"Owing to competitive pressure we were unable to pass on the full impact of these higher costs to our customers, which led to compressed margins, although less pronounced than in the second half of 2004," it said.
Sales in the organic fine and performance chemicals division dropped 2.3 per cent to SF434 million (€277.5m) although earnings before interest and tax at this division increased slightly to SF66 million from SF64 million in the prior year's first half thanks to reduced costs.
Lonza said it raised prices for nicotinates (vitamin B3) in local currencies but overall margins were 'unsatisfactory', despite the strong demand from both food and feed customers.
The Swiss company has however managed to defend its market share in L-carnitine, currently under heavy pressure from Chinese competition, by introducing a low-cost L-carnitine for the feed sector.
It has expanded production of the vitamin-like substance to meet higher demand from both supplements and animal feed, particularly in Asia and the USA.
Sales of intermediates for vitamin production were also high during the first half thanks to increased demand for vitamins.
Despite the marked difference in performance of its custom manufacturing activities - sales up 32.8 per cent to SF429 million - a company spokeswoman confirmed that "nutrition products are a strategic market for Lonza".
She added that the firm will add new capacity for niacin in September this year.
Overall growth at the group during the first six months has largely been a result of the marked improvement in its biomanufacturing business, which helped boost sales 12.6 per cent to SF1.22 billion.
Earnings before interest and taxes (EBIT) reached SF135 million (€86m), 26.2 per cent higher than in the first half of 2004.
The chemicals group said it had successfully implemented the first part of its business strategy announced in January and was on track to reach the SF300-400 million EBIT target by the end of 2006, which would represent a growth rate of 20 per cent a year.