[00:00:13.100] – Shirley Choo
Ok. So again, very good afternoon to our participants. Just 1 second. Very good afternoon to our participants. I’m Shirley Choo from the Focal Association of Asia. Again, thank you for joining today’s webinar titled Logistics Finding a Way Out. So this webinar is organised by the Cocoa Association of Asia, a leading trade association representing the interests of the cocoa and chocolate trade since 2004 and in partnership with Henry Bath, a specialist in global commodities, warehousing and logistics, and together with our guest panellists from StoneX Financial, Darren. This event is moderated by Bartalks. Now with continued uncertainty over border restrictions in China, crisis in Ukraine and other issues affecting global trade flows with distinguished panellists will offer their insights on how the market has responded to the crisis. They will share learnings and solutions and risk management measures that have evolved to tackle the crisis head on. Now, we will first start with a ten minute presentation by Robert Holthausen, Director of Agricultural Products Asia at Henry Bath. And then for the rest of the session, the panel will discuss an attempt to address questions asked by the participants ahead of the webinar. If you have additional questions, please do enter them at the Q & A box that you can find at the bottom of your screen and Katie will review them.
[00:01:48.010] – Shirley Choo
Please note that the webinar is being recorded. I have questions coming if this will be shared. Yes, it will be only if you fulfil the survey form at the end of the webinar. Now let’s welcome our distinguished panellists for today. We have Robert, Director of Agricultural Products Asia, Henry Bath. Everybody is on screen the panellists. We have Alvin Lee, Chairman of the Cocoa Association of Asia. We also have Panella Pima, Business Development Manager at Henry Bath Singapore, currently based in China. She’s currently in China. Stephanie Lockley, Logistics and Shipping Manager, Henry Bath Amir, located in Liverpool, and Darren Stetzel, Vice President, Soft and Acts Asia at StoneX Financial, and your moderator for today’s, Nick Baskett, Editor in Chief at Bartalks. So without further Ado, I hand the floor over to our speaker. So over to you.
[00:02:44.010] – Robert Holthausen
Thank you, Shirley. Welcome everybody. Thank you again. Welcome everybody to this webinar organised by CAA in partnership with Henry Bath. I would like to extend a special thank you to Shirley for bringing us all together and making this webinar happen. Before we start, we would like to share a quick poll with everybody to get an idea of your expectations with regards to the current supply chain issues. If you would take a minute to answer the poll which will be shared with you now, this is the poll. Please answer the question if you can. I think we will wait a little bit for the results to come in.
[00:04:28.730] – Shirley Choo
Okay, so it looks like we have now about 83% of the participants that have answered the question. So we can end poll. Yeah.
[00:04:38.950] – Robert Holthausen
What is looking forward to see the results. Okay. More than one year, most people more than a year, but still quite a large percentage of things. Within the next six to twelve months it will get better. Let me start the presentation and then after the presentation we will look again at the same poll question. So some of you might be familiar with Henry Bath, but for those who aren’t, I would like to give a short introduction to our company. Henry Bath, established in 1794 in Wales as a copper trading company. Over the years it has been involved in shipbuilding, is a founding member of the LME and since January 2016, Henry Bath is 51% owned by the Chinese state-owned enterprise China National Materials Storage and Transportation Corporation, or CMST, and for 49% by energy trader Mercuria. CMST is China’s largest integrated Logistics company and is a major Shanghai Futures Exchange and Dalian Commodity Exchange delivery warehouse operator. CMST owns more than 70 logistics, distribution centres and operational facilities in more than 30 major Chinese ports and cities and possesses over 10 million square metres of land across China, including bonded and non-bonded warehouses in the Shanghai Port areas.
[00:06:06.770] – Robert Holthausen
In 1995, Henry Bath has started to be involved in the handling of various soft commodities including cocoa and coffee. Henry Bath is approved by ICE to warehouse and issue warrants against the ICE cocoa contract, the ICE Robusta contract and the ICE Coffee ‘C’ Arabica contract. We are also approved to store and handle both Utz and organic products and can offer options for bulk and specialty commodities in the Asian region. We operate warehouses and provide logistic services in Singapore, Malaysia, South Korea, Taiwan and China. In these locations we handle a variety of commodities, all managed by our own specialised teams on the ground. Now to move on to the main subject of the webinar and the reason why you have taken the time to join us today, the current logistic situation and what to expect going forward. It has been discussed many times already since the onset of the Pandemic and the situation has evolved quite a bit and keeps on evolving. The general sentiment for container freight in 2022 is that it will be an extremely difficult landscape to once again navigate. We expect Port congestion in the main ports to remain high and freight rates to remain elevated compared to the pre epidemic levels.
