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ANALYSIS-Ivorian war would paralyse bulk cocoa exports

Source: Thomson Reuters Foundation - Wed, 9 Mar 2011 16:58 GMT
Author: (c) Copyright Thomson Reuters 2011. Click For Restrictions. http://about.reuters.com/fulllegal.asp
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* Ouattara's export ban likely to be extended

* Around 1/3 of Ivorian output sitting in warehouses

* Smuggling from Ivory Coast likely to increase

(Repeats to add editing credit below story)

By David Brough and Ange Aboa

LONDON/ABIDJAN, March 9 (Reuters) - An all-out civil war in Ivory Coast would probably paralyse exports of the bulk of the main cocoa crop in the world's largest producer, unlike the 2002-2003 war when supplies reached the world market.

Cocoa futures prices <CCc2> on the ICE exchange have already exceeded highs in the last civil war, reaching ${esc.dollar}3,775 per tonne on March 4, as fighting between supporters of two rival governments has intensified fears over the future of supplies.

The main harvest starting in October could suffer as violence forces workers, many of them impoverished migrants, to abandon farms and flee the country due to fears for their safety, analysts said.

Jonathan Parkman, joint head of agriculture at Marex Financial Ltd in London, said that in the longer term, civil war would harm investment prospects for the cocoa industry in Ivory Coast, which accounts for about 40 percent of global supplies.

"Everybody would be reconsidering whatever investment plans they already had on the table. At best they would be shelved, if not ripped up," he said.

In the short term the risk is that around 475,000 tonnes of beans now sitting in Ivorian warehouses -- more than 10 percent of cocoa forecast to reach global markets this year -- could rot.

The beans have accumulated since presidential claimant Alassane Ouattara, widely seen by the international community as the winner of Nov. 28 elections, urged a cocoa export ban, which has been largely adhered to by exporters.

Whether the beans rot or reach the market now depends on moves by the two presidential contenders.

Analysts said Ouattara is likely to extend the export ban, which runs out on March 15, in order to starve incumbent Laurent Gbagbo of cash he needs to pay the military and civil service.

But Gbagbo issued a decree this week for the state to take over purchasing of beans from farmers at a set price and then handle all exports, triggering fears stocks would be seized.

There is no plan for now to seize stocks, but cocoa exporters have until the end of March to ship the stored beans and pay taxes on them or risk seizure, the sector regulator said on Wednesday. [ID:nLDE72822C]

ROTTING AT QUAYSIDE

While the two sides make their moves and countermoves, "We have had stocks from the 15th or 20th of January," said an industry source in Abidjan who did not want to be identified for safety reasons. "Quality is starting to become complicated, and that is our greatest worry."

Cocoa is normally held at port for no longer than 10 days before being loaded on a ship, but some sacks have now been kept on the quayside for more than a month-and-a-half.

"Even without war, cocoa is rotting in the warehouses ... which are not well adapted for long-term storage. So imagine if there were war," said another industry source.

Export companies are trying to preserve the beans from rotting by airing them out routinely.

A third source said, "Every morning we open the warehouse doors to keep the cocoa aired out, but if there is war, who will come and do this? The cocoa will stay in the warehouse and rot." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on world cocoa output vs. Ivorian cocoa arrivals:

http://r.reuters.com/bup48r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Gbagbo's move to control the trade would be welcomed by many Ivorian farmers, who would have an incentive to sell cocoa to authorities after the country's banking system collapsed. [ID:nLDE71H1NQ] Many farmers face a shortage of cash and finance, making it more difficult to care for their trees and renew plantations.

Gbagbo's action also has raised questions over how he could engineer exports in the face of Ouattara's ban and sanctions by the European Union, a leading market. He is expected to turn to secondary markets such as Russia and Asian countries, which have not imposed sanctions.

"Who do they sell it to? It does follow that Gbagbo would do this (control cocoa trade) as his finances are being squeezed," said Kona Haque, an analyst with Macquarie Bank in London.

ABANDONING PLANTATIONS

Analysts said that if fighting erupted across the country, the immediate impact on production would be limited as the latest main crop harvest has been collected.

The brunt of the supply and price impact would be felt when the main crop harvest starts in October, although the smaller mid crop which begins next month could be vulnerable.

Analysts said wide-scale hostilities between Ouattara and Gbagbo would also trigger an upsurge in smuggling, which has already been taking place through neighbouring countries such as Ghana. But neither smuggling nor production from Cameroon, Nigeria and Ghana, ranked the world's second-largest, would be enough to make up for an output shortfall from Ivory Coast, analysts said.

As for consumers, cocoa stocks in European ports are likely to be low. Analysts say London-based merchant Armajaro, which took a big position against the London July futures contract, has probably sold most of the tonnage to processors by now. Armajaro has declined comment.

A worsening supply outlook, therefore, is likely to trigger further price rallies, squeezing margins of chocolate makers.

"We're likely to see the big confectioners downsizing chocolate bars rather than passing on big price increases to consumers," the analyst with the Western trade house said.

(Additional reporting by Marcy Nicholson, Tim Cocks, and Sarah McFarlane) (Reporting by David Brough and Ange Aboa; editing by Jane Baird)

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