European 2Q09 Cocoa grind falls short of Olam's expectations

Brussels-based European Cocoa Association (ECA) recently reported that Europe's cocoa grind had fallen 11.3% yoy to 291,763 tonnes in 2Q09. The ECA's statistics cover most of the grinding industry in the European Union and Switzerland, and is a closely watched measure of cocoa demand. The results were below Olam's expectations as one day before the data release, Reuters had interviewed Gerry Manley, managing director of Olam Cocoa, who expected European 2Q09 cocoa grind to fall 8-10% yoy and global grind to be down 6%. Manley, head of Olam's global cocoa operations, attributed the low cocoa grind to falls in demand due to the global recession. He indicated that the financial crisis had been impacting demand from markets like Eastern Europe, and less premium chocolates were being used in markets like US. Manley expects a global cocoa deficit in 2009-10 aided by disappointing mid crop in the world's top producer Ivory Coast.

As mentioned in our recent downgrade note on Olam, the group's volume surge seen in Apr/May 09 was due largely to Chinese re-stocking and has not been sustained. Cotton demand has slightly declined in June, and the outlook is weak. Wool and rubber remain weak due to continued poor consumer spending. Cocoa and dairy, which are said to be recession resistant, are also showing slight weakness.

While the weak demand for cotton, wood, wool and rubber can be explained by the weak global demand for industrial raw materials, it may be a concern to some that the relatively recession-resistant products of cocoa and dairy are also showing signs of weakness. Accordingly, it is logical to wonder whether Olam's other recession-resistant products could see weakness in future.

We reiterate our Sell on Olam for its high valuations and potential disappointments in certain product categories as mentioned above.

Click here for more Commodity Stocks Technical Analysis

Sponsored Links

Related Posts by Categories