China to get coffee boost

Updated 2018-05-22 10:42:02

Growing demand will lead to influence in pricing

China is poised to have a say in the pricing of coffee, the world's second-most traded commodity after crude oil, in five years, an executive at a key coffee exchange in China said on Monday.

"Among the global markets, China is the last gold mine left to be tapped, and it will likely have a meaningful say in the global pricing of the commodity," Zheng Zhi, chairman of the board of supervisors with the Chongqing Coffee Exchange, told the Global Times on Monday.

As the Chinese economy develops and living standards improve, the country will have a growing say in the prices of a range of global commodities. In 2018, the country rolled out crude oil and iron ore futures based on its yuan currency.

Coffee, the world's second-largest commodity category after crude oil, is also becoming more important in China, as domestic demand for coffee is growing.

In one sign of this, Seattle-based US coffee chain Starbucks Corp said in May that it hopes to almost double its store count to 6,000 in China over the next five years.

The Chongqing Coffee Exchange currently handles via spot trading annual turnover of 50,000 tons, or about one-third of what is consumed in the domestic market.

However, despite the growing domestic demand for coffee, China has little say in the pricing of the commodity.

Global food conglomerate Nestle told the Global Times in an email statement on Monday that the buying price for coffee beans in Southwest China's Yunnan Province - where most of China's homegrown coffee is produced - is based on international coffee bean prices at the Intercontinental Coffee Exchange in New York, which is the global benchmark.

"Local prices are adjusted frequently to reflect the futures closing prices, which are in the public domain and accessible to farmers," the company said.

Besides the Chongqing Coffee Exchange, there are also two coffee exchanges, in Yunnan and Shanghai, respectively. All three are based on spot trading, offering no futures trading and with no pricing influence.

Future potential

Coffee consumption in China is still very low compared with neighboring markets, according to Nestle.

The US, in comparison, anchors its pricing power in its annual consumption of 1 million tons of coffee beans and reserve storage of half that amount. In all, the US controls about one-sixth of global coffee production and consumption, experts said.

"Given the low domestic consumption, the timing for offering futures trading is not yet ripe. If we do, the market will not be able to accommodate the large volume of capital it would attract," Zheng said.

"However, in five years' time, domestic coffee consumption is expected to reach 300,000 tons a year, and China will become a major world coffee market in terms of absolute demand. We might then consider launching futures trading and giving the exchange a price finding function, thereby becoming a factor in the global coffee pricing system," Zheng said.

Zheng noted that consumer education is important.

"Currently, the number of people in China who drink coffee is about 30 million. In 10 years' time, with the promotion of coffee culture, the number could grow to 300 million. At the same time, the per capita coffee consumption is expected to grow from the current 4 cups a year to 40 cups a year… What an immense market it will be!" Zheng said.

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