Analysis: African cocoa grinders counting on global upturn
March 11, 2010
By Mark John Dakar
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 that want to derive more revenues from their sectors.
Top producers, including US-based Cargill and agribusiness giant Archer Daniels Midland, have added capacity in west Africa in recent years, in some cases just before the 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 about 1 million tons, giving scope for a strong increase in future grindings on the 630 000 tons processed on the continent in the 2008/09 season.
"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, a senior statistician at the International Cocoa Organisation.
Top grower Ivory Coast and second-largest producer Ghana have targets to process half of their output locally, a goal that in Ivory Coast's case could mean it overtakes the Netherlands as the world's top grinder.
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 planters) only produce when they have orders from Europe," said Felix Oladunjoye, the secretary-general of the Cocoa Processors Association of Nigeria, estimating that just 40 percent of local capacity of 150 000 tons was in use.
"Everyone is trying to export raw beans rather than processed products because the margin on processed cocoa is very low," he said of cocoa prices just below three-decade highs, partly owing to long-standing concerns about the Ivorian crop.
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 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 fourth quarter of last year, 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.
"It is a major concern producing at only a third of your capacity while your machinery lies idle," said a local processing company manager.
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. - Reuters
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