TEA MARKET: Supply scarcity spurs prices



Research Intelligence Unit / Tea Promotion Division of Sri Lanka Tea Board

Tea market conditions in 2009 have offered some hope to an industry that was battered by the global financial crisis in the second half of 2008 and its resulting fallout. Following several straight months of falling demand during the last quarter of 2008, prices commenced to show signs of a positive incline in the New Year. The glimmer of hope extended to the tea industry is heartening since prices of many other commodities are declining in response to poor international demand. However the revival in tea prices may not be due to any upturn in bullish sentiments but as a consequence of a global shortage in supply.


As a result, shippers are trying to muscle-in on the dwindling quantities at the Colombo auction. For instance, during the first auction in May, strong demand was witnessed from several shippers representing Japan and Pakistan due to volume constraints. Russian buyers too were keen on picking up crops, which further spurred the positive momentum in the Ex-estate sector. However, the tea prices of the high grown sector in general, fetching around Rs.250 to Rs.275 per kilo during April remains below the cost of production. Despite the crop short fall, the drop in quality due to the off-season and the stifled demand from western countries may have contributed to this unhappy predicament.

For the low grown teas’ demand was satisfactory in the New Year and prices improved strongly in early May with increased interest from Iran, the CIS and Libya, especially for the BOP1 grade. The Tippy teas too experienced considerable interest from Iran, the CIS and Dubai. The price of crude oil has exceeded US $50 per barrel which is no way near the record prices of mid-last year but better than what it was during the second half of 2008. Reports from the Middle East say, consumers are cutting unnecessary expenses and staying at home which may turn out to be a blessing in disguise for tea consumption.

Local tea production only reached 18.2Mkg in March 2009, a drop of 44 percent from last year. Severe drought, frost in the hilly regions, efforts to curtail supply and non-fertilizing in 2008 are the main factors cited for this shortage. During the first quarter of 2009, production has fallen by 41.6 percent to 48.8Mkg as compared to 83.5Mkg in the first quarter of 2008. Low grown crops have been squeezed the most.

However, the supply equation has an international dimension where the combined shortage from Sri Lanka, Kenya and India, who together account for some 80 per cent of total global back tea production, is currently estimated at between 80-100Mkg. This is the most severe shortage since 1999. Sources indicate that India’s production is worst hit. In April, the north Indian shortfall alone was between 15-20Mkg.

The tea exports from Sri Lanka for the first quarter of 2009 recorded 67.5Mkg as against 79Mkg in the corresponding period of last year representing a drop of almost 15 percent. The earnings have also declined 14 percent from Rs.33 billion to Rs.27.5billion.

In retrospect, the initial response on the part of the Tea Board and the industry to cut supply in order to match international market conditions has worked to improve prices. Also the view that tea, the cheapest drink after water is relatively immune from the global recession seems to come true. All factors considered, the islands tea industry is not in the safe zone as yet and further strategy navigation will be required in order to emerge intact from the global economic woes.

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