* Falling margins put pressure on smaller mills
* Bigger rivals making ground despite overcapacity
* Major, low cost mills service industrial users
By Hallie Gu and Josephine Mason
BEIJING, March 21 (Reuters) - Rising wheat prices in China are putting pressure on thousands of the country’s small flour mills, speeding up rationalisation of the world’s biggest milling industry and boosting the market share of bigger players.
Many small-scale mills have been forced to shut down or cut back operations since late last year, analysts and industry insiders said, as government buying of high quality wheat and bad weather in big producing regions tightened supplies.
The price hikes have squeezed margins and left smaller mills competing for high-cost supplies, while larger cashed-up mills have benefited from buying in advance at cheaper prices.
“It is really hard to do business now,” said Mr. Tong, who runs a small flour mill with about 10-20 tonnes of output a day in China’s eastern Shandong province, a major wheat and flour producer.
“I have basically stopped operations,” said Tong, who did not want to give his other name. “Flour from bigger companies is flowing in. Their flour is cheaper and it’s taking over the local market.”
The difficulties are speeding up a transition from an industry made up of thousands of tiny mills servicing household buyers to one dominated by big players such as market leader Wu Deli and Singapore’s Wilmar International Ltd, which sell to commercial buyers making products such as ready-to-eat steamed buns and noodles.
“Big mills, producing better flour at a lower cost, are expanding. They have increased production lines and expanded production capacity,” said Shandong-based analyst Li Dongchao, at commodities information service Zhuochuang. “Small mills ... are being eliminated.”
Wheat prices rose after the government stepped up buying to maintain its state stockpiles, currently estimated at as much as 111 million tonnes.
Price rallied to three-year highs on local exchanges this month including Xiamen W-CIFXMN-GEN, Fuzhou W-CIFFUZ-GEN and Shanghai W-CIFGZH-GEN, but flour prices have failed to match gains.
Milling margins for wheat flour in northern China have fallen about 20 percent since last June, when the harvest began for the 2016/17 crop, according to Reuters calculations, based on data provided by China’s National Grain and Oils Information Center.
Rabobank estimated there were more than 40,000 flour mills in China five years ago, although the vast majority were only able to process less than 200 tonnes a day.
China’s State Administration of Grain says the number of mills with capacity of more than 200 tonnes a day jumped 40 percent between 2010 and 2014, the latest date for which it has figures, and these produce 85 percent of China’s flour.
Overcapacity is rife, however, with an industry-wide production capacity of 200 million tonnes, said Wen Jiping, a professor at Henan University of Technology, against annual production of 90 million to 100 million tonnes.
“The industry is facing fierce competition and going through fast consolidation. Big players ... are operating at a rate of more than 90 percent, while many small mills have been forced to shut down,” he said.
The shake-out is likely to further boost big players such as Hebei-based private firm Wu Deli, which processes 40,000 tonnes of wheat a day - up 50 percent from 2013 - and is aiming to lift its market share from around 15 percent to at least 20 percent.
“We have economies of scale, small operators can’t compete,” said a trader at a leading wheat miller in China. “We use one complex for all our operations ... so our costs are much lower.”
Other big players include state-owned COFCO and Wilmar, which has a dozen mills in China, with another five on the drawing board, according to its website.
Wilmar’s Yihai Kerry subsidiary has 5.6 million tonnes of wheat processing capacity, according to its official website.
Wilmar declined to comment on its China business.
($1 = 6.8671 Chinese yuan renminbi)
Reporting by Hallie Gu and Josephine Mason; Additional reporting by Naveen Thukral in SINGAPORE; Editing by Richard Pullin