The sweet spot: Sector players are looking to capitalise on expected production boosts

Adverse weather has hit the world’s third largest cocoa producer hard the past two years, first with La Niña bringing copious amounts of rain followed by a dry spell from May to August 2011 and a prolonged infestation of damaging cascular-streak dieback disease. These extremes have put the brakes on production and exports, which had been bullish for the past decade. “Economic fundamentals are strong, but there will be difficulties,” Arshad Chaudhry, president director of Nestlé, told OBG. “The year will see a lot of pressure on input costs as commodity prices continue to increase.”

Estate production of cocoa reached an all time high of 68,600 tonnes in 2007 before tailing off in 2008 to 62,913 tonnes, according to data from the Indonesian Central Statistics Agency (BPS). Exports experienced a similar decline as cocoa butter, fat and oil exports dropped from 55,584 metric tonnes in 2008 to 41,606 metric tonnes the following year. Cocoa powder exports also decreased from 34,408 tonnes to 27,540 tonnes over the same period. This happened despite a $350m programme initiated in 2009 to boost production in excess of 600,000 tonnes per year by 2014.

“If weather is good, national production can increase to 550,000 tonnes but will likely never exceed more than 650,000 tonnes in the long run,” Zulhefi Sikumbang, chairman of the Indonesian Cocoa Association ( ASKINDO), told OBG. “This is due to a number of factors, including economies of scale, diseases which are unique to the Indonesian climate, lower yields compared to other crops selling at higher prices and other factors.”

DOWNSTREAM: Downstream refining operations (in essence, grinding) capacity within the Indonesian cocoa industry stands at 629,000 tonnes per annum (tpa), according to ASKINDO. Grinding operations are dominated by three big companies: Davomas Abadi with a grinding capacity of 140,000 tpa, General Food Industry with a capacity of 100,000 tpa and Bumitangerang Mesindotama with 96,000 tpa. A fourth company – Asia Cocoa Indonesia – also entered the market in 2010 with its own 65,000-tpa grinding facility and plans to expand the facility to 120,000 tpa. There are also 12 additional grinding companies operating in the sector with capacities ranging from 4000 tpa to 40,000 tpa.

But as production has dipped, many of these smaller facilities were running below 50% capacity. Due to decreased productivity, the already tight margins of these smaller companies are being squeezed into the red. This trend could likely cause consolidation as smaller operations with capacities under 50,000 tpa fold.

NEW TAXES: Another trend expected in the sector is a further increase in grinding capacity due to the implementation in April 2010 of a new export tax on raw cocoa beans. Under the scheme, the amount of tax on cocoa exports is levied on a sliding scale dependant on the commodity’s trading price. When the price is below $2000 per tonne, for instance, export tax is 5%.

From $2750 to $3500 the tax per tonne is 10% and it climbs to 15% above $3500 per tonne. Prior to the policy change, there was no export tax on cocoa products.

Seeking to capitalise on the expected boost in demand upon the recovery of production, a number of large international agricultural players are also looking to enter the downstream market. Cargill, Barry Callebaut, JB Cocoa and ADM Cocoa are all planning grinding investments that could bring an additional combined total capacity of 200,000 tpa to the market. Barry Callebaut, the world’s largest chocolate maker, announced in November 2011 plans to construct a $33m processing plant in Sulawesi with an initial capacity of 28,000 tpa by 2013. The project will be a 60:40 joint venture between Barry Callebaut and local commodities trader and cocoa exporter Comextra Majora. US-based Cargill likewise announced plans for a $113m plant which will produce 70-80 different cocoa products by 2013, also to be built in Sulawesi.

The processed output from Indonesia is primarily exported in the form of cocoa butter to Europe, the US, India and China. Another export is cocoa cake, which is shipped principally to the US, Eastern European and ASEAN countries for additional processing.