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April 18, 2007
China and The Chocolate Factor(ies)
In November 2006 Swiss chocolate maker, Barry Callebaut, broke ground on its first chocolate factory in China. In January 2007 Hershey’s announced a joint venture with Lotte Confectionery to produce and market products in China. With Mars (Dove brand) already the market leader in China, and Chinese demand for chocolate estimated to be growing by 20-30% annually, the argument could be made that Callebaut and Hershey’s are arriving late on the scene. However, given that on a per capita basis annual Chinese consumption of chocolate is estimated to be only 50 grams - versus 11.6 kilograms in Switzerland and 2.2 kilograms in neighboring Japan - when Hershey’s VP John Bilbrey says “It's never late to begin business in China” he could be right.
Needless to say, as chocolate makers energize efforts to produce/market more product in China, the longer-term outlook for cocoa turns more bullish, the growth outlook for chocolate makers improves, and everyone seemingly wins. That is, of course, assuming the affluent base of Chinese consumers continues to grow, something that stock market participants in China’s fairy tale rally rarely see as in doubt.
China Rebound Continues
Feb 27: Who or what will show up to capture falling Chinese stocks remains the question of the day...
Nearly two-months after the Chinese led mini-crash rocked the financial world the numbers are in, and those that called for a quick rebound were right. In fact, with the S&P 500, FTSE, and Sensex enjoying rallies this week the only major market unable to recapture its February 26 close is the Nikkei.
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A Sweet Ending To The Rebound?
Investors faithfully expect the Chinese bull to charge at least until the Olympics, bond market participants increasingly think several central banks will continue raising interest rates, and nearly everyone anticipates that economic slow down in America will not prove contagious (not even to commodity prices). When placed beside each other a more convoluted set of expectations is difficult to imagine.
In an effort to simplify things, the sole story/expectation that remains in play is that nearly all asset classes are expected to float higher (with U.S. equities floating a little lower by comparison), because investor appetite for risk is supposedly on a perpetual upswing.
As for the Chinese consumer’s appetite for chocolate, it is common practice when speculating on such matters to talk about China’s massive population, the country’s booming economy, and the consumer’s growing penchant for extravagant purchases. Less talked about are the hair dressers and cab drivers making more money in the stock market than at their jobs that are increasingly experiencing chocolate.
While not yet comparable to the indoctrination of American savings into investment funds during the 1990s, the stock market mania in China is growing more noteworthy by the day. To be sure, despite Chinese policy makers taking numerous steps to try and stop a potentially dangerous market bubble from forming (i.e. in December the China Securities Regulatory Commission temporarily stopped processing applications for new funds to invest in the stock market), in February an LA Times piece highlighted some examples of the mania:
After emptying his savings account, Lu Gang borrowed funds from his mother, relatives and friends. Now he's planning to mortgage his home. Where's all the money going? Into China's booming stock market. LAT
Since the February 27-March 20 pause, stocks have soared, new flows into stocks have surpassed records, and Chinese IPOs have been flying off the shelf. And yes, as growth in mature markets slows and capital remains more plentiful than fresh ideas, the chocolate makers are coming. Cocoa shorts beware?
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