UPDATE 2-Demand slump halts ops at 14 Indonesia cocoa grinders

* Only 2 out of 16 Indonesia grinders still running

* Grindings in Indonesia seen down 29 pct in 2009

* Buyers could start seeking bargains in Malaysia (Adds details, ICCO estimates)

By Lewa Pardomuan

SINGAPORE, April 8 (Reuters) - Falling demand for ingredients for chocolate have forced 14 cocoa grinders in Indonesia to temporarily stop operations, an industry official said on Wednesday, possibly prompting consumers to seek bargains in rival Malaysia.

Grinders across Asia have seen sales declining in recent months, forcing them to slash prices for butter even when bean prices had gone up to track rallies in London futures.

Indonesia is Asia's second-largest grinder after Malaysia, where grinders are struggling to reduce mounting stocks of butter and beans.

"Grindings in Southeast Asia are facing similar problems with those in Europe and the Unites States. The market is lethargic, causing some factories to cut capacity or temporarily stop operations," said Piter Jasman, chairman of the Indonesian Cocoa Industry Association.

"The global economic crisis has resulted in falling demand for butter. Also because of high bean prices, grindings in Indonesia will fall to 120,000 tonnes in 2009 from 170,000 tonnes in 2008," he told Reuters by email from Jakarta.

Only two grinders, PT Bumitangerang Mesindotama and Delfi, are still operating, said Jasman, adding that a recovery depends on how cocoa prices behave.

"A stable cocoa price will certainly revive the cocoa butter market which has been quiet in the past six months," he said.

Petra Foods (PEFO.SI) is the parent company of Delfi, the brand name for its cocoa power, liquor and butter.

Cocoa butter is used to make chocolate bars, spreads and also for soaps and manufacturing. When cocoa beans are processed, grinders get butter and cake, which is later pressed into powder.

Although there was still demand for powder, which is used as a coating in chocolate manufacturing and beverages, dealers said grinders were losing money because they had to deal with mounting stocks of butter.

At least 10,000 tonnes of cocoa butter have piled up in Malaysia, the highest level since 2002, with the country's 10 grinders cutting bean purchases and operating runs because they were unable to sell their product for months during the economic downturn.[ID:nSP4565]

International Cocoa Organization Chief Jan Vingerhoets told Reuters financial television on Tuesday that he expected a 2009/10 global cocoa surplus of more than 100,000 tonnes due to weak demand and rising supply. [ID:nL7554868]

"Some grinders have no choice but to stop operations. They can only resume the activity if the market recovers," said a dealer in Jakarta. "Grinders have shifted to selling their own bean stocks. It's making money."

For a graphic on grindings in selected Asian countries, click: here

London's July contract LCCN0 dropped 30 pounds to 1,826 pounds on Wednesday but was still 10 percent above a two-month low of 1,656 pounds hit in February.The contract rallied to a seven-week high of 1,944 pounds a tonne last Friday.

Even though the butter ratio has fallen to a five-year low at 1.80 times London futures, it has failed to attract buyers. <COCOA/ASIA1>.

Butter and bean markets move in an opposite direction. (Editing by Ben Tan) (lewa.pardomuan@thomsonreuters.com; +65 6870 3834; Reuters Messaging:lewa.pardomuan.reuters.com@reuters.net))