TEA MARKET: Exporters face challenges, future looks green



Compiled and written by Roshan Madawela

Sri Lanka’s most famous export is facing a number of challenges that it must meet in order to remain as one of the islands most prominent sectors and the world’s most favored tea.

Seasonal factors and global warming stifles demand

A combination of external conditions served to exert downward pressure on the demand for Sri Lankan tea at the Colombo Auction during the month of August. Seasonal factors like the dawn of Ramadan that affects millions of tea consumers in the Middle East and the CIS region, elections in Turkey and Syria as well as a prolonged hot-summer period in many export destinations are some of the factors that continue to impact on the market. The latter can be attributed to the phenomenon of global warming that is increasingly out of control according to scientists.
August started well for the Tippy teas with strong demand from Iran, Dubai and the CIS driving prices in an upward direction. Saudi Arabia and Turkey were also active as this segment of the market continued to pick-up further at the second sale. In the market for the Leafy-grades, Pekoe teas started the month with a dip following eight straight weeks of enjoying heightened demand. The slide continued during the entire month as demand conditions in export destinations continued to impact the Colombo Auction. Exporters representing Dubai, Germany, Turkey, Syria and the CIS were some of the key players in the market according to analysts at Bartleet Produce Marketing.

Producers, exporters march on

In the wider economy, data indicates that the islands plantation crop exporters are capturing a greater share of the international market despite a challenging domestic environment. Tea exports for the first five months of 2007 indicated a revenue of Rs38.9 billion, an improvement of 10.2 per cent compared with the corresponding period last year. Similarly, rubber exports rose by 35.5 per cent whilst coconut based products gained 15.3 per cent. However, tea production up to June has declined by 12.7 per cent to 143.6Mkg this year according to the Central Bank.

Players in the industry have recently intensified calls for focusing on increasing the value addition elements of exports as it strives towards achieving a net income of Rs100 billion. Valued added products will need to improve from its present 35 per cent share of total exports. Conversely, bulk exports of teas will need to be reduced from its current share of 65 per cent. However, the due assistance from the state ear-marked for sector development has not been forth-coming. Essentially, the tea cess worth some Rs1.2 billion is not being re-invested according to representatives from the industry. In addition to slowing the advancement of the products in a sector that has to compete in a fiercely competitive international environment, the welfares aspects relating to factories, estate workers and their health and education also stand to be squeezed out when due funds are delayed. As Sri Lanka’s production costs are significantly higher than those of its competitors, wastage, corruption and mismanagement urgently need to be dealt with.

A number of plantation companies have been reporting losses in their financial statements principally due to rising costs much of which can be attributed to the negotiated wage hike of December 2006. Those companies with a diverse range of crops were found to be somewhat cushioned from the bumpy-ride that tea has been through recently. Included amongst those reporting profits are Kelani Valley, Mallwatte Valley, Namunukula and Hapugastanne.

Meanwhile, in a revolutionary measure that could completely transform the Colombo Auction, one of the islands’ leading software developers has been handed the task of automating the prevailing system that is now over a century old. With trial runs currently taking place, the real-time implementation of the million dollar project is expected to take place in 2008. Once complete, the traditional method of shouting-out bids would become a thing of the past.

Cost-cutting is the rationale for seeking the change. In order to cope with the current volumes of tea that are in the range of six million kilos per week, a number of additional auction rooms are being used over two days. Automation will reduce the number of staff required as well as reduce lead times and facilitate greater volumes especially during times of heavy cropping. The nine brokers, many of whom have already shifted their catalogues online, will need to be prepared for the change that will be architected by the software firm Millennium IT
Spotlight on green tea

The future of the international tea industry is increasingly looking to be shaped by its greener variety. The take-off in demand for green tea is based on a large number of scientific studies that have served to prove a positive connection between its consumption and good health. Weight loss, skin rejuvenation, aging deterrence, lowering of cholesterol, lowering of hypertension, controlling diabetes, preventing tooth-decay, stress reduction, fighting common cold and curing a ‘hang-over’ are just some of the accolades that are attributed to green tea drinking.

