International shipping companies have resumed deliveries of cocoa from the Ivory Coast, the world’s largest supplier of the bean, easing supply concerns that pushed the price to record highs in March. However, analysts say the commodity will remain volatile for the foreseeable future.
The Ivory Coast supplies around 40 percent of the world’s cocoa but a protracted political crisis, which spilled over into widespread violence earlier this year, saw deliveries halted.
Presidential elections in November 2010 led to a stalemate, with incumbent president Laurent Gbagbo refusing to relinquish power to the challenger, Alassane Ouattara, who was declared the winner by international observers. The deadlock was finally broken on April 11 2011, when forces loyal to Ouattara stormed the presidential palace and arrested Gbagbo.
In March, when the deadlock appeared to be descending into full-scale civil war, London Cocoa futures ran up to £2,400 ($3,965) per ton as investors priced in political risk and speculators tried to hook onto the market’s rise. Prices have now dipped to late 2010 levels at around £1,900 per ton.
The international community resorted to economic measures to try to undermine Gbagbo. The European Union imposed sanctions designed to halt the export of cocoa, the incumbent’s principal source of revenue. The lifting of the ban and the resumption of shipments marks a return to relative normality.
“The fact that we are now seeing ships leaving should reassure the market that the infrastructure is working,” Brenda Sullivan, head of research at Sucden Financial told CNBC.com. “We’ve had confirmation that the mechanics are working.”
There are 500,000 tons of cocoa waiting in port in the main export hubs of Abidjan and San Pedro, and a further 300,000 tons still on trees waiting for processing, according to analyst estimates.
The political strife had led to considerable speculation and volatility, Keith Flury, senior commodity analyst at Rabobank International said. “That’s going to simmer down. But I don’t think it’s going to be a calm and settled market.”
Information on the state of the cocoa industry in the country is scarce, noted Flury, who said that the Ivory Coast has been “a little bit of a black box”.
However, the fact that the financial sector largely ceased to function during the past month of crisis as sanctions bit and Gbagbo’s government attempted to nationalize international institutions will reduce farmers’ ability to bring in crops and to invest in inputs for the next season.
Damage Already Done?
Banks are reopening – Reuters reports that Sociéte Générale will resume operations from Thursday – but the damage may have already been done.
Although political tensions came to a head towards the end of 2010, the country’s last civil war ended in 2003 with the de facto division of the Ivory Coast into north and south.
Gbagbo’s mandate to rule expired in 2005, but he continued to delay elections for a further five years. Investors shied away from the country during that period, and the cocoa sector received insufficient backing. Plantations have aged and become less productive, and some infrastructure has deteriorated.
Short-term drivers are bearish, due to the effects of the existing Ivorian surplus reaching the market and the strong mid-crop, but this will only last until the beginning of the next season in October, Kona Haque, commodity strategist at Macquarie Bank, told CNBC.com.
“West Africa had really good crops because of La Niña,” Haque said. “We’re not expecting another La Niña next year. We expect the longer-term decline trend to be resumed from next season onwards.”
“There are some replanting initiatives taking place, but for every new tree that’s planted there are several hundred getting older and producing less,” She added. “We see a three-to-four- year period of it getting worse before it gets better.”
Unless other countries can bring supplies on stream, exposure to the Ivory Coast means that the combination of residual political tension and long-term decline will continue to rock markets.
"I don’t think you’re going to see non-volatile prices for some time,” Haque said.