[00:07:26.870] – Robert Holthausen
Black Swan events such as the invasion of the Ukraine and major lockdowns in China continue to fuel worldwide congestions. We are closely watching the impact of interest rates due to changes in the central bank’s monetary policies. The elevated freight rates still need to be separated in Headhaul rates versus Backhaul rates as the two markets will operate separately. Port congestion remains a major issue, although we saw an improvement at the beginning of this year, especially the sanctions placed on Russia and the recent lockdowns in China and line with its zero-Covid policy have caused an increase in the Port congestion in European and Chinese ports. The Port of Shanghai is still operating, though at considerably lower productivity. Lack of dock workers due to restrictions are impacting loading and unloading. Additionally, limitations and delays on trucking do affect container availability. To get around your disruptions, shippers are shifting their cargo to nearby ports such as Ningbo and ocean carriers are omitting Shanghai calls. Short term we expect to continued easing of the congestion in various US East and West Coast ports where the number of vessels waiting to birth has decreased considerably compared to previous months.
[00:08:51.390] – Robert Holthausen
This improvement is backed by measures taken by various governments to solve the congestion. This, in combination with slowing of demand due to the ongoing inflation and less cargo arriving from China will allow some ports to catch up and resolve the congestion. Freight rates remain very unpredictable. At the end of 2021 early 2022, we were still confident that the rates would decrease before the end of 2022. We are now looking at sustained elevated rates well into 2023. There has been recent easing of prices. However, in absolute numbers these drops seem to be considerable, but when we look at the relative change, it’s in line with what we would expect. At this time of the year, we hope to see continued reduction fuelled by a lower demand caused by the higher inflation coupled with increased interest rates. This lower demand would also help to ease the port congestions, which would again have a dampening effect on the high freight rates. In the ideal situation, carriers will then be forced to reduce their freight rates and start to compete again for cargo by offering lower freight. The high earnings of the carriers has allowed them to invest in new capacity which will start to come online by 2023, increasing the supply of space while demand might remain or even reduce and as such lower the freight.
[00:10:20.950] – Robert Holthausen
How long will it last? This remains a big question. We might be able to give a timeline based on what happened in the past. We would look at solving port congestion and the freight rate as two separate although interrelated events. To get a timeline to resolve port congestion, we can look at the congestion caused by the Labour dispute in North America in 2005. Once the ports became fully functional after the issues were settled, it took about six months for the congestion to be resolved and this was only in North America, whereas now we are looking at a global event. As for the freight rates, we can look at the sharp, sustained drop we have seen in the past. Between 2015 and 2016, there has been a sustained drop in freight rates caused by a price war between the carriers. This took about twelve months. Today, there’s no immediate reason for the carriers to start the price work. On the contrary, it’s in their benefit to keep the prices high where they are now for as long as possible. We could therefore conclude that even with lower demand, it will take more than a year for prices to come down to pre-pandemic levels.
[00:11:33.650] – Robert Holthausen
China, China’s largest city, has experienced by far its largest outbreak of confirmed cases since the start of the Pandemic, prompting strict virus containment measures from the authorities. A total lockdown in Shanghai was imposed at the beginning of April, and though restrictions are already being relaxed slightly, the full impact on the supply chain is still unfolding. Shanghai Port remains operational but is congested with cargo unable to move out of the Port area. This especially concerns reefers and specialty cargo such as dangerous goods. Major carriers have started to inform their clients to ship or divert the cargo to other Chinese destinations or markets to avoid the congested port. Some of that congestion is rippling out to other ports, with ships being diverted further north to Port in Qindao and Tianjin, where trucking services have not been impacted as much. Finding a way out of the current logistic impediment is more a question to keep an eye on the risk than being focussed on getting lower freight rates. One of the bigger risks today is previously mentioned zero Covid policy in China and how big the ripple effect of the current lockdowns will be going forward. Once the lockdowns are over and Port activities can return to normal, the accumulated cargo waiting at the ports, factories and warehouses will be shipped and can cause new congestion in destination ports.
[00:13:02.040] – Robert Holthausen
Regardless of the easing we are currently seeing, we think the way out is to have a long breath and ride out the wave by absorbing high freight rates and keeping an eye out for known risks and future Black Swan events. Thank you again for joining this webinar. And before I hand over the floor back to Shirley, we would like to ask you to fill in the same poll as you completed at the beginning of the presentation to see if you have altered your opinion. After our presentation previously, we had about 42% of people who were looking at six to twelve months, but in the majority for more than twelve months. I wonder if we get similar results or different results.
