HUNGARY'S ESSENTIAL OIL INDUSTRY Csaba Fodor ... - IFEAT

Paper presented at the IFEAT 2002 International Conference – ‘Central & Eastern Europe: A source and a market
for essential oils and aroma chemicals’; Warsaw, Poland, 13-17 Oct. 2002. Pages 35–49 in the Conference Proceedings.
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HUNGARY’S ESSENTIAL OIL INDUSTRY
Csaba Fodor
Silvestris & Szilas Ltd
Vasút u. 42, H-2144 Kerepes, Hungary
[ csaba_fodor@silvestris.hu ]
Hungary has a long history as an origin of essential oils. However, the industry has undergone a
number of major changes over last century. My intention is to give a brief overview of the whole
history of commercial production and then to focus on the more recent developments.
Background on Hungary
Hungary is located in the heart of Europe, and has borders with Austria, Slovakia, Ukraine, Romania,
Yugoslavia, Croatia and Slovenia.
Hungary and its neighbours
The population is 10 million, of whom 20% live in the capital, Budapest. Since WW I, a large number
of Hungarians (equivalent to more than 30% of the current total population) have been living in
neighbouring countries. This has resulted in the development of special, ethnic-based trading links
with neighbouring countries, which are used also in our essential oil sector.
The GDP per capita was US$5,088 in 2001, which equated to about 50% of the average in the member
countries of the EU, and the growth rate was around 5%.
Hungary is expected to become a member of EU by 2004, and harmonization work is in hand in
preparation for this step.
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Prior to 1990, Hungary was considered an agricultural economy and the main crops were wheat and
corn. In the past decade, however, a large amount of foreign investment arrived in the country and
changed the orientation to an industrial profile. Hungary succeeded in attracting the largest foreign
investment per capita in the region up until 2001. This was due to the relatively cheap and skilled
manpower resource, the advanced banking system, plus a stable economic and political environment.
This inward investment trend stopped in 2002 as, probably due to the sharply increasing cost of skilled
manpower, some large multinational companies moved their operations to cheaper developing
countries, in several cases outside of the region.
The Essential Oils Industry
My discussion of the essential oil industry in Hungary examines the following time periods:
• Before WW II.
• The Communist era, 1945-90.
• The transition period 1990-94.
• The years of a market economy, 1994-2002
• Future challenges
Before WW II
It is possible to trace the industry back to the 13 th century and the manufacture of the famous ‘Hungary
(or Rosemary) Water’ but, instead, let us start with the birth of commercial essential oil production in
the 1920s.
The renowned Schimmel Co. of Miltitz in Germany established a subsidiary in Budapest in 1923. The
company held a very strong position in supplying local users by offering a full range of aromatic
products: liqueur and rum essences, essential oils, flower oils, perfume compounds and aroma
chemicals.
In the early 1920s, Dr. Jules Bittera introduced several new selected crops from abroad, including
French lavender, English Mitcham peppermint and Dutch caraway. Next, he initiated a continuous
crop selection programme to increase oil yields and qualities. As a result, the production levels grew
year by year all products were exported and were praised as of very high quality (as recorded in Ernest
Guenther’s The Essential Oils). Additionally, Dr. Bittera made products from wild grown plants.
By 1941, production was as follows:
From
cultivation
From wild
plants
Product Output (tonnes) Main producing areas
Peppermint oil 8.5 Zalavár & Deáki
Dillweed oil 3 Dömsöd & Deáki
Lavender oil 0.6 Tihany
Marjoram and caraway oils
Kalocsa
Juniper berry oil
Oak moss extract.
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Chart 1: Production scale for the main oils
in 1941 (kg)
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Peppermint Dillweed Lavender
Map 2: Distillery locations in 1941
Deáki
Tihany
Dömsöd
Zalavár
Kalocsa
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The Communist Era (1945-1990)
The end of WW II brought the Russians and the communist system to Hungary, and both stayed for 45
years.
Schimmel and Dr. Bittera’s distilleries of were appropriated by the communist regime, as were all
companies in the country. In 1951, these state-owned operations were called the Kompozíció Essential
Oil and Chemical Factory (and were renamed as KHV in 1962). In this organization, everything was
centralized (fragrance and flavour manufacture, essential oil and aroma chemical production). It was a
100% monopoly situation as no other company in the country was permitted to compete. Similarly, the
only company entitled to export essential oils was state-owned, Medimpex.
With the emergence of Cold War politics, the industry lost its traditional markets in the West and there
was a consequent decline in essential oil production, reaching a minimum of 1.9 tons in 1954.
