Spilling the beans about cocoa prices

CEO Tay says Guan Chong’s orders have been increasing.

FROM US$4,200 per tonne at the start of 2024, cocoa prices saw a dizzying spiral to an all-time high of US$10,080 this month.

For Guan Chong Bhd, the world’s fourth-largest cocoa grinder, the price upswing of over 130% in less than three months – even outpacing the erratic bitcoin – has added more pressure to its already stretched financials.

After all, the cost of cocoa beans accounts for about 80% of its total production cost.

To make matters worse, the Johor-based grinder reveals to StarBizWeek that it does not expect the surging cocoa bean prices to cool down anytime soon.

Some of its peers have resorted to halting their grinding operations. They simply can not digest the heavy working capital needed as a result of higher raw material prices.

Another reason for stopping production temporarily is that there are not enough beans in the market to grind.

In the case of Guan Chong, it is also facing a tough time coping with the huge cost needed to meet its operational obligations.

However, the company has managed to keep its head above the water, largely thanks to its sufficient banking facilities to fund the purchase of cocoa beans for its inventory.

Unfortunately, bank borrowings come with a cost.

In the financial year ended Dec 31, 2023 (FY23), Guan Chong’s total borrowings jumped by 88% to RM2.2bil, bringing the net gearing level to a high of 1.21 times.

As a result, the finance cost or the interest paid leapt by 150% to RM140.2mil in FY23.

Interestingly, this was before the price of cocoa beans surged by over 130% since January this year.

It is noteworthy that cocoa bean prices have been on an uptrend since early 2023. Throughout 2023, the price of cocoa beans have increased by about 66%, starting from just below US$2,500 per tonne.

The massive finance cost on its books has led Guan Chong to register its lowest net profit in six years at RM101mil, despite its record-high revenue of RM5.35bil in FY23.

Net profit margin, which has been declining since 2019, fell further to 1.9% in FY23. This means for every RM1 in sales, Guan Chong gets only 1.9 sen in net profit.

For comparison, in FY18, the net profit margin was 8.4%.

Managing director and chief executive officer Brandon Tay Hoe Lian, however, clarifies that the lower net profit margin was a result of higher revenue, in line with higher cocoa prices.

“But if you look at our profit margins, based on production tonnage as the denominator, we are doing commendably well. The trend will continue.”

While the company is paying premium prices for the cocoa beans, Tay says it has been passing the additional costs to its clients.

This is by selling its cocoa ingredients such as cocoa butter, cocoa powder and cocoa liquor at higher prices.

An analyst says Guan Chong cannot keep transferring the higher prices to its clients.

“There’s only so much they can transfer (to clients). This is because the clients or chocolate-based food makers cannot drastically increase their product prices,” sayas the analyst.

Nevertheless, Tay says the biggest concern for Guan Chong and other grinders is not the sharp rise in cocoa prices, but the shortage of beans.

“But, we (Guan Chong) are still comfortable, as our grinding operation in Ivory Coast is close to the source of beans, which also allows us to purchase beans at a lower price due to decreased logistical costs and the bypass of intermediaries.

“Besides, our grinding operations in Malaysia and Indonesia are still progressing, as we have been in close and consistent contact with our suppliers to sustain our bean supply,” he says.

Guan Chong has a total annual grinding capacity of 330,000 tonnes per year.

Of this, the Pasir Gudang, Johor facility has an annual capacity of 150,000 tonnes, followed by Batam, Indonesia (120,000 tonnes) and San-Pedro, Ivory Coast (60,000 tonnes).

Cocoa ingredients from the facilities are exported to more than 70 countries worldwide, including world-famous chocolate makers and other leading cocoa ingredient traders.

The current unprecedented surge in cocoa bean prices is caused by the decrease in bean production.

Unfavourable weather

This was due to unfavourable weather conditions and the ongoing swollen shoot disease affecting crops in Ivory Coast and Ghana in West Africa, where both countries combined contribute about 60% of the world’s production.

“During good times, the world can produce about five million tonnes of beans.

“However, the International Cocoa Organisation has forecast the production of beans to decline to 4.4 million tonnes for the cocoa year 2023/2024 (Oct 1, 2023 to Sept 30, 2024),” Tay says.

Amid the global chase for cocoa beans, he assures that Guan Chong’s beans supply is manageable.

“We are keeping close contact with our cocoa beans suppliers and constantly checking on availability.

“We are managing our inventory levels for both beans and finished goods to ensure we can meet our clients’ demand.”

The fact that Guan Chong continues to have access to cocoa beans supply, even as some peers are halting their grinding operations, has put the company in a good position to meet market demand.

Tay says Guan Chong’s orders have been increasing because its clients are trying to avoid the impact of higher cocoa bean prices.

“With more festivities throughout the year and active travel, consumers will still buy chocolate,” he says.

Commenting on Guan Chong’s higher finance costs, Tay points out that the situation is unavoidable.

“However, we believe it is still manageable as we have sufficient inventory of finished goods to clear, which will help with our cash flow,” he adds.

Guan Chong’s ability to handle the current volatile market condition better than some of its global peers is be attributed to its aggressive expansion in the past several years, especially the venture into the Ivory Coast – to be close to the source of beans.

The entry into the West African country boosted the company’s exposure to Europe, which is the world’s largest chocolate-consuming region.

It expanded into Germany in 2020 and the United Kingdom in 2023, focusing on industrial chocolate production business in both countries.

Natural progression

Being a cocoa bean grinder for years, Tay says the venture into downstream industrial chocolate production was a “natural progression” for Guan Chong.

“Our grinding facility in Ivory Coast will provide support to our German and UK operations with quality cocoa butter made from beans of a single-country origin, which is much demanded by European consumers.

“Being a supplier of cocoa ingredients and industrial chocolate presents better long-term growth for the group with a good product mix to improve earnings,” he says.

Perhaps, Guan Chong’s ability to sustain its operations and grow its market footprint amid challenges is well received within the investing community, looking at how the stock has rallied in recent times.

In March alone, the stock has run up by over 56%, reaching a market capitalisation of almost RM3bil.

Going forward, Tay is focused on streamlining the company’s existing operations and may explore investing in new machinery to speed up the production process of cocoa ingredients.

“At the moment, we think Europe is still the biggest market for us to tap into.

“Before we look into new markets, we want to ensure our Ivory Coast, German and UK operations are self-sustaining,” he says.