Arabica coffee futures for March remained under pressure after hitting US$1.4945. AFP PHOTO / TONY KARUMBA
Arabica coffee futures for March remained under pressure after hitting US$1.4945. AFP PHOTO / TONY KARUMBA

Markets

Arabica coffee glut has markets jittery

What's Down: Arabica coffee futures for March remained under pressure after hitting the lowest level for the second month since June 2010, weighed down by forecasts of bumper output.

Agencies

November 19, 2012

Arabica coffee futures for March remained under pressure after hitting US$1.4945, the lowest level for the second month since June 2010, weighed down by forecasts of bumper output.

Dealers said the robusta market was expecting a large crop in Vietnam, albeit slightly smaller than last year.

The brokers Marex Spectron said the consensus was that the crop would be unchanged to 10 per cent lower than last year's 27 million bags, with the average at down 5 per cent.

Prices were down 0.55 cent, or 0.36 per cent, at $1.522 per lb at the close in London on Friday.

"The current arabica supply picture is comfortable and stocks are building," Marex Spectron said on Thursday, adding that a large Brazilian crop had allowed for restocking internally as well as exports.

"We favour arabica over robusta and expect the arabica market to improve given sharply lower prices, although an improved harvest in Brazil is likely to cap the upside," Standard Chartered said.

January robusta futures were up a marginal $3 at $1,905 a tonne after earlier dipping to $1,891.

Next year's coffee yield is likely to be bountiful, with Peru's crop expected to rise by 20 per cent.

Lower prices could send income from coffee exports down to $950 million, down by as much as 40 per cent from $1.57 billion.

This supply glut is already being felt in the commodity futures market.

Weak European demand will also probably contribute to lower coffee bean prices. Cafes in Europe are struggling to turn a profit as the weak EU economy has reduced disposable incomes.

Europeans are switching to cheaper, lower-quality coffees in response to these challenges.

Gourmet arabica coffee is preferred, but now Europeans are switching to robusta, a bitter but less costly alternative. This trend has worldwide consequences, since Europe has the greatest coffee consumption per person.

The spot price of arabica beans has fallen about 30 per cent because of the switch to robusta.

The downwards revisions for Vietnam's forecast production of robusta beans may continue to narrow the spread between these two beans.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”