However, this was followed by a strong recovery over the next 13 years. From 1954 to 1967:
• production grew twenty-fold to 41.1 tonnes / year, (see Chart 2), and
• the area under cultivation grew eight-fold from 250 ha to 2,000 ha (see Chart 3).
Chart 2: Total Oil Production (tonnes)
in 1941, 1954 and 1967
45
40
35
30
25
20
15
10
5
0
1941 1954 1967
The reason behind this renaissance in the fortunes of the industry also was political: the communist
love for redistribution. KHV made good profits on F&F products as the regional market was protected
from international competition. At the same time, many aroma chemicals needed in F&F formulas
were not available in the Eastern Bloc countries and, therefore, hard currency was needed for imports
from the West. This led to the state subsidies for the production of essential oils destined for export to
Western markets. As a result, many cooperatives all over the country were encouraged to grow
aromatic herbs and to build distilleries.
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Chart 3: Essential oil crop cultivation area
(ha) in 1954 and 1967
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1954 1967
Map 3: Distilleries in 1967
Újfehértó
Kapuvár
Enying
Páty
Papkeszi
Tihany
Balatonfenyves
Öreglak
Paks
Daránypuszta
Miske
Székkutas
Mohács
There were 14 operating distilleries in 1965:
• 7 operated by KHV (in Budapest, Kapuvár, Papkeszi, Paks, Miske, Mohács, Balatonfenyves),
and
• another 7 operated by cooperatives (at Páty, Újfehértó, Enying, Öreglak, Daránypuszta,
Székkutas, Tihany).
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All distilleries delivered the oils to KHV in Budapest, where they were blended, filtered, packed and
prepared for export.
The oils produced in the mid-1960 were:
Main products:
• lavender and lavandin (8-10 tonnes)
• peppermint (4-5 tonnes)
• dillweed ((8-10 tonnes)
• Pinus sylvestris (6-8 tonnes)
Minor oils:
• clary sage
• tarragon
• hyssop
• fennel
• coriander
• caraway
It is interesting to note that at this time the yields of almost all essential oil crops were low, usually
half or one third of recent yields. The profitability of the 1960s industry in a market economy context
would have been questionable, even with heavy subsidies - but it was the soviet system.
Chart 4: Production of the main oils in
1967 (tonnes)
10
9
8
7
6
5
4
3
2
1
0
Lavender and
Lavandin
Peppermint Dillweed Pinus
Sylvestris
In 1977 the organizational arrangements changed. One of the cooperatives (Szilasmenti) took over the
business of KHV and all distillation units of several cooperatives were delivered to Kerepes, creating a
huge concentrated capacity there. Additionally, exporting was transferred from Medimpex to
Pharmatrade, another state owned company. This change was smooth, although production figures in
the 1970s were slightly lower than in the 1960s, around 30-35 tons/year, the major crops remained the
same.
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In the 1980s, total production quantities remained more or less at the same level (~ 30 tons per year)
but the product structure slowly changed:
• peppermint and lavender oil production went down, while
• output of fennel, caraway, angelica, blue and Roman chamomile increased.
Chart 5: Total Oil Production Levels (tonnes)
in 1941, 1954, 1967 and 1980
45
40
35
30
25
20
15
10
5
0
1941 1954 1967 1980
The major export markets during the communist era were heavily European oriented with Germany
and France accounting for 70% of the total.
Chart 6: The Export Markets in the 1970s
France 36%
Germany 34%
UK 8%
USA 7%
Switzerland 5%
Rest 10%
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The Transition Period (1990-94)
We had our first free election in 1990. Everyone was happy - the Russians had left - and the Hungarian
people felt freedom and unlimited possibilities. However, the situation was not that rosy in the
economy. Our new conservative government tried to find solutions but, unfortunately, their actions
have not always been the best ones for the essential oils industry. The government’s programme
involved:
• The withdrawl of all subsidies.
• A political attack on cooperatives, which were regarded as communist economy hang-overs.
• Re-privatization of land.
The immediate effect of the abolition of subsidies in the essential oil sector was profitability losses
and, within 3 years, bankruptcy at the Szilasmenti cooperative. It was then privatized and acquired by
Silvestris Ltd.
Reprivatization of the land caused a tremendous problem for the whole of Hungarian agriculture:
• All modern cultivation equipment was owned by the cooperatives but these were deprived of
land.
• The new landowners mainly held areas of only 1-2 ha and, moreover, had no intention or
capability to undertake cultivation.