[00:13:57.010] – Shirley Choo
Okay, now we have 68% of people who have just responded. We just give everyone maybe a couple more seconds to quickly respond to the relaunch of this. Call 72%. Come on, a few more. Yeah, a few more. We currently have 72% at least. Let’s try to aim for 80% and then we launched the results just to see if people’s mindset minds have changed after your very nice presentation.
[00:14:34.130] – Robert Holthausen
My positive story.
[00:14:38.610] – Shirley Choo
Okay, so it looks more people are excited to respond now. Okay. So we have about 75% of people responded. Should we end poll?
[00:14:57.070] – Robert Holthausen
Big change. Shirley. I’d like to give the floor back to you. Thank you very much.
[00:15:12.090] – Shirley Choo
Thank you, Robert, for insightful sharing. Very interesting results. As you can see, I now hand the floor to Nick Baskett to start the panel discussion. Nick, ready? Over to you.
[00:15:23.410] – Nick Baskett
Great. Thank you. So, I mean, clearly it was very interesting to see the disparity, the change in attitude from the beginning to the end. And I think Shirley sent around some questions in advance to people. What’s really on people’s minds? What kind of questions do they want to ask? What do they want to get out of the presentation? The webinar. Of course, a lot of people came back and just said, when is it going to end? Right. But there’s so many different data points to take into account because we’re seeing not just one macroeconomic crisis, but several. We’ve got the inflationary pressures, we’ve got COVID, we’ve got now the Russian war, and any one single one of these would give a trade or a headache. You take all three of them together and it almost becomes voodoo. But the important thing is to try to establish some data points. And I think one of the most important data points everyone’s got the eye on right now is it’s actually what’s happening in China. So what I’d like to do is because we’ve got I say we pass have got a person on the ground over in Shanghai.
[00:16:26.290] – Nick Baskett
I’d like to maybe just pass the floor over to Penelope for a second just to give us an update on what the status is there.
[00:16:34.270] – Penelope Ma
Sure.
[00:16:35.100] – Penelope Ma
Thank you, Nick.
[00:16:36.490] – Penelope Ma
Hi. Thank you, everyone. I’m Penelope. I’m based in Shanghai at the moment. Actually, I’m stuck in Shanghai at the moment. So the full lockdown started from 1 April in Shanghai, but parts of the city could be traced back to lockdown from mid-March or even beginning of March. So most of the people right now, 26 million are still locked in their house. They’re not allowed to go out. And even we are reading on the news, some business are resuming. But the companies were saying we are not able to get our workers back to the business park because the lockdown is still in place.
[00:17:17.230] – Penelope Ma
So at the moment.
[00:17:18.240] – Penelope Ma
As Robert shared, the Shanghai Port as well as the boundaries are still operating, but definitely at much lower pace than normal. So Henry Bath, as well as our parent company, CMST, we have placed some measures in advance before the full lock down to let our colleagues or some of these workers to work two shifts within the zone. So they are not coming out of the bounded zone. So in this case, when the full lockdown happens, it doesn’t impact us or companies within the zone area. However, the inland transportation is severely disrupted. Even after 20 days. We are not seeing any improvement in terms of movement within the city or moving the cargo outside because all the lands, all the roads in Shanghai and also the highways around Shanghai are still blocked. They do not allow trucks to move in and out freely. And truck drivers are very reluctant of coming to Shanghai because they will be facing lockdown and also when they are going back, they will also face current chain. So this is what we see. The situation is not seeing any good sign of improvement. Cargo’s are powered up at the bundle zone and couldn’t be moved out and to reach their end users and any of the exported good, they can’t reach Shanghai Port and it needs to be transferred to some other ports.
[00:18:54.610] – Penelope Ma
So major ship liners like MSC Maersk, they have diverted their vessels to nearby ports like Ningbo changing Chimney or even to South Korea. They just don’t want to be caught in the congestion here as the picture Robert showed earlier, and any of the BL, they couldn’t be delivered to the bank or to the ship bonus. So this is the major disruption we’re seeing even after 20 days. So back to you, Nick.
[00:19:30.410] – Nick Baskett
I’m just wondering if there’s going to be anybody positive or optimistic on the call. We feel like we’re on a downward slope here. So let’s just talk about maybe some let’s lead this in, maybe more of a positive direction. So the Serenity prayer, if anybody is a stoic philosopher out there, talks about let’s focus on the things that you can control rather than the things that are outside of your control. I know that, Robert, we talked earlier about the investments that potentially some companies were making or going into improving infrastructure because that’s going to be key in this, isn’t it? I wonder if you can maybe just touch on what changes are happening at some of the ports. Was it yourself or Stephanie actually was going to talk about that? But let’s talk about some of the changes that are happening, the infrastructure and when they might come into effect and what kind of impact that might have going forward so that once we do find a get out of this, we can see that there’s a light at the end of the tunnel.
