By Neena Rai
Cocoa futures in both London and New York plunged over 3%
Thursday on much weaker than anticipated European second-quarter
cocoa-grindings data--a key sign that Europe's appetite for
chocolate is waning.
The data, which measures the amount of processed cocoa beans and
is therefore seen as a proxy for chocolate demand, showed grindings
slumping by almost 18% to 292,551 metric tons from the same period
a year earlier. This marked the sharpest quarterly decline for 12
years, data from the Brussels-based European Cocoa Association
showed.
"I am absolutely shocked by today's grind numbers, the market
was caught wrong-footed by the data," said Jonathan Parkman, head
of agriculture at Marex Spectron in London. "Most people were
expecting grind data to come in lower, but in a range of 5%-7%," he
added.
Some analysts believe that the data highlights deeper issues for
the demand picture for chocolate, a food typically perceived as
recession-proof.
"The sharpness of the fall is alarming given that the European
Union & Switzerland typically account for 40% of the world's
cocoa grind," said Edward George, head of soft commodity research
at pan-African banking group Ecobank.
"With demand for cocoa and chocolate collapsing in Europe and a
decent global crop expected in 2011-12, cocoa futures will come
under further pressure, pushing them back towards the psychological
floor of GBP1,500/ton," Mr. George warns.
The market isn't far from there already. At 1435 GMT, Liffe
front-month cocoa futures were trading 2.9% lower at GBP1,561/ton.
ICE cocoa futures.
The trend for lower demand in Europe isn't new, but the pace of
the decline is somewhat alarming. Major international confectionary
manufacturers such as Kraft Foods Inc. (KTF) and Nestle SA
(NESN.VX) have already started to target new markets in Israel and
the Middle East as they look for new pockets of consumption.
There are other factors than European chocolate demand at work,
however, which highlight rising demand in other regions, such as
Asia.
"Cocoa grindings are lower as processing margins have been very
thin or negative in 2012 due to falling powder ratios. An increase
in production capacity to meet growing Asian demand has resulted in
a build up of product (liquor, powder, butter) inventories, and
this has pressured the ratios and the profitability of grinding,"
said Keith Flury, senior soft commodities analyst in London.
However, Mr. Flury explained that the new season's outlook looks
better as the reduction in grindings now will result in a drawdown
of product stocks and will help grinding margins in the new
season.
According to the International Cocoa Organization, the global
cocoa market is expected to see a deficit of 43,000 tons in the
2011-12 crop year. But Marex Spectron's Mr. Parkman warned that the
extremely bearish data could likely lead to upwards revisions.
"This is a very big deal for the cocoa market indeed and will
have a material bearing on the supply-demand picture for this
season," he added.
-Write to Neena Rai at neena.rai@wsj.com