An interesting example of the outcome is provided by the lavender plantation in Kerepes. In 1990, the
plantation was just turning to the high yield stage, but the agrarian reform committee divided the land
exactly crossing the rows of lavender. The Szilasmenti Cooperative tried to rent this land back, as it
represented a huge investment made only a few years earlier, but this proved in vain. Some of the new
smallholders decided to grow corn as feed for their pigs, so they weeded out the lavender. Eventually,
the whole lavender plantation disappeared.
Finally, all of the cooperatives involved in cultivation and distillation of aromatic herbs disintegrated.
Distillation units were sold and, generally, everything was chaotic for 4 years.
Chart 7: Hungary’s Essential Oil Exports 1984-97
(US$ millions),
2.5
2
1.5
1
0.5
0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
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This is demonstrated by the export figures in Chart 7 for 1984-97. It reveals that 1990 was the peak
year, a rapid fall occurred until 1993 (the year of privatization of Szilasmenti), afterwards there was a
recovery and by 1997 exports re-attained the 1990 level.
Stabilization in a Market Economy
An interesting characteristic of the Hungarian essential oils industry is that always it has been
dominated by one company. In the communist era, it was Kompozícó / KHV / Szilasmenti while,
today, 80% of exports arise from Silvestris & Szilas. This is quite fascinating as modern Hungary
apparently is following the good old soviet system in the market economy: one industry - one
dominant company.
Chart 8: Total Hungarian vs. Silvestris Exports
from 1994-2001(US$ millions)
2.5
2
1.5
1
0.5
0
1994 1995 1996 1997 1998 1999 2000 2001
Silvestris
Hungary
The 20 % non-Silvestris part of Hungary’s exports are mostly comprised of re-export from the former
Soviet Union and are based on the traditional links between the former Eastern Bloc countries. The
largest products in this group are lavender, coriander, clary sage and fir needle oils.
The essential oil production system in Hungary today has an even higher concentration than under the
old regime:
• 95% of the capacity is operated by Silvestris - the largest capacity (122 m 3 ) at Kerepes and
another (18 m 3 ) at Nyiracsad.
• Two other distilleries are run by farmers: at Szekkutas (5 m 3 ) and at Öreglak (2 m 3 ).
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The Kerepes distillery
Map 4: Distilleries in 2002
Nyíracsád
Kerepes
Öreglak
Székkutas
Charts 9 and 10 show that between 1967 and 2002:
• the number of distillery sites decreased by 70%,
• while capacity decreased only by 20%
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Chart 9: Number of Distilleries,
1967 vs 2002
20
15
10
5
0
1967 2002
Chart 10: Total Distillery Capacity (m 3 ),
1967 vs. 2002
200
180
160
140
120
100
80
60
40
20
0
1967 2002
However, the export markets have been changed radically. In 2000, the USA had the largest share
(26%), followed by France (17%) and Germany (11%) – see Chart 11. The comparison figures for
1970 and 2000 in Chart 12, illustrates the decline in the importance of the European market.
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Chart 11: The Export Markets in 2000
USA 26%
France 17%
Germany 11%
Japan 10%
UK 9%
Rest 27%
Chart 12: Export Market Shares (%)
1970 vs. 2000
40
35
30
25
20
15
10
5
0
France Germany USA Japan
1970s 2000
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Also, there has been a significant change in the crop structure:
Major crops of 1960s Major crops in 2000
• Peppermint • Angelica root • Fennel
• Lavender
• Blue chamomile • Dill
• Pinus sylvestris • Caraway
• Parsley seed
• Lovage
• Origanum
The comparative crop shares have changed every year but it is worth mentioning one important oil that
influenced the country’s figures heavily between 1994-1998; namely, parsley seed. Some of you might
still remember the extreme shortage and skyrocketing prices of this oil that were caused by the huge
demand from US breath freshener manufacturers. This was followed by a huge overproduction that
sent the prices far below production cost. This example leads to the last part of my discourse.
Present and Future Challenges
The essential oil industry faces general and country specific challenges.
The general problems encountered by all essential oil producers are:
Instable supply - Being natural products, a crop failure in a major producing country will result in a
shortage, higher oil prices and, eventually, lower demand. This happened recently with our high
azulene type milfoil oil, where – after 3 consecutive crop year failures in Hungary - the major users
eliminated it from their formulas.