[00:20:34.070] – Robert Holthausen
Yeah, sure. Next thing. So the carriers, they have been making very decent money in the last year, two years, we all know that. We’re all aware, we’ve all seen it in the news and this has been invested in new ships, new carriers, and this will come online in 2023, 2024, which will increase the supply of space and therefore should reduce the freight rates. And that as I mentioned earlier in the presentation, coupled with inflation we are seeing at the moment, which will reduce demands, that should reduce the freight rates, but it will take time and it’s time that some people might not have.
[00:21:21.170] – Nick Baskett
Right. So inflation, let’s ask the question on inflation, because obviously there’s perhaps a slightly more understood metric for us to look at than the covered pandemic. But as prices increase, what are the models? What do we expect to see in terms of demand and how our company is dealing with that. So most of us have seen the shrinkflation, as I think Alvin used the term the other day. So the shrinkflation where we all go and buy a bar of chocolate and notice that something’s different about it. What’s changed the packets the same size, but it’s just not as much chocolate inside. We’ve got a reduced demand either from lockdowns and businesses that aren’t operating. Airports are a major source of pool demand for the commodity. And when those aren’t working, that impacts demand. So as we see demand potentially drop off again because of these issues, how much impact will that actually have? Will that potentially move the needle in terms of the shipping and the congestion that we’re seeing, or is that just a drop in the ocean?
[00:22:42.650] – Robert Holthausen
If you would ask me? The inflation will reduce demand. Normally, governments, are changing interest rates to fight the inflation. Unemployment is still at record levels. So people or most of people have a job will keep on working. Therefore, stagflation is not going to happen just like that. Governments obviously will do anything to avoid it. And therefore, I think we might see a reduction in demand, which would actually help with the freight rates because ports will be able to resolve congestion. Liners might be able to move their equipment, which we’re seeing already. We’re already seeing some carriers moving equipment from the US back to China now that some of these container vessels might not get stuck in Shanghai, but that we didn’t know at that time.
[00:23:42.170] – Nick Baskett
Right. So let’s talk about shipping lanes actually for a second, because this is one of the key things. When I saw in your presentation the disparity, it might be worth actually putting that slide back up again because we were looking at earlier, there was the forward hall on the back hall lanes. And the way that those prices had changed, I think it’s worth just touching on that for a second and explaining quite how much the Ford Hall has changed. Can someone maybe throw that slide back up?
[00:24:16.110] – Nick Baskett
Yeah.
[00:24:16.510] – Nick Baskett
Great. So that’s it. Well done. Is that Katie? Thanks, Katie. So, yeah, the head hole. So what we’re looking at here, Robert. Right. Is the head hall last year is in green, this year is in blue versus the Backhaul. We can see that the prices have kept relatively in match to each other. So can you just maybe put some context around that or colour that a little bit?
[00:24:52.710] – Robert Holthausen
So what we put in here is we focused on freight from China, East Asia to North America East Coast and the other way around, knowing that a lot of the chocolate and cocoa beans are going into this direction. So we see the huge disparity between last year’s headhaul and today’s headhaul. So going from east to west, where it’s about six times higher. And the interesting thing is that the backhaul remains like you mentioned, relatively the same. Now, don’t be fooled by the big changes you see between back and head haul because you have to look at it in the percentage. So these are all numbers, right. So of course, the changes look very big, but this is only a few hundred dollars versus a few thousand dollars.
[00:25:46.050] – Nick Baskett
Right. I’d like to bring Alvin into conversation because I know Alvin, we talked about it before. It’s got a lot of interesting things to say, in particular about the subject and the conversations we had. You’ve talked Albin about the I don’t know, I guess we talked about potential, how this might change people’s thinking. So when you look at these changes in prices and the fact that it’s not going to go away next week, this is going to take at least a year or longer realistically to unfold. How is this affecting people’s decision-making companies, do you think?
