The rise of Africa as an investment destination is particularly encouraging considering the unique challenges characterising many fast-growing countries. These include a lack of infrastructure, which the World Bank predicts will cost USD 75bn per year to resolve, and energy shortages. In addition, political risks have plagued the continent, but the progress made in these areas has been extremely promising from an economic perspective.

Difficulties still remain though, and among these, public health issues continue to be a worry in certain countries. Currently, the world is witnessing the human and economic cost inflicted by fragile and failing public health systems, with the outbreak of Ebola plaguing much of West Africa. Ebola infection rates have reached crisis levels with over 3300 Ebola-linked deaths. Over and above the human tragedy, the crisis is having a severe effect on the economies of those countries affected, and risks spilling over to neighbouring countries.

Two of these, Ghana and the Ivory Coast have yet to record any cases of Ebola. Their proximity to the countries most affected by the outbreak is, however, already having a major impact on the cocoa industry.  Together, these countries produce around 60% of the world’s total cocoa supply.

Due to the relatively archaic way in which the crop is collected and distributed, quarantines and travel restrictions would wreak havoc with the supply chain model. Cocoa farmers use small areas of land to grow their crop, with middlemen riding from farm to farm on motorbikes collecting the crop for transport to the coast before being exported. Should Ebola spread into either Ghana or the Ivory Coast the effects that travel restrictions and quarantines will have on the middlemen could be catastrophic for the market.

Both Ghana and the Ivory Coast are heavily dependent on cocoa trade for income. Ghana relies on the commodity for around 20% of its total exports, while Ivory Coast derives approximately 30% of total exports from the cocoa industry. Total production for 2013 was estimated at 835 000 tonnes and 1 445 000 tonnes for Ghana and the Ivory Coast respectively. At an average price of GBP 1 576/tonne this equates to total production values of approximately GBP 1.3bn and GBP 2.3bn respectively.

Cocoa supply in West Africa is already under pressure due to ageing plantations, a lack of investment and minimal use of fertiliser.  Due to these factors alone, production forecasts indicate that supply will be insufficient to meet the growing global demand. Although growth in total production for the Ivory Coast is expected to be 7% for the period to 2018 and 42% for Ghana, this is still not enough to reduce the shortage, which is expected to reach 209 000 tonnes in 2015. The spread of Ebola could provide further risks to the downside of these forecasts.

The price of cocoa has already spiked amid the Ebola concerns with cocoa futures reaching 42 week highs recently, a phenomenon dubbed the “Ebola premium”. Business Monitor International forecasts that the spot price for cocoa will average GBP 2 000/tonne in 2015, an increase from the 2014 average of GBP 1 850/tonne.

While an increase in price would offset some of the losses from the two countries’ lower export volumes, the risk of product not reaching the market could weigh heavily on overall export values. Liberia, Guinea and Sierra Leone have virtually come to a standstill as Ebola-led restrictions have significantly affected economic output in the region. The closure of airports, border posts, schools and markets has meant that the three worst-affected countries will need to rely on economic support to aid their recovery once the virus is controlled. The spread of Ebola into the Ivory Coast and Ghana would lead to similarly crippling economic problems.

Craig Metherell
Analyst, RisCura Fundamentals

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