Asia Cocoa Sector Boom At Risk Of Bean Scarcity

BMI View: The ongoing boom in investment in the cocoa processing sector in Asia should intensify in the coming years, as trading firms and chocolate makers try to tap Asia's robust demand for chocolate. However, we continue to believe the cocoa processing sectors in Malaysia and Indonesia are at risk of overcapacity and depressed margins. Moreover, dwindling cocoa bean supply from Indonesia will make Asian countries dependent on West Africa, where production is volatile.

Interest in Asia's cocoa and chocolate sectors is rising, with many local and international players entering the cocoa grindings and chocolate making business in the region. These sectors hold a promising future, as they will benefit from strong demand for chocolate confectionery in Asia in the coming years. Although there is no traditional culture of eating chocolate in the region, consumption has been growing in recent years in some countries, driven by increasing purchasing power and the westernisation of diets. Asian countries currently consume a limited amount of chocolate per capita, with consumers in China eating as little as 0.3 kg per capita of chocolate a year, compared with 3.2kg in Japan, 5.6kg in Australia and 14.4kg in Germany. Vietnamese are one of the largest chocolate eaters per capita amongst Emerging Asian countries, with consumption per capita at 0.5kg a year, while Indian, Indonesian and Thai consumers eat 0.1kg a year.

Although we forecast limited growth in per capita chocolate consumption across Emerging Asian countries, the aggregate volume growth potential in absolute terms are tremendous given the size of the key markets. We forecast China's consumption to grow to 0.4kg per capita by 2018, while Indian demand will grow to 0.2kg per capita and Vietnam's to 0.7kg per capita. Malaysia has one of the highest chocolate consumption per capita rates, which should limit demand growth in the coming years. Meanwhile, Japan and Australia will remain the largest consumers by far, but will see lacklustre growth. The value of the chocolate market in these two countries continues to rise, however, driven by the introduction of innovative and value-added chocolate products.

Room To Catch Up With Developed Asia
Select Countries - Chocolate Sales, Kg/capita

BMI View: The ongoing boom in investment in the cocoa processing sector in Asia should intensify in the coming years, as trading firms and chocolate makers try to tap Asia's robust demand for chocolate. However, we continue to believe the cocoa processing sectors in Malaysia and Indonesia are at risk of overcapacity and depressed margins. Moreover, dwindling cocoa bean supply from Indonesia will make Asian countries dependent on West Africa, where production is volatile.

Interest in Asia's cocoa and chocolate sectors is rising, with many local and international players entering the cocoa grindings and chocolate making business in the region. These sectors hold a promising future, as they will benefit from strong demand for chocolate confectionery in Asia in the coming years. Although there is no traditional culture of eating chocolate in the region, consumption has been growing in recent years in some countries, driven by increasing purchasing power and the westernisation of diets. Asian countries currently consume a limited amount of chocolate per capita, with consumers in China eating as little as 0.3 kg per capita of chocolate a year, compared with 3.2kg in Japan, 5.6kg in Australia and 14.4kg in Germany. Vietnamese are one of the largest chocolate eaters per capita amongst Emerging Asian countries, with consumption per capita at 0.5kg a year, while Indian, Indonesian and Thai consumers eat 0.1kg a year.

Room To Catch Up With Developed Asia
Select Countries - Chocolate Sales, Kg/capita

Although we forecast limited growth in per capita chocolate consumption across Emerging Asian countries, the aggregate volume growth potential in absolute terms are tremendous given the size of the key markets. We forecast China's consumption to grow to 0.4kg per capita by 2018, while Indian demand will grow to 0.2kg per capita and Vietnam's to 0.7kg per capita. Malaysia has one of the highest chocolate consumption per capita rates, which should limit demand growth in the coming years. Meanwhile, Japan and Australia will remain the largest consumers by far, but will see lacklustre growth. The value of the chocolate market in these two countries continues to rise, however, driven by the introduction of innovative and value-added chocolate products.

Booming Cocoa Processing Sector

Attracted by these enticing consumption trends, cocoa grinders are investing heavily across Asia, especially in Malaysia and Indonesia. Although modest, the growth seen in Indonesian cocoa production in the 2000s, along with the implementation in 2009 of an ambitious public programme to boost output, made grinders believe they could count on a stable supply of beans from Indonesia. As a result, although Europe remains by far the largest grinding region (holding a 39% market share in 2013), the global cocoa grinding capacity is currently shifting to Asia. Asia's grindings have grown at the fastest pace globally over the past five years, slowly eating into Europe's market share. Asia now accounts for 21% of global grindings, compared with 18% a decade ago.

Indonesia Overtaking Malaysia
Select Countries - Malaysia And Indonesia Cocoa Grindings & Grinding Capacity ('000 tonnes)

Indonesia has attracted most of the investment, as the government revamped its export tax policy in 2010 to favour the export of value added cocoa products (such as butter and powder) over raw cocoa bean exports. Since the change in tariffs, the largest cocoa market participants (including Cargill, Archer Daniels Midland, Barry Callebaut and Olam International) have invested in grinding capacity in Indonesia, doubling the country's cocoa processing capacity in just five years, from 200,000 tonnes a year in 2010 to an expected 500,000 tonnes in 2015. Indonesia has now overtaken Malaysia as the largest cocoa processor in the region. Facing stiffer competition from a lower cost cocoa butter and powder producer, we believe Malaysia will now increasingly look to move up the value chain, investing in chocolate making activities.

