* Sluggish economy weighs on cocoa demand in Europe
* Vegetable oils may replace more expensive cocoa butter
By David Brough
LONDON, Feb 17 (Reuters) - Cocoa demand is likely to remain depressed this year as high bean prices make processing less profitable and put pressure on chocolate makers to shrink bar sizes or use cheaper alternative ingredients such as vegetable oils in products.
After worse than expected cocoa demand data in Europe, North America and Asia in the fourth quarter, the outlook is expected to remain disappointing.
"I expect first-quarter global grindings to be lower than the equivalent quarter last year," said Jonathan Parkman, joint head of agriculture at broker Marex Spectron.
"If cocoa prices continue to appreciate from here, there is very little chance demand will recover."
London cocoa futures rose by more than 13 percent in 2014 boosted partly by forecasts that production may fall this season in Ivory Coast and Ghana, the world's top two growers.
Now the higher cocoa prices are leading chocolate makers to consider re-formulating products.
Mondelez International, which owns brands such as Milka and Cadbury Dairy Milk, said higher cocoa prices can lead to smaller chocolate bars.
"Price increases come either through a straight price increase or through product downsizing, when keeping a certain price point is important for the consumer," spokesperson Thomas Armitage said, referring to information shared in an analysts' call last week after full-year results.
Victoria Crandall, Abidjan-based analyst with Ecobank, said chocolate makers may also switch to less expensive ingredients like palm kernel oil as a substitute for cocoa butter.
"Chocolate companies (in North America and Europe) are more likely to increase retail prices and shrink sizes of chocolate bars, which has been the trend for the last year," she said.
"However, in emerging markets where regulation is less robust and consumers are more price sensitive, like in Asia, this (using cheaper alternatives) could be a plausible option."
U.S. brand Hershey has not cut the size of chocolate bars in recent years but has raised prices.
"Last summer we announced a price increase driven by increases in a number of ingredients and inputs to our products, not just cocoa," said spokesman Jeff Beckman.
One of the reasons for weak cocoa demand is the sluggish economy in Europe, a major consumption centre.
"As long as the situation doesn't improve, then it's difficult for chocolate demand to pick up," said a trade source at a southeast Asia-based cocoa grinder.
Blommer Chocolate Co, North America's largest grinder, expects cocoa demand to remain "anaemic" in 2014/15, an executive said, suggesting price hikes and slow economies in consuming countries will pressure demand longer than many had expected.
John Palabrica, president of MJMB LLC, a private commodity trading company in Newark, Delaware, said demand would again be weak for the second and third quarters.
"Higher prices and lower product size is not what my professors taught me as a way to increase demand," he said. (Reporting by David Brough; Additional reporting by Fergus Jensen in Jakarta, and Marcy Nicholson, Luc Cohen and Christine Prentice in New York; Editing by Nigel Hunt and David Evans)