Cocoa Butter Price Fall Eases AAK’s Chocolate Demand Risk

(Businessweek) – AAK AB (AAK), the 143-year-old Swedish supplier of fats to the chocolate industry, said the recent decline in cocoa-butter prices could protect chocolate demand after soaring costs started posing a threat to consumption.

“It’s good when cocoa butter prices are high, but there’s a limit to how high we’d like to see prices go,” AAK Chief Executive Officer Arne Frank said in an interview at the company’s headquarters in Malmoe in southern Sweden. “The way we see it, there is a limit when volumes may be hit.”

Cocoa butter prices have dropped 22 percent in the past two months, after more than tripling between the middle of 2012 and the end of 2013. Cocoa prices have also declined recently, though they remain at historically high levels, as chocolate demand outstrips supply. The International Cocoa Organization has forecast supply deficits in the coming year.

This year’s jump in cocoa prices has prompted chocolate makers such as The Hershey Co. and Mars Inc. to announce price increases to try to offset higher raw material costs, which Frank said could hurt demand for chocolate and in turn impact sales at AAK, which is the world’s largest manufacturer of specialty fats to the chocolate and confectionery industry.

Cocoa-butter equivalents, vegetable fats that can be used to replace some of the content of chocolate to reduce costs or improve properties, are among AAK’s most profitable products. Its chocolate and confectionery unit saw a 31 percent advance in operating profit in the first nine months of the year as the equivalents benefited from the higher cocoa-butter price. The unit accounted for 28 percent of AAK’s sales in the period and 37 percent of its profit.

Cautious Outlook

Frank said he still remains cautious on the outlook for cocoa butter, stressing that the long-term average price is about $4,500 a ton. At the moment, the cocoa-butter spot price stands at $6,681, down from more than $8,500 earlier this year.

“For a while we have gained from an exceptionally high price,” Frank said. “Recently it has decreased somewhat but it’s still exceptionally high. We try to develop our business so that we are not as dependent on whether what we substitute is cheap or expensive.”

While the recent decline in cocoa prices probably won’t have an impact on increases already announced by chocolate makers, Frank said continued moderation should lower the risk of more advances. Hershey said in July it would raise prices by 8 percent while Mars announced a 7 percent increase the same month. AAK’s clients have responded to rising costs by increasing prices by 8 to 12 percent, Frank said.

Doubling Profit

AAK is seeking to double its operating profit from the 2010 level within the next couple of years and plans to increase production capacity in emerging markets to do so.

The company is currently building an oils factory in Zhangjiagang, China, that is scheduled to start production in 2016 and will cost the company 400 million kronor ($54 million). It’s also constructing a factory in Sao Paulo, which will start production toward the end of 2015. The expansion in emerging markets is likely to continue, Frank said.

“In five or ten years we’ll probably have more than one factory in China,” the AAK CEO said. “We will also expand in South America and there are also many smaller, but still significant, markets where we haven’t been present.”

AAK, which traces its roots to an oil-cake factory that was opened in 1871 in Aarhus, Denmark, has in recent years entered Colombia and Turkey. Frank said that “on that level, there are a number of markets that we are looking at.”