Cocoa Grinders Bet on Africa Despite Challenges

Industry moves to process more cocoa beans in Africa are being held back by local obstacles and weak global demand, but grinders are pursuing the strategy in the belief it will yield rich dividends once markets recover.


Processing beans close to the field has a compelling logic for producers keen to cut costs, and for African countries who want to derive more revenues from their sectors.Top producers including U.S.-based Cargill and agribusiness giant Archer Daniels Midland added capacity in West Africa in recent years, in some cases just before the 2008/09 economic slowdown hit global demand for cocoa.

Cocoa butter is one of the major and most versatile cocoa products, used in everything from chocolate to face cream and other toiletries.

Total capacity in Ivory Coast, Ghana, Nigeria and Cameroon currently stands at around one million tonnes, giving scope for a strong increase in future grindings on the 630,000 tonnes processed on the continent in 2008/09.

« It was bad timing. There has been a huge increase in capacity at a time when demand was going down. But that will reverse in the medium-term, » said Laurent Pipitone, senior statistician at the International Cocoa Organisation (ICCO).

Top grower Ivory Coast and world number 2 producer Ghana both have targets to process half of their output locally, a goal which in Ivory Coast’s case could mean it overtaking the Netherlands as the world’s top grinder. For an analysis on grinding volumes in Europe and North America click on.

But while Ivorian authorities are helping firms there with tax breaks, processors elsewhere in Africa are feeling the pain as they sit tight and wait for demand to pick up. « They (the plants) only produce when they have orders from Europe, » said Felix Oladunjoye, secretary-general of the Cocoa Processors Association of Nigeria (COPAN), estimating that just 40 percent of local capacity of 150,000 tonnes is in use.

« Everyone is trying to export raw beans rather than processed products because the margin on processed cocoa is very low, » he added of cocoa prices just below three-decade highs partly due to longstanding concerns over the Ivorian crop.

HIGH LOCAL COSTS

The European cocoa butter ratio — the ratio between the price of cocoa butter and the price of beans — stands at just under 1.7, a figure which traders say shows that there is a clear surplus of cocoa butter already lying in warehouses.

Squeezed margins have been a factor holding back grinding across the world, including in Europe where the grind showed a modest 0.6 percent increase in the last quarter of 2009 and in North America, which saw a 1.54 percent fall in the same period. But in Africa that has been exacerbated by local factors.

In Ghana, plants are running at only 36 percent of capacity because of a shortage of the light-crop beans made available at a reduced price to them by local regulator Cocobod, according to an industry study seen by Reuters.

« It is a major concern producing at only a third of your capacity while your machinery lies idle, » a local processing company manager said. « As an industry this is not a good news and we can’t continue like this, » he added of Ghana’s total installed capacity of 360,000 tonnes.

The problem stems from a gradual waning of the light crop, the smaller of Ghana’s two crops which runs from May-September. Some processors are lobbying for Cocobod to allot them a portion of beans from the larger main crop at discounted prices.

In Ivory Coast as in Nigeria, producers complain that any advantage derived from processing beans close to origin — which in theory should reduce shipping costs to the consumer — is outweighed by higher local production costs.

« It’s true that the raw material is here but the high energy and transportation costs are a handicap, » said the head of one Abidjan-based export company, estimating that average production costs in Ivory Coast were slightly higher than those in Europe.

DEMAND SEEN RETURNING

Ivorian support for the sector such as lower import taxes on machinery and a lower export tax on semi-finished products than on beans have helped offset those costs, meaning that grinders have managed to keep capacity utilisation around 80 percent.

Current grinding capacity in Ivory Coast should hit 507,000 tonnes this year, rising to 570,000 in 2011 when local firm SAF CACAO’s new Choco-Ivoire plant in San Pedro increases its output potential to 100,000.

But with evidence that global demand is taking off again — the ICCO on Tuesday forecast that the first quarter 2010 global grind would rise three percent year-on-year — even others have grounds to hope that their expansion plans will pay off.

Multi-Trex, Nigeria’s leading cocoa processor, inaugurated a new 50,000-tonne plant near the commercial centre Lagos in December, and a Cocobod source said there were industry plans this year for the construction of two extra plants in Ghana, which is looking to raise capacity to around 500,000 tonnes.

As a pick-up in the global economy leads to more expensive oil, the fact that cocoa product is less bulky than beans and so is cheaper to ship will once again bolster the argument for more grinding in Africa, where the beans are sourced.

« I’m more optimistic than ever about the grinding market. That’s why we are also trying to do it, » SAF CACOA director Ali Lakiss told Reuters by telephone.

Source : Flexnews