A 2006 study published in the Journal of the American Medical Association concluded that "Green tea consumption is associated with reduced mortality due to all causes and due to cardiovascular disease but not with reduced mortality due to cancer."

Similarly, a University of Tokyo study followed a cohort of 40,530 Japanese adults with a history of stroke, coronary heart disease or cancer from 1994 till 2005. It found that those in the cohort who consumed five cups of tea or more per day had a 16 per cent lower risk of all-cause mortality and a 26 per cent lower risk of cardiovascular disease (CVD) than participants who consumed less than one cup of tea per day. The study also concluded that ‘if green tea does protect humans against CVD or cancer, it is expected that consumption of this beverage would substantially contribute to the prolonging of life expectancy, given that CVD and cancer are the two leading causes of death worldwide."

Green tea production was first developed in China using Chinese clonal stock with the seeds later being exported to Indonesia, Japan and Brazil. These methods were later developed in India using Assamese clonal stock. It is the Assamese variety that is mainly used in Sri Lanka today according Wikipedia sources. This is the reason why most of the islands green teas have the characteristic darker color and a different flavor from the Chinese, Japanese, Indonesian and Brazilian varieties. However, the names given to the varieties like ‘gunpowder’ and ‘Chun Mee’ have their origins with the Chinese.

Silverland are currently the islands largest green tea producer with two tea factories focusing on producing high quality green teas from the Kandy district. The Elpitiya factory is rolling out a range of green tea premiere grades that will include Gun powder special, Gun powder, Chummee, Young Hyson and a Fannings grade to be used for tea bags. This factory commenced operations in 1996 and has an annual production capacity of between 100,000kgs to 700,000kgs. Meanwhile, the Seevalihill tea factory has been producing the same range of premiere grades since inception in 2003. Annual green tea production at this factory is in the range of 10,000kgs to 300,000kgs.

The company has stated its vision as giving a ‘top quality green tea product to the export market at a very competitive price’. Its mission is ‘to remain the largest producer of green tea in Sri Lanka’ whilst its core value is to ‘provide employment to a larger section of rural people and to look after their welfare’.

UPDATE: The Colombo Auctions

Sale number 35 at the Colombo Auction witnessed a total of 5.90Mkg arriving this week as compared with 5.98Mkg in the previous sale. Some 0.760Mkg of these were Ex-estate teas as compared with 0.786Mkg last week.

The Tippy catalogue gained in strength during the sale as strong demand for flowery fanning’s, FF’s and FF1 grades exerted upward momentum on prices. Iran played an important role with active buying on these grades. Dubai and the CIS were moderately active whilst exporters representing Saudi Arabia were very selective during this week’s sale that witnessed ‘Very Tippy’ teas meeting with exceptionally strong demand.
The Leafy market picked up this week across all grades except for the BOP1’s. ‘Bottom Pekoes’ in particular gained by as much as Rs10 per kilo whilst OP1’s also picked-up as buyers showed strong interest. Shippers to Syria and Turkey were once again energized to their normal levels as the border between the two Middle East states reopened.

As the one year anniversary of the Sri Lanka Pakistan FTA approaches, officials representing both sides of the Palk Straight have expressed optimism on the potential to expand trade to over a billion dollars by 2010. Currently the volume of trade between the two countries is worth around $250 million. However, with the removal of barriers, greater quantities of Sri Lanka teas and spices along with Pakistani Honey Mangoes and Pomegranates are expected to be traded.

The Sri Lankan rupee has finally crossed the psychological Rs113 barrier against the dollar this week. Analysts expect this trend to continue and we might even witness a rate of Rs114 by next week according to sources. Economists have long held the view that the rupee is overvalued and that adjustment at around Rs118 against the greenback would be par.


Copyrights Reserved ( RIU 2007).