[00:26:26.310] – Alvin Lee
And I guess particularly in the space of what brings us together here. Right. It’s a good question. I think one of the things, obviously, is when you look at the headhaul chart, so people who have chosen to set up manufacturing out here are now at a somewhat steep disadvantage. Right. Because I think one of the other charts, obviously, when we look at processing, the fashion has been removed, processing to origin. Right. Where the cocoa has been grown. And if we were to pull up a chart for, say, West Africa to Europe, West Africa to North America, you will not see the same numbers as what you see here on the headhaul chart. So it just means that other producers of cocoa products and chocolate have become more competitive visa vis the industry that sits here in Asia. Now, does that mean that people who have put money down on the table back up the factories and shift all the processing capacity somewhere else? No, because factories set up are not so easy to just back up and go and things like the approvals that you have to go through to get your factory into the books of some of these multinational customers is also a fairly lengthy process.
[00:27:46.390] – Alvin Lee
So that’s not going to be a knee jerk reaction. But what it could do on a more long-term detrimental side for this part of obviously, it could potentially reduce the interest to put investment to expand capacity or capabilities out here in this part of the world if you know you are reliant on a certain fixed percentage for exporting. Right. Like you are in the cocoa pressing business.
[00:28:12.150] – Alvin Lee
Right.
[00:28:12.410] – Alvin Lee
Where a significant percentage of cocoa butter, for example, still has to be re-exported out west, where chocolate is still the more dominant product and taste.
[00:28:23.110] – Nick Baskett
Yeah, indeed. Okay, super. And we’ve got a question as well. I’ve just seen pop up here. So with the coverage restrictions easing, you mentioned that there will be a rush of vessels to destination ports, which are the main ports that could be affected. Hands up, who wants to take that one? It’s going to go back to Robert by default, unless Stephanie wants to step up to the plate. Just throw you under the bus there.
[00:28:53.530] – Robert Holthausen
Stephanie, I would expect and it might be a cliche also, but these are the European ports and the US East West Coast ports. And I would say more to the US that production in the area, there’s a lot of electronics which will go there and the timing of time of the year.
[00:29:16.170] – Nick Baskett
Right on the electronic side, there’s a massive backlog. You can’t buy anything at the moment because it’s all backlog. So picking up on further question we had earlier on, which was if you do have a problem with your shipping, your car goes stuck somewhere. Someone asked this question, if your car goes stuck, how do you get it? Prioritised? What do you do? How do you get that moving again? Go on, Stephanie.
[00:29:55.370] – Stephanie Lockley
Okay, a lot of it is based on your relationship with the carriers. So that’s your key issue here. So that’s where your contractor is. Spot rates come into question as well. So if you’ve got contract rates with the carriers, you could be paying higher than the usual spot rates, but you are guaranteed based most of the time on the vessel services. Not always. You do get the odd rolling, but you can. Now, what do you do in the situation where you’ve just got a spot rate? You’re a smaller trade, you’ve only got one container and it stuck.
[00:31:31.190] – Nick Baskett
So if you’re a small business, does this work? Can you build up relationships? Does it make sense to work with a partner like yourselves or should you build up those relationships on your own home?
[00:31:43.860] – Stephanie Lockley
We have the contacts with all the carriers in most locations. As I said, we’ve got warehouses in global locations. So we do have agents in each. So we do have agents in each region that can speak to the carriers. We also have those relationships. If you did get spoken, you couldn’t get it on a service. Then we’ve been known to be able to speak to the carriers and to be able to use our relationship and get your container onto our contract to be able to ship and get things moving for you.
[00:32:12.620] – Nick Baskett
Okay.
[00:32:12.990] – Nick Baskett
So it’s still very much a relationship business, is what you’re saying. It’s not all computerised do it online and then forget about it, like your FedEx or whatever.
[00:32:21.840] – Stephanie Lockley
Yeah, definitely.
[00:32:24.770] – Nick Baskett
So got a question in the chat. He asks, is there a way to fix fright rates while still keeping open the option if it goes down? So I’m actually trying to think when someone says option to me, I don’t know what they mean. Like option as in trading option or option as in the ability to choose. So if there’s a way to fix freight rates whilst you give me the option, if it goes down, is that a question, do you think, for Darren or who is that for?
[00:32:56.910] – Darren Stetzel
Yeah, I’ll check in. I’m not an expert on hedging freight, but you can hedge freight rates on the exchange, so there are products available on the future exchange to be able to help. So it’s possible. And I know Benny very well. So you want to have a chat about that option separately, then? I’m happy to.
[00:33:18.930] – Nick Baskett
Okay.
[00:33:19.620] – Alvin Lee
I can add on to that as well. I think it’s a combo solution to that issue as well.
[00:33:24.740] – Alvin Lee
Right.