Other Asian countries where chocolate demand is growing have also recorded investments in their grinding capacity. India has developed its processing sector at a faster pace than other Asian countries and is now less dependent on imports of processed cocoa and chocolate. Meanwhile, China maintains a relatively stable balance between imports of beans, processed beans and chocolate. Other emerging countries, including Vietnam and Thailand, mainly import cocoa powder due to their lack of processing plants. This corresponds well to the taste of consumers in emerging countries, who usually prefer milder chocolate products based on cocoa powder (cakes, biscuits and drinks) rather than cocoa butter-based products which tend to be stronger (melt-in-your-mouth products such as chocolate bars and ice cream).

Overcapacity Weighing On Margins
Guan Chong Berhat - Select Margins (%)

Beans Scarcity Limits Cocoa Sector Development

In spite of strong demand fundamentals for the cocoa and chocolate sectors in Asia, headwinds are growing in the processing industry. First, the ongoing wave of investment in cocoa processing plants has led to overcapacity in Malaysia and Indonesia. We believe the fast development of capacity will have a lingering impact on cocoa grinders' profitability in the coming years, with margins in the industry remaining in the doldrums. Operating and profit margins of Guan Chong Berhat's, one of the largest cocoa processing firms in Malaysia, have been declining since Q312. In fact, the reason behind Petra Foods' decision to sell in 2013 its Indonesian cocoa business to Barry Callebaut, may have been the lingering overcapacity in the processing sector.

Worrying Trends In Asia
Select Countries - Cocoa Yields (kg/ha, LHC) & Production ('000 tonnes, RHC)

The second challenge facing the sector is the dwindling supply of cocoa beans coming Indonesia, which has traditionally been Asia's main supplier. Cocoa production in Indonesia has been declining since 2012/13, as the government's ambitious plan to double output has been a failure so far. Seeds supplied by the Indonesian Coffee and Cocoa Research Institute are producing defective cocoa trees that yield poor-quality pods and small, discoloured beans. The scarcity of locally grown bean is being exacerbated by the fast development of the grinding sector. Indonesia's cocoa production surplus is steadily narrowing and is expected to come in at a low 119,600 tonnes in 2013/14, compared with the five-year average of 274,000 tonnes.

Not only have beans exports fallen recently, hampering the processing sector in Asia, but Indonesia is now forced to import higher-quality beans from Africa. In addition, grinders in Indonesia are lobbying to lower the import tax on cocoa beans in order to increase domestic supply. This would put further pressure on Indonesian cocoa bean farmers, as they would have to face stiffer competition from African beans, which are cheaper and of better quality. Many Indonesian cocoa farmers could be pushed out of business, limiting production further in the future.

In Need Of New Beans Suppliers
Indonesia - Cocoa Bean Exports By Destination, 2013 (as % of volume exported)

We believe the growing scarcity of Indonesian beans, on which many Asian grinders were counting to supply their plants, will put the development of the chocolate making sector in Asia in jeopardy. The stagnation in beans output will leave the world dependent on a single source of cocoa, West Africa, known for its unstable production. This is likely to lead to volatile and slim margins in times of elevated cocoa prices. Decreasing supply from Indonesia should limit the global production surpluses in the coming years, leaving cocoa prices at high levels compared with historical averages ( see 'Cocoa To Average GBP1,850/tonne In 2014', March 11).

Select Countries Cocoa Production & Consumption, 2013 - 2018
2013 2014f 2015f 2016f 2017f 2018f
Cote dIvoire
Cocoa Production, '000 tonnes 1 1,445.0 1,517.2 1,471.7 1,486.4 1,508.7 1,531.4
Cocoa Consumption, '000 tonnes 1 435.3 e 444.0 448.5 457.4 466.6 475.9
Ghana
Cocoa Production, '000 tonnes 2 835.0 830.0 871.5 932.5 988.5 1,057.6
Cocoa Consumption, '000 tonnes 2 225.0 226.1 227.7 231.1 237.1 245.2
Indonesia
Cocoa Production, '000 tonnes 1 430.0 422.0 437.6 455.1 473.3 492.3
Cocoa Consumption, '000 tonnes 1 280.0 302.4 332.6 365.2 401.8 441.1
Malaysia
Cocoa Production, '000 tonnes 3 4.0 e 4.1 4.2 4.3 4.4 4.6
Cocoa Consumption, '000 tonnes 1 285.6 297.0 305.9 315.1 324.6 334.3
Nigeria
Cocoa Production, '000 tonnes 1 225.0 240.0 266.0 294.8 326.7 358.6
Cocoa Consumption, '000 tonnes 1 20.4 e 21.7 23.2 24.8 26.4 28.2
Notes: e BMI estimates. f BMI forecasts. Sources: 1 International Cocoa Organisation; 2 National Statistics, Research and Information Directorate, Ministry of Food and Agriculture, International Cocoa Organisation; 3 Malaysia Cocoa Board.

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This article is tagged to:
Sector: Food & Drink, Agribusiness
Geography: Asia, Australia, China, Indonesia, India, Japan, Malaysia, Philippines, Thailand, Vietnam
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