Cloves market – July 2016

Since the beginning of the year, Indian buyers are relatively quiet.
Despite the small crop forecasted, the Indonesian cloves market is flat.

In the Comoros, the harvest has started in June, as usually. Availability of the goods is currently satisfactory whereas the quality remains average, due to a high percentage of small cloves (more than 10%). Nevertheless, a 350mt crop is still foreseen by our local partners.

Price levels are relatively competitive for the time being. However, an increase in the local market is to be feared. Indeed, if the total of expected quantities to export of local businesses is taken into consideration, potential exportations reach 7000 mt and more.

One of our local friends reported that new Indian buyers came to Anjouan lately, in order to resupply even in green buds. This statement confirmed the risk of local prices soaring up.

In Madagascar, harvest might be smaller than expected in May. Indeed, the rainy weather that last since April in the North leads most of green shoots to become leaves instead of flowers (clove). Currently, packers give the following forecasts:

– Southern Area > 3500 mt: If cloves reach Tamatave too wet, they will certainly be small with a bark color.
– North Area < 4000 mt: goods available in Octobre - Carry-over of crop 2015/2016 should be below 2000 mt Several exporters have confirmed that largest collectors are sitting on stocks of 100/200 mt each. Moreover, as the prices has decreased since March, they seem not ready to sell.

Today, it is difficult to have a clear idea about Malagasy offers. Because of the vanilla pre-financing, the Ariary has increased by 10% against EURO and USD in the past 2 weeks. Exporters have raised their offers in foreign currency, except the ones who have stocks and have to finance the vanilla.
Most qualities are fairly acceptable – current price levels (crop 2015/2016) are as follow:
CG3 FAQ USD 8700 pmt CFR EMP
CG3 Premium USD 9300 pmt CFR EMP
HPS quality USD 11500/12500 pmt CFR EMP

This can be read in Indonesia this week:

[Quote]
1° Indonesian clove crop has started in some locations but prices seem to be mixed. International reports say less crop but locals say normal crop. A bit of mixed stories. Bottom line is cloves from large areas do not seem to been harvested yet and only small lots are coming from some places in Java.

2° CLOVES – With rumors flying about of heavy infestation in Indonesian Clove production which would affect coming crop and a documentary to back it up there was much excitement in the Clove circles. The Indonesian Kretek (Clove Cigarette) did not budge and the ruse was discovered and soon fizzled out. The fact is India consumes some 12,000 Mts of Cloves per annum – whilst Indonesian cigarette manufacturers need 80-100,000 Mts annually – but usually speculative on twice that figure with a series of market rumors and manipulations. Clove is at a very comfortable level and we do not see Indonesian Clove prices diving or rising substantially in the short term. The fact remains that crop estimates this year are at a healthy 80-85,000 Mton figure and only speculators are driving up the market albeit not to successfully.
[Unquote]

Although the worm infestation is plausible, the consequences on the clove production is less than what is said by the rumor. I tend to think that El Nino had a real impact on the production. In addition to the 2 previous years of relatively good crops, it seems understandable to have an average one this year. Considering these two statements, we can expect cloves’ prices to be firm and speculative, even if this hasn’t happened yet.

According to us, explanation for the Indonesian market being silent are:

1° Cigarette manufacturers strategically wait until the end of the season to buy, as they have enough stock. An information from Singapore relate that those manufacturers have 2 years of consumptions, which means that they are able to hold six months without buying. Note that cloves must be matured approximately 18 months before being used in Kretek.

2° Recently, the Indonesian government has changed rules for the local taxes payment, in order to get the accurate amounts. Kretek manufacturers now have to pay those taxes, and no more local traders or farmers organizations, as they have a real accounting organization. Consequently, the 5 largest Kretek manufacturers agreed to limit cloves’ prices around USD 9000 pmt.

As a result, local traders are trying to find foreign buyers as they expect to get better prices.
For European buyers, Indonesian clove is less interesting because of customs duties.

In mainland Tanzania, harvest is starting in August. It is currently possible to offer “farmer quality” cloves, what appears to be the best option regarding clove spice for now.

In Brazil and Sri Lanka, it is still too early to know the next crops size.

The market trend is dull. India might have to come back in the market soon in order to push it, as they have stopped buying massively since February.
It seems like the right time to take position in favor of competitive traders, such as in Dubai or Singapore, even if, sometime, the quality doesn’t meet the US or European standards.