[00:33:24.920] – Alvin Lee
I just put on my old procurement hat here. I think part of the problem why we are where we are as well is that when people look at freight rates going up in 21, very few people were keen to lock in anything on a long-term basis. Right. And the fact that everyone had to rush to a tiny little door at the same time towards the end of 21 really gave in combination a whole bunch of other factors, obviously give you that boost. Right. And it’s every procurement manager’s biggest nightmare.
[00:33:52.980] – Alvin Lee
Right.
[00:33:53.280] – Alvin Lee
Like, how do I lock in myself to basically record high rates and how am I going to answer my boss in six months time if it suddenly collapses? Right. And it’s a fair question and it’s not an easy, easy one to answer, but I think in the current environment where you have a lot of unprecedented and simultaneous Black Swan events, a bit of protection always comes in useful and you can do that via exchange products. But I would also say that old fashioned long-term contracts, albeit at these higher rates, are not a terrible way to go. But you just don’t do it for 100% of your needs. Right. I mean, if you want to participate in the downside potential, you leave something open and you say, you know what, if it hits the fan, then, yeah, at least I got 30%, 40% covered at a lower rate, and then I’m still better off than the market and more importantly, I may be better off than my next door competitor. So I don’t think there’s an easy solution here. Otherwise we all wouldn’t be here. But I think there are some sensible, old fashioned ways, if you will, to navigate these somewhat murky and muddy waters.
[00:35:01.370] – Nick Baskett
So it depends on your risk appetite, doesn’t it, then is what you’re saying. So if you’ve got a high risk appetite, let it roll. But if you got a lower risk appetite, then maybe lock in the certainty. Even if this had a higher price after the poll.
[00:35:15.870] – Alvin Lee
I’m not sure you want to let anything roll.
[00:35:19.110] – Nick Baskett
Well, I said risk appetite. Maybe you got a big I don’t know. But you’re right.
[00:35:22.850] – Nick Baskett
Yeah.
[00:35:23.160] – Nick Baskett
Look, we don’t think it’s necessarily going to get easier anytime soon. That picture of those containers outside of China or those ships outside of China really drive home. They say, a picture worth 1000 words. Well, there’s a thousand ships out there, I think says it all. So we’ve got another question here from you. What changed, if any, has Henry Bath or indeed any other panellists seen in terms of cocoa or coffee volumes going into Russia? Well, that’s an interesting one. I actually have got something to say about that, but I’m going to leave it until the panellists want to dive in. Anyone want to dive in? Okay, we read a story about that and I can’t remember the exact number, but it was something like I’m going to throw out a number, which is probably going to be wrong, but I think it was like 13% or maybe it was 13% of the coffee market was going into Russia. I think it was something like that. And I know that Nestle have pulled their coffee products from Russia. I also know of some ships that have had problems because of potential sanctions of getting in.
[00:37:42.860] – Nick Baskett
Got a question here from David Dubois who says are you expecting I like this question, are you expecting to have less consumers to buy chocolate due to the inflation and high price of shipping and petrol, et cetera? If that’s correct, then what are you expecting the price to be in the next six months? So there is our Crystal ball question, what price is chocolate going to be? How is inflation? How much are I guess the question maybe is just to shape it a little bit. Is our chocolate companies willing to eat into their margins or where does the calculation happen? Do they just pass on all costs? Do they accept margin erosion? So how much of that is going to be passed on to the customer? Albin? Why don’t you feel that one?
[00:38:32.290] – Alvin Lee
Yeah, well, it’s one of those questions. Why? I always say to people, if I knew the answer, I wouldn’t be sitting here with you guys. No, look, it’s an extremely fair question. I think we have an adage in cocoa and chocolate that says that the product is relatively inflation, recession shock proof in that sense. Right. Or shock resistant. I think it’s going to be tested like never before, simply because unlike some of the previous shocks we’ve had over the last couple of decades, this is one where it is just pure overnight hyperinflation as a result of several black Swan events that have just been unleashed on us almost simultaneously. So it is going to be a key test, a litmus test here, if you go for the resistance, if you will, of consumption, I think in the short run, certainly, because I think you’ve seen the price of staples, all kinds of staples, food staples, energy staples all go up at very high watering percentages virtually overnight. And I think as one of my global trading here in Cargo, says Joe Public, is going to really reel from that as a knee jerk reaction. Right.
