announced. After much lobbying, we were provided a partial relief by bringing the product in 12% tax bracket. This rate of tax is still a burden and has had an adverse impact on the industry. Currently, all the capital that exporters have is deposited as GST with the government. As evident to everybody, the government has not been able to process refunds on time. A high GST rate and no tax refunds have hampered the growth of the industry. While the new FTP is good – an additional 2% incentive has been provided under MEIS – a lot more needs to be done to promote natural menthol.
TDB: What are the compliance requirements to export menthol?
VA: There are a lot of compliance requirements in this sector. Menthol is a product which is used widely as an important ingredient in food, pharma and cosmetic products. Hence, manufacturers and exporters of menthol need to focus more on international food safety standards, GMP compliance, etc., to be at par with global competition. However, there is a lack of awareness about the procedures amongst MSMEs. Unfortunately, our export promotion councils are also not doing enough in this area.
TDB: What government assistance do exporters receive? What needs to be done to boost exports of menthol?
VA: The Government of Uttar Pradesh provides nothing. In fact, it has made the life of menthol producers and mint farmers miserable by imposing a 1.5% mandi tax on menthol and mint sellers. The central government, as a part of the FTP, provides some incentive under MEIS. But then, that’s not enough support. We urge more assistance from the government, particularly for farmers, to increase productivity and become a competition to synthetic menthol.