According to a new report by Reuters, at least 18 thousand tons of robusta coffee was purchased by traders and is destined for the European ICE warehouses. To put that in perspective, ICE had, at the time of the trade, a total stock level of about 100,000 tons.
For the last few years, such a trade would have been unthinkable, as the costs would have outweighed the profit.
Why did Traders Drop the Price so Much?
So how is that economically viable today, when shipping rates have gone up 400% in some cases? Two factors contributed to this epic transaction, the first was a drop in the price the traders could buy Robusta in Indonesia and Vietnam, and the second is that the traders used an alternative form of shipping.
Looking first at the prices, the beans came from Vietnam and Indonesia, the biggest and third-biggest producers of Robusta worldwide (Brazil is number two behind Vietnam). The shipping prices have been so high in large part due to a constrained supply. This meant that stock levels of Robusta had been steadily rising in the countries, and the dealers were now desperate to sell them.
Why is Shipping so Constrained Right Now?
The infrastructure that supports international trade movement was built on a “just in time” model, which was an economic development born out of the need for companies to reduce waste by supplying just what was needed to consumers at the point of demand. No more or less.
But the model broke when the pandemic struck, firstly because the ports were closed during the lockdown, creating a backlog of container ships waiting to unload. Secondly, consumers who sat at home with nothing to do, tended to buy more goods online, most of which were shipped internationally, thus adding to the logjam.
How Did the Traders Ship it Cheaply?
Most shipping is carried out using containers – either 20 or 40′, rectangular metal boxes which are stuffed with goods. These containers are then quickly loaded, stacked on top of each other, and unloaded at the destination port.
However, there is another less popular form of shipping, called Breakbulk, in which the ships are designed not for containers but for the goods to be loaded directly onto the ship, sometimes on pallets or in big cargo nets. This is what the canny traders did.
This type of shipping is less used and thus cheaper, although it carries a risk of the coffee being damaged, as they are exposed to the elements during transit. No doubt, the traders have included the costs of insurance into their profit calculations.
“Breakbulk is potentially a game-changer. We’re only tight because the coffee is in the wrong place,” said a Swiss-based coffee trader at a global trade house.
Who’s Behind the Trades
According to the report, a large trader, Ecom, plans to move 5,000 tons to the European market this way.
Deliveries are likely to go to ICE warehouses in Antwerp, London, and Amsterdam. Succafina and Louis Dreyfus have also been reportedly using the technique with prices rumoured to be around $1,950 a tonne, at a significant discount to those being traded on ICE (currently, $2,240)
The influx of Robusta to the dwindling stocks at ICE is likely to put downward pressure on the price of the commodity.