Volatile demand – The parsley seed oil case is a very good example. There was a stable market: and
distillers in France and Hungary used cheap non-germinating seeds for production of relatively cheap
oil, which found some usage in the flavour industry. The annual world production was 1-2 tons a year,
the price was stable around US$100-110 / kg and everyone involved was happy. But, in 1994
American breath freshener companies created a new, immediate and huge market. They requested
more than 10 tons of PSO annually. The result After eating up all existing stocks, prices skyrocketed
to US$300 / kg by 1996. This oil price trend moved on to the raw material and it encouraged hundreds
of farmers all over the world to plant parsley. By 1999 there was a huge supply but by that time the
main user had changed the formula: reducing PSO incorporation by more than 50% as a first step and,
finally, discontinuing manufacture of the brand. What had he left behind him Many essential oil
distillers and dealers had large stocks of oil and hundreds of desperate farmers had huge quantities of
seeds that had been begged for two years earlier but now nobody wanted the material. The result The
oil price went down to US$70-75 / kg, several farmers went bankrupt and cursed parsley forever. This
good old roller coaster probably will start again one day, when some new uses will be created on a
delusionary low price. Perhaps we shall see soon a roller coaster developing with one of the oils from
this region that has recently increased in price: coriander.
Another problem is the unbalanced relationship between large F&F corporations and small raw
material suppliers. Even if you can get through the painfully long process of approvals, you have filled
up tons of documents and finally got a contract at a reasonable price, are you completely happy Not
necessarily, if you think of the 2 years contract time and your forthcoming difficulties. You may have
to get loans to finance your next production season, while you are still carrying the stock of giant
corporations, from last year’s crop.
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Or, what can you do if one of your major customers is merging with another multinational, and your
product is simply eliminated from the raw material list Shall we be worried again, listening to the
news
Legislation: I shall refrain from going into details, as there are a number of lectures during the
conference dedicated to this subject. However, what can a distiller do if his customer is forced to
eliminate his oil from the formula Unfortunately, several essential oils now should be considered as
endangered species in the EU. Even in Hungary we have a local problem and our association is trying
to fight a clever clerk in the Environmental Ministry who put a phrase into our law on Hazardous
products two years ago. This regulation states that all waste material from aromatic herb processing
must to be considered as hazardous material, unless otherwise proven by some very expensive tests.
Now all exhausted residues of chamomile, dill, caraway, etc., formerly considered as valuable byproducts
(natural fertilizers), are targets for our local agencies. It is a really crazy world.
Other specific Hungarian problems include:
• The strengthening of our currency (the Forint) by more than 15 % this year. This is quite a
challenge considering the fact that more than 95% of the Hungarian essential oil production is
exported. We have to compensate it with increased productivity, cost reductions, etc. which is
not an easy job.
• The lack of experienced farmers with large landholdings and cultivation equipment.
• The cost of manpower is increasing sharply.
Our answer to these challenges are:
We will strive to develop better and better species. Sometimes the result of research is an existing
crop with higher yield (as in case of fennel), or with higher contents of active ingredient (as in the case
of blue chamomile with more that 10% chamazulene). Sometimes, we reintroduce traditional species,
abandoned earlier due to heavy competition. Examples of this group are: lavender, coriander, tarragon,
and peppermint; all were big Hungarian products in the past, are small today but any of them might be
a key product tomorrow. Also, we must examine native flora that has previously never been distilled
on a commercial scale; the most recent example of this work is origanum. Other research in these
areas has given promising results.
Reorganization of the raw material supply: To persuade and then teach farmers to grow an
unknown aromatic herb is a difficult and sometimes hopeless job. They always compare the
profitability with very different types of crops. Unless they see a large potential margin, they stay with
their well-known annual crops, such as wheat and corn. Also, those who are already growing aromatic
herbs tend to quit rather quickly at crop failure. They do not plan for long term. If you want stability
you have to put some control on your raw material supply. For these reasons, Silvestris created a
subsidiary to grow aromatic herb exclusively for its essential oil production in 2000. This proved to be
successful in the first two years.
Reorganization of production system: Eliminating manpower whenever possible, by using
mechanisation in both agricultural and distillation operations. A new distillery is being established
right on the field to reduce transportation costs.
In summary, I think that the general trend in our industry is for shorter product lives, thus the time to
adjust to market challenges all through the supply chain is becoming shorter and shorter. Those closely
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monitoring market demand trends and are the most flexible will be the winners, while those who are
not will disappear. I think this will happen more often in the future even in our specialist sector.
Csaba Fodor has been involved with the essential oils industry since 1987. He was born in Budapest
and was educated as a chemical engineer, specialising in distillation technology. In his early career,
Mr Fodor developed rectification units for the largest Hungarian essential oils manufacturing
cooperative (Szilasmenti). In 1989, he established Silvestris Ltd., which acquired the essential oil
business of the Szilasmenti cooperative in 1993. His company has been the principal essential oils
manufacturing and exporting company in Hungary since that time.
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