Failed Gamble Leaves Trader With Huge Cocoa Stock

It is an attempt to squeeze which didn't work because they underestimated the size of the crop and they underestimated the strength of other commodity traders, said a trader.

They never thought there would be enough cocoa that could be put on the market and they've been proved wrong, the trader said.

The London Commodity Exchange (LCE) said 21,250 original tenders representing 212,500 tonnes were registered on Monday, the largest ever delivery in one day. The LCE gave no further details but market sources said a single large trader was believed to have received virtually all the cocoa and has further net long positions of 8,000 to 9,000 10-tonne lots.

 

The trader's position of around 300,000 tonnes of cocoa is equivalent to a third of top grower Ivory Coast's crop.

Monday's delivery marked the climax of a five-month long war of nerves over the London September cocoa futures contract.

Although the tonnage came as no surprise, traders said the market is now watching the major long's next move. Traders estimated that it would cost him at least 42,000 a day or 1.25 million a year to finance the storage of the cocoa.

I don't suppose there's much else they can do in this moment in time, said a trader. The market has given them cocoa that they thought they would get and they have just to carry (it) for the time being. There's nothing else they can do, he said.

Any move to sell the cocoa would put further pressure on a sliding market, amid ample crops from producers and slack demand from the chocolate industry, they said. And chances of simply retendering (re-delivering) the cocoa are minimal due to the trader's remaining net long position.

Cocoa delivered on the LCE has to have a grading certificate proving it is of acceptable quality. This certificate is valid for six months.

Almost all of the current certificates expire by November and to regrade them would cost a further 1.5 million.

The LCE said there were about 35,400 lots of cocoa graded since April 1, indicating that there is sufficient cocoa to satisfy the major long's position.

Cocoa's fundamental and technical pictures seem far from bright.

Fundamentally the market is weak, techically, the market is oversold but only on short-term indicators. The long-term indicators are still showing plenty of scope for downside, another said.

Furthermore, the market seems to be awash with cocoa and the industry will not benefit from buying at the moment, he said.

Market analysts said the trader was banking on lower Ivorian and Ghanaian crops this season after last year's record harvest.

I guess they felt they market was heading for a small and late Ivory Coast crop. Neither of those things are going to be likely at the moment, said one.