Singapore, March 12 - Vietnam, the world's largest grower and exporter of robusta coffee, aims to emulate Brazil's move up the value chain by developing its own soluble coffee industry.
Over the next two years, over $80 million will be invested in the construction of three coffee processing plants, more than doubling Vietnam's soluble coffee output to around 15,000 metric tons by 2010.
"It used to be that coffee was always processed in the consuming country rather than at origin, though this has now changed," said a trader based in Singapore.
Brazil and Columbia bucked the trend and embarked on a rapid expansion of their soluble coffee industries in the 1990s to meet increased demand from the then newly freed up Russian market.
"With rising domestic consumption, local producers are now keen to move higher along the value chain," said Doan Trieu Nhan, a senior advisor to the Vietnam Coffee Association.
Vietnam's domestic coffee consumption is estimated to reach 90,000 tons, up from 60,000 tons last year, he added.
These investments are being made by Vietnam's leading instant coffee manufacturers - Vinacafe Bienhoa Joint Stock Co. and Thai Hoa Coffee Corp - as well as global agricultural supply chain manager Olam International.
This year, Thai Hoa Coffee will invest $34 million in a coffee processing plant in Lam Ha district with the capacity to produce 65,000 metric tons of fresh coffee, 100,000 tons of dry coffee and 2,000 tons of soluble coffee a year. The plant will be operational from mid-2009.
"We aim to increase our exports from 2009 onwards," said an official from Thai Hoa Coffee, which is Vietnam's second biggest coffee manufacturer after Vinacafe Bienhoa.
Vinacafe Bienhoa started construction of a $7.5 million high-quality coffee processing plant in Duc Trong district in January. The plant is expected to supply 1,800 tons of instant coffee for export by August this year, and 3,200 tons by 2009.
The company is also in talks with the Brazilian Coffee Association to build a $15 million soluble coffee plant in Vietnam.
Olam started building its $ 45 million soluble coffee processing facility in the Mekong Delta Long An province this month, which will be the biggest in Southeast Asia when completed in 2010 with the capacity to produce 4,000 tons of soluble coffee a year.
Good Way To Utilize Rejected Beans
Last year, Vietnam's revenue from coffee exports totaled $1.8 billion, of which instant coffee contributed only 4 percent, or $72 million. At this rate of expansion, traders expect revenue from instant coffee to easily double by 2010.
Instant coffee commands a premium price of around $8,000-$10,000 per metric ton, compared to green robusta coffee beans, which are currently offered out of Vietnam for around $2,300/ton on a free-on-board basis.
"It's also a good way of using up rejected coffee, or coffee that is not good enough for international roasters to use raw," said a traded based in Ho Chi Minh City.
Even though Vietnam ranks as the second-largest coffee exporter worldwide in terms of quantity, it ranks lowly in terms of quality. Each year, around 30,000 tons of coffee from Vietnam are rejected at ports by traders and London's Euronext.liffe futures exchange.
A robust soluble coffee processing industry would be able to absorb all that coffee - and more. Every ton of instant coffee requires between three and seven tons of green beans, depending on quality.
And the markets for Vietnamese instant coffee exports are promising. These include the fast growing markets of China - which accounts for 80% Vietnam's soluble coffee exports - Taiwan, Japan and the U.S.
However, constraints to the growth to Vietnam's soluble coffee industry do remain.
"With the sudden expansion of the soluble coffee market, profit margins will be squeezed. Will the market be able to sustain the industry?" said a trader based in Ho Chi Minh City.
The export taxes which range from 5%-20% imposed by consuming countries for processed coffee is another hurdle.
Lastly, will there be enough coffee available for all the plants to operate at full capacity?
"If the factories were operational this year, they would have had great difficulty getting enough coffee within Vietnam," said a trader based in Ho Chi Minh City.
Vietnam's farmers have been slow to release their coffee stocks this year in bullish anticipation of even higher prices.