Guan Chong sticks to the grind

MALAYSIA’S only listed global player in cocoa derivatives, Guan Chong Bhd, has seen half of its share price melt away this year amid a volatile cocoa market and cautious consumer demand.

The decline underscores the close link between cocoa bean prices and the products Guan Chong manufactures: cocoa powder, butter and liquor. Profit margins hinge on “product ratios” – the relationship between the selling prices of cocoa butter, powder and liquor, and the cost of the cocoa beans used to produce them.

These ratios have softened alongside moderating demand, pressuring margins despite the company’s operational scale.

Yet, there are glimmers of relief. Improved weather in West Africa, the world’s main cocoa belt, has eased some supply constraints, pushing cocoa bean prices lower.

“After an extraordinary rally, it is natural for cocoa bean prices to adjust,” says managing director and chief executive officer Brandon Tay Hoe Lian. “Cocoa beans account for about 80% of our cost of sales, so lower prices are favourable as they ease pressure on our working capital and financing requirements.”

The easing bean costs, however, have not immediately translated into stronger earnings. Cocoa futures have tumbled nearly 50% this year, resulting in sizeable hedging losses for Guan Chong.

RHB Research notes that in the first quarter ended March 31, 2025 (1Q25), Guan Chong recorded a RM1.2bil marked-to-market unrealised loss, largely stemming from a RM430mil fair value loss on a long forward bean contract with the Coffee and Cocoa Board of Ivory Coast. Core net profit for the first half of 2025 was further impacted by a RM330mil net hedging loss.

Despite the sharp drop, cocoa prices remain historically elevated. Futures are around US$6,000 per tonne, compared with pre-rally levels of around US$3,000 to US$3,200 per tonne.

The earlier surge stemmed from extreme weather in West Africa, including excessive rainfall in late 2023 that fuelled black pod disease and crop rot, compounded by El Niño-driven droughts in 2024, which intensified the incidence of cocoa swollen shoot virus disease.

Tay says the current price trend of around US$6,000 per tonne is “within its expectation”, as the elevated bean prices since 2023 have encouraged increased replanting of cocoa trees across key regions, including West Africa (Ghana, Ivory Coast, Nigeria and Cameroon), Latin America (Ecuador, Peru and Brazil), and parts of Asia‑Pacific (Indonesia, the Philippines, India and Malaysia).

He says prices will likely remain under pressure this year as supply conditions improve, global grinding eases, and weather supports crop growth in Ghana and the Ivory Coast. “The significant deficit seen last year is now expected to turn into a surplus for the next crop harvest,” he says.

While weather-driven optimism supports production, some caution remains. West Africa is expected to experience a 10% decline in output for the 2025/26 crop year, with Ivory Coast exports about 25% behind last year’s pace.

“West Africa is still struggling with crop diseases and ageing trees, all of which have cut yields and pushed up costs to maintain the plantation,” Tay says.

There is also the aspect that the chocolate industry is spending more on sustainability, from ethical sourcing to new rules that require full traceability of cocoa beans.

All these added pressures are pushing up costs across the supply chain, making a return to the much lower cocoa prices in the past “increasingly difficult”, Tay says. Yet cocoa prices alone do not dictate Guan Chong’s profits.

The company’s earnings are primarily influenced by product ratios, bean yield, hedging effectiveness and operational efficiency.

“Our business model is based on a ‘tolling’ model, where we generate our income based on sales and production volume through economies of scale. We can pass on raw material costs to our customers; hence we are less affected by fluctuating cocoa bean prices,” Tay says.

Under the tolling model, Guan Chong earns processing fees for grinding cocoa beans into cocoa butter, powder and liquor, insulating the company from volatile commodity prices. Cocoa butter ratios have eased recently, as chocolate makers have adjusted formulations to use more cocoa powder and other ingredients to keep products affordable.

But Tay remains unperturbed: “It is not an issue for us, because Guan Chong sells cocoa liquor, cocoa butter and cocoa powder.

“We are focused on delivering higher sales volume to sustain our earnings. Not only that, but we are also in the downstream industrial chocolate segment, which can help enhance our earnings.”

Lower cocoa prices also tend to bring buyers back into the market.

“We are already seeing signs of renewed interest. This gives us confidence that ratios can recover and provide healthier margins,” Tay notes.

Rising cocoa prices amid a precarious supply outlook, meanwhile, have triggered consumer pushback, prompting buyers to reduce consumption or switch to cheaper alternatives.

Some chocolate makers have reformulated products with “chocolate flavouring” to manage costs.

Despite this, Tay says the group’s grinding margins and sales volume “remain healthy”, and notes it has “not so much been affected by chocolate demand than by bean supply”.

“Chocolate consumption is resilient. While pack sizes and formulations may adjust, consumers still want chocolate, and substitutes cannot truly replace it.

He expects demand to gradually improve over the next two years as easing bean prices provide a tailwind for recovery.

“Lower cocoa prices make it easier for chocolate makers to increase coverage, while competition for market share will encourage them to maintain offerings for consumers,” he adds.

Tariffs have also influenced market dynamics. Under the latest US tariff regime, cocoa product imports from Malaysia and Indonesia face a 19% levy, compared with 15% from Ivory Coast.

While recent reports have indicated that countries such as Malaysia and Indonesia have been identified for tariff exemptions for cocoa and cocoa‑based ingredients exports, Tay notes these exemptions are not yet in force and will require time to process.

Nonetheless, Tay says the impact from the US tariffs “is just a short-term implication”.

“Tariffs have undoubtedly created new considerations for the industry, but the impact on our business has been manageable. Customers have generally been willing to absorb the additional cost, and we have taken steps to optimise our operation, including managing shipments to the US from Ivory Coast which enjoys lower duties at the moment,” he notes.

Guan Chong is Asia’s largest and the world’s fourth-largest cocoa grinder, with an annual grinding capacity of 335,000 tonnes across facilities in Malaysia, Indonesia, Ivory Coast and the United States.

Its cocoa ingredients are marketed under the Favorich brand. The group also operates chocolate production units in Europe and the United Kingdom, with combined annual capacities exceeding 116,000 tonnes.

Earlier this year, the company acquired a 25% stake in Ivory Coast-based Transcao Côte d’Ivoire for €28.08mil (RM130.1mil), strengthening its upstream supply chain.

To this end, Tay says the partnership has helped to strengthen the company’s presence at origin by ensuring a reliable and responsible supply of beans, enabling it to respond more effectively to market fluctuations.

He notes that while Ghana and Ivory Coast remain key producers, Guan Chong has long diversified its sourcing: “Cameroon has reached record output, Ecuador is on track to surpass Ghana, and Indonesia’s crop continues to improve. This diversification ensures reliable access to supply and protects us from over‑dependence on any single origin.”