Karlshamns expects considerable growth potentials from new EU regulations

6/28/2000 5:47 AM EST

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.