A rise in cocoa futures to around three-year highs this week has reduced industry purchasing in Europe's cash cocoa market, traders said on Friday. "I think industry is running down its inventories rather than purchase at current high prices," one European trader said.
"I think the confectionery industry worldwide has cut its cocoa bean supply cover to about four to five months of supply because of current high prices, against about 10 to 11 months at this time last year," the trader added. Cocoa jumped to near three-year highs in New York trading on Thursday on technical factors and as the market reacted to higher demand for the raw material cocoa butter used for chocolate making.
Chocolate makers expect stronger demand to be generated by the global economic recovery. "Futures have dropped back from their peak and I think European industry is eyeing the 1,900 pound ($3,200) level on London futures as a minimum level for purchasing," a trader said. "But I believe a major break below 1,900 pounds would be needed to generate substantial industry buying.
"Industry has been undertaking a scaled-down, hand-to-mouth purchasing strategy since cocoa futures started rising sharply in May this year," the trader said. "This means there is pent-up demand and when industry buys into the futures dips, they stop the market from falling, so creating a vicious circle." London's second-month September cocoa bean contract was at 1,921 pounds at 1242 GMT on Friday.
Bean price differentials were little changed and were often regarded as nominal because of thin European industry demand, traders said. Good quality Ivory Coast beans for July/August delivery were quoted unchanged at 70 pounds over the London September bean contract. Cocoa butter, the ingredient which gives chocolate its melt-in-the-mouth quality, was also unchanged at 2.60 times the London September bean contract.
"There was some butter purchase demand for 2014 delivery, but very depressed interest in 2015 deliveries as high prices are painful for the chocolate industry," a trader said. "Butter purchases are only being made by those forced to buy for immediate cover."
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