Market report desiccated coconut December 2009

With 2009 running to an end, we hereby send you our traditional December report on desiccated coconut.

Looking  back at  the last 1,5 years, it becomes evident  that we are looking  on one of the most challenging periods in recent history, with unexpected external factors dominating most soft commodity markets.

First half 2008  D/C prices were setting new record highs in sentiment with the general consensus of a growing
worldwide  food and fuel shortage. Long term it is clear that modest growth in agricultural production will fall behind on  the growing world population and its improved buying power in especially new economies such as China and India.

The worrying trend of tightening supply  is still valid on the long term. It was only temporarily put to a halt when the credit crisis started materializing,  bringing  Brent Crude oil  in a free fall from a record high of US$ 147 a barrel in July 08 to a low of  just USD 40 per barrel in December 08, representing a decrease of  70% in just 5 months time!!!   With global economies slowly recovering, crude oil pricing has now improved to levels  between US$ 70 and US$ 75 per barrel.

We are again putting special emphasis on Crude oil as this commodity definitely continues to be one of the main fundamentals behind D/C,  as Biodiesel has created a strong linkage between mineral  oils on the one side and vegetable oils like coconut oil on the other side. If crude oil prices increase,  Biodiesel prices also increase with an immediate impact on the underlying raw material-availability and –pricing.  Amongst others it is palm oil,  which subsequently  gives a boost to competing coconut oil prices, which subsequently gives a boost to Desiccated coconut as both the oil millers and D/C producers have to compete for the same raw material.



To get a better understanding of the actual supply situation let’s take a look at the different origins:

SRI LANKA:

Looking at Sri Lankan D/C  exports over the last few years, a declining trend  becomes evident.
For 2009,  exports up to October stand at 33.480 whereas total 2009 exports are expected to reach 37.000.
In comparison  Sri Lanka exported :

-  38.500 Mton in 2008
-  42.990 Mton in 2007
-  44.900 Mton in 2006    

One of the reasons for this decline is the lower quality standards of Sri Lankan quality in comparison to especially Philippine and (some) Indonesian producers. However, the main reason still remains the high Sri Lankan  import duty on edible oils imposed by the Sri Lankan authorities. With this protective measure domestic coconut oil prices are kept artificially high, enabling local oil millers to pay high prices for the raw coconuts. This makes it difficult for the Desiccated coconut manufacturers to produce  a product, which can be sold competitively in the world market.

With weather conditions being favorable, we expect a normal crop of close to 3 billion nuts in 2010. However, this  still falls short on the actual internal  demand of approximately  4 billion nuts, which makes it clear that fierce  competition for   the nuts will continue to persist , with the oil-millers having the upper edge as long as the import-duty will be  maintained.

With the burden of high local  nut-prices we foresee a further decline of Sri Lankans importance as a D/C supplier, all the more as their quality standards will make it difficult to comply  with  the stricter  food-legislation in a.o. Europe.

PHILIPPINES:
       
Production in the Philippines, the world largest producer of D/C, is also down from  last year’s figures,  with exports up to October standing at 98.417 Mton down by 17% from  last years 118.641 Mton.
Expected final exports for 2009 should end up to approximately 115.000 Mton.

Despite the huge acreage of Coconut-plantations, raw material supply remains the main burden for Philippine D/C producers as they are in continuous competition with the coconut oil mills. 
With worldwide demand for vegetable oils expected to increase at a phenomenal rate in the coming years, it is clear that the present competition for raw material will  intensify further in the years to come - all the more as the Philippine government seems to be unable to meet the targeted growth in coconut output (target for  2010 is
3 million tonnes  with present output standing at approx 2,7 million) which will widen the gap between supply and demand even further.  
   
INDONESIA:

Exact numbers out of Indonesia are always a bit of a problem.  However, we estimate final 09 production to be more or less unchanged at approx 50.000 Mton.

One of the more significant factors in Indonesia is the climate changes the country is experiencing with less  rainy days a year. In certain parts of the country an average of 200 rainy days a year was experienced in the past, whereas today  only  70 days a year on average are registered. This climate change is having a significant effect  on crop size in certain areas in Indonesia, creating a more erratic and tighter supply-situation.

Expectations for  2010 figures should be more or  less comparable with 2009.
     
VIETNAM:

As an exception to the other origins, Vietnamese exports are showing  a gradual  increase year after year with 2009 exports expected to reach an approximate 35.000 Mton representing an annual growth of approx 15%.

The Vietnamese growth is mainly covering traditional Sri Lankan demand, which  - due to the high Sri Lankan prices - is now being channeled to Vietnam.

However, with nut supply already being a significant bottleneck right now, Vietnam will not be able to maintain its present growth in the years to come - all the more as Chinese appetite for the raw Vietnamese coconuts is growing at a healthy pace as well, taking up a significant part of the crop in the main growing areas in Ben Tre province!     
 
FORWARD TREND

As for the forward trend 2010/2011 we are of the opinion that prices will gradually improve further. The tightness of supply, as seen in 2008, was temporarily put to a halt by the credit-crisis with buyers taking a more cautious approach and  running only minimal inventories. However, now that the worst of the crisis seems to be behind us, we are seeing buyer-confidence return with increased  demand. This already resulted in a modest improvement of D/C prices. As an example Crude oil prices went from their low of approx US$ 40 end 08/early 09 to prices well above US$ 70  at present, representing  a recovery of more than 75% in just 12 months time. Present crude oil prices are, however, still 50% below the US$ 147 high of  July 08, so long term there is definitely a lot of room on the upward side!  So with markets slowly getting out of the doldrums, improved demand will start putting more pressure on the supply-side which is expected to result in higher price levels. We  already see this trend materializing  with producers being sold out up to 2 to sometimes 3 months ahead which leaves insufficient supply capacity once the demand picks up further!

On the long term it is evident that the producers in the various origins will be unable to keep up with growing worldwide demand in especially vegetable oils, which will leave less raw material for D/C production.       
In this respect the  D/C market will heavily depend on Philippine  ability to step up production to cater for the increased demand as other origins, except maybe Indonesia, are ill equipped to make any significant progress in stepping up D/C production.


For more information visit: www.catz.nl.  

 

Publication date: 12/23/2009

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