[00:39:57.290] – Alvin Lee
And your discretionary spend, which cocoa and chocolate is a fairly discretionary item for most households, is one of the first things to go or cut back on. Right. I think the other interesting thing that will obviously impact the consumption of the demand numbers, as you touched on it earlier, which is shrinkflation. Right. Because the ability to pass on price increases to consumers in the supermarket shelves is an area where a lot of FMCGs typically don’t want to try. They don’t want to test that out. Right. And so the answer becomes inflation. Right. Put less in the bar, make the bar size smaller without visually not affecting the consumer’s impression, but as a result, everyone consumes less. Right. Although they think it’s at the same price. So I think eventually the barometers for measuring demand, be it in the numbers being in the pricing, are going to have to come down, whereas the magic price. I think the question may have been asking for a prediction on a terminal. I think that’s always something that makes people look very foolish six months, six days from now, so just stay out.
[00:41:08.690] – Nick Baskett
That’s the professional job of economists and yet economists never get it right.
[00:41:11.860] – Alvin Lee
I’ll pass that on to Darren. Darren.
[00:41:15.990] – Nick Baskett
We’Re not making any friends on Today’s Call. Well, Darren, have you got anything you want to say from a trader’s point of view?
[00:41:24.610] – Darren Stetzel
Yes, I think probably. I don’t know if these questions are going to come up a bit later, but two of the things I’ve noticed, especially during COVID and the current phrase situation, we used to trade a lot of OTC products for those that are unfamiliar. There’s a lot of structured products so you can tailor the contracts and hedge against cocoa on your own terms so you’re not tired by the future exchange contract rules. So you can fix dates, accumulate, swaps over certain periods of time. There’s all these exotic products you can trade. And before Covets, they were probably one of the most popular products that we were trading every day. And now, especially in the cocoa sector, we really do that much on the structured product side. So the risk has been a considerable drop in the risk site. I think you’re in COVID. That was the result of kind of factory closures spread through factories, a lot of different things. Like a lot of customers got caught out and lost a lot of money on some of the structures that were working, so they just completely backed away from it for some time. And it’s exactly the same now with the phrase no one really knows about the flow of the product, so that hasn’t picked up.
[00:42:48.450] – Darren Stetzel
So we’re still seeing safer bets on the futures and some stops and options. But more than one customer has been chasing the market on a number of times and had relatively large margin calls. One or two have nearly caught out. So everyone’s playing a lot safer at the moment in the market. So it’s not as exciting as it used to be, but people are playing it a lot safer compared to a year and a half two years ago. The other thing we discussed previously was we’re hearing that a lot of, especially in coffee, tends to kind of lead the way. There’s a lot of build up of soccer ports, so I think it’s risen for the first time since August last year and it’s expected to rise further. So if people’s projections are correct and they expect it to continue for another year because normally this thing grains first and then you see a knock on effects in other commodities. But if the stock supports continue to increase, obviously the price will come down because there’s more in storage. We’re hearing rumours of people selling their products back, various modern products back to where they came from and obviously during the last year, we saw negative territory when that happened.
[00:44:12.960] – Darren Stetzel
So for me, that’s one thing I would personally just keep a close eye on. But monitor because we’ve seen it already happened in oil. And I consider that to be a bearish factor for the market that people might not be considering at the moment.
[00:44:32.150] – Nick Baskett
Yeah, it’s interesting. That kind of goes towards the question we had also in the panel from Stephan as well, who was asking, I suppose more on the Cocoa side whether we’re starting to see processes holding physical cover. And you were mentioning that people are now the stocks of coffee are full and it is really having to maybe consider starting to send those back, which is causing another logistics issue. But on the Cocoa side, do you think that’s following the coffee trend or is it a different scenario there?
[00:45:12.290] – Darren Stetzel
I think the first stories came out of the US, obviously Brazil. There was a big congestion for a while out of Brazil of shipping. So I’m not completely sure what the situation is with Cocoa’s obviously grown in Brazil and coffee as well. It’s a developing story for sure. So it’s just something that’s just starting to emerge at the moment that more people in the market is talking about. I think it’s worth mentioning when you were talking about the flows into Russia. We obviously do a lot of physical products as well. And our policy is anyone related to Russia. They currently go through very strict compliance process, as you can imagine. But the one thing that was to me was we have an office in Poland and it’s more sensitivity to the staff in those offices as a global company and how to best treat them and how to best fit them and those around the Polish office related to our business. So that’s kind of the ethical situation in our company, specifically with a decent presence in Poland is something that is definitely affecting how we operate in that region.
[00:46:41.720] – Nick Baskett
Okay. Super. Thank you. I’d also say I’m pretty sure aren’t there’s numbers available, Stephan? I believe from is it Ice has warehouse numbers that they release on cocoa.
[00:46:58.390] – Robert Holthausen
Yes. What I would like to add to this is that cocoa stocks and also coffee stocks, we see them, especially coffee we see at origin. And what we have seen in December last year and the first quarter this year is different ways of shipping coffee. Traditionally it’s being shipped in containers. But we discussed it previously. Depending on what you put in a container, if you put coffee or relatively low value commodity and I think cocoa beans goes the same, rubber would be the same, then your price for freight versus the value of your product is huge difference. If you put electronics, it’s different. So for shipments of coffee, we’ve seen a lot of Breakback shipping going from Brazil to Europe, from Vietnam to Europe. Exporters and traders, they are looking for other ways to ship their commodities. And if we speak for coffee, we haven’t seen that happen for two decades. And now, because of the high freight rates, people are forced to look at other ways to move their cargo. And it’s similar for cocoa products and cocoa beans.
[00:48:15.310] – Nick Baskett
Yeah. So there’s more risks, right? In brake bulk shipping. What’s the capacity like for break bulk? Is it easier? Is it more available or is it cheaper?
[00:48:27.130] – Robert Holthausen
It’s a volume game than 20,000 metrics on the risk is higher. But if you know what you’re doing, the risk isn’t that high. Okay. You look at it.
[00:48:38.070] – Nick Baskett
Yeah. Super.
[00:48:40.150] – Robert Holthausen
You try to get space on the vessel for the equivalent number of containers. That’s a huge risk. You might not get it. And then your car was stuck. You got the merrier detention. Got no.
[00:48:53.830] – Nick Baskett
How would you handle that? Somebody came to you and said, Look, I want to get my beans. What’s the best way of doing it? Would you recommend break bulk or does it depend on their risk appetite or different situation circumstances? What would you say to them?
[00:49:08.530] – Robert Holthausen
Instantly Interestingly. For cocoa beans going from Africa to Malaysia. It doesn’t make sense to do freak bulk in our opinion at the moment. Stephanie can enlighten us a bit more on this. Go ahead, Stephanie.
[00:49:26.050] – Nick Baskett
You’re muted Stephanie.
[00:49:30.290] – Stephanie Lockley
Which trade Lane.
[00:49:35.270] – Nick Baskett
Africa to Malaysia.
[00:49:41.190] – Stephanie Lockley
We’ve recently been working on a 10,000 tonne inquiry from Africa over to Malaysia. And the feedback that we’re getting from the charter is that there’s just not the appetite there for this small damage. They’ve got higher vessels for metals and other goods, basically not soft commodities that the higher 30,000 tonne vessels for. And you’re just not interested in 10,000 tonnes. So the best way to move into those trade lanes would be by containers, because we’ve been trying two months now to try and get bite on a vessel, and there’s just no chance that are interested in low tones such as 10,000 tonnes. It’s just not worth doing for them.
[00:50:26.430] – Nick Baskett
Fantastic. Listen, I’m very conscious of time. We’ve got two minutes left. I don’t think there’s probably enough time to field any necessary. Any more questions? I think there was one or two more questions in the chat room. What we’ll do is we’ll pass this across the panellists and we’ll make sure that people registered, maybe get an answer to these questions that we weren’t able to field today on the call. So I’m going to pass it back to Shirley, the maestro organiser, and to wrap it up. And I’d like to thank the panellists. I think it was a really interesting discussion. I learned a lot and I thank very much for everyone attending as well.
[00:51:03.390] – Robert Holthausen
Thank you, Nick.
[00:51:06.390] – Shirley Choo
Okay, thanks, Nick. Thank you for having a very exciting discussion. Look at the questions that came in view of time. What Nick said, we couldn’t respond to every one of them. You can still email them to us at this email address. You have your phone ready. You can also scan the QR code and connect with us by email right away. Okay, I’d like to use this. So many of you would have also received the information about the CA International Cocoa conference happening in September. If you have not now, you know we hope to see everyone there and here’s where you can find more information about the conference. Scan the QR more details and then the right one to register your interest. This is a biannual event conducted by the CAA and it’s an in person event. Finally, after two years of being in the fridge, we are out. So hope to see everybody in person in September in Singapore now.
[00:52:09.960]
Okay.
[00:52:10.250] – Shirley Choo
The time now is exactly 430. Thank you, Nick, for keeping the time. We have now come to almost come to the end of the webinar and we trust you enjoy the session as much as panellists and we did. I’d like to take the time to also thank our distinguished panellists for their sharing and most importantly, for all the participants for joining us today. I understand some of you had some initial technical difficulties. I do apologise for that and I’m very glad that all of you could make it. The recordings will be shared with all the participants. So not to worry. And if you’ve missed the first part, we will make sure that you get to listen to the hole webinar. Okay. So with that thank you very much again for everyone for joining and stay safe.
