The Tea Market Report

TEA MARKET: Bearing up!

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

Still reeling from the global financial crisis of last year, the Sri Lanka tea industry has been putting up a brave fight-back in the effort to survive the current difficult period. Prices at the Colombo Auction have witnessed a positive trend throughout the first half 2009. During May & June in particular, prices have remained very buoyant due to restricted supplies and renewed interest from traditional export destinations.


For the first time during the current year high grown and medium grown averages exceeded Rs. 300/- per kilo in month of June. The average price of low grown tea continued to maintain a level above Rs. 400/- per kg.

World Market

Tea prices at the leading auction centres in the world have been on a continuous rise in 2009. The strong prices fetched at Colombo and Calcutta Auctions combined with a smaller rise in Mombasa Auction contributed to this positive performance.
The following table reflects comparative Auction averages at Colombo, Calcutta and Mombasa put together during 2009 as against the previous three years. It shows positive signs that the global market has now recovered from last years financial shocks.

Three-Auction Average (US cents/kg)
2009 2008 2007 2006
January 218.6 237.7 178.8 170.8
February 213.5 239.7 177.9 195
March 219 226.3 177.2 171.7
April 250.9 248.8 198.1 191.4
May 268.8 248.4 194.1 188.4
June 266.9 207.4 198.9
July 275.9 213 200.5
August 274.2 206.9 195.5
September 266.9 213.3 190.7
October 230.5 224.9 185.3
November 196.7 220.6 178.6
December 192.6 231.3 182.8
Source: World Bank

Demand drivers in Colombo

The Ex-estate segment performed well as strong interest from shippers to Russia, Japan the UK and Europe managed to maintain upward pressure on prices. The CIS too was active during recent auctions. CTC teas enjoyed better demand whilst brand packers remained focused on picking up quantities at every available opportunity. The arrivals of Ex-estate teas thinned out to just 0.799Mkg by the end of June 2009.

Meanwhile, the Leafy grade segment moved up towards all-time high price averages with sustained upward pressure. At the frontline were shippers to Russia, Iran, Libya, Iraq and Europe.

In the Tippy segment, a strong market prevailed throughout June with demand from Iran, the CIS and UAE.



Supply factors

The Sri Lanka Tea Board announced that, total production of tea in Sri Lanka during May 2009, amounted to 25.5Mkg as against 33Mkg, produced during the corresponding month in 2008. This represents a decrease of 7.5Mkg or 22.8 percent. The total tea production during the period January to May 2009 amounted to 105Mkg, as against 144Mkg produced during the corresponding period of 2008. This shows a decrease of 38Mkg or 26.9 percent.

Poor weather patterns at the start of the year have been highlighted as the main reason for the supply shortfall. Lack of rain during the first quarter of 2009 resulted in many growers foregoing fertilizer applications as tea bushes need rainfall in order for the application of fertilizer to take affect.

Low grown teas were worst affected, with production falling by 32 percent, followed by the mid-elevation teas (24 percent) and the high elevation teas (17.5 percent). The production of green tea in May fell by a staggering 38 per cent.

The elevation-wise break down of tea production, up to May 2009 and the cumulative production total as compared with the corresponding figure for the previous year is given below.
Give the production table here
Forecast

With improved rainfall in recent months, the crop outflows are expected to improve during the second and third quarters. The impact of this higher production on prices is difficult to determine since some key export destinations like Japan, UK, Australia etc. are still not out of recession. However, holy month of Ramadan for the Muslim people round the world will commence in September and hence, requirements by Islamic nations for replenishments will be necessary in July and August. Therefore, Colombo Tea Auction prices are bound to remain strong even during the next few months despite the anticipated higher production.

The price of a barrel of crude oil is hovering around US$ 70 which is almost doubled of the rock bottom price hit in 3rd quarter 2008 although the price is way below the peak of US$ 147. As a result, the demand for Ceylon tea from Middle East and Gulf countries is bound to remain strong during the second half of the year as well.

Exporters can expect to see the dollar / rupee spot rate holding on at between 114.90 and 115.10 in the coming months. A stable currency is being pursued by the Central Bank as exchange rate stability is generally good for the economy.

As per World Bank predictions global tea prices should remain firm in 2009 but will slip marginally in 2010 due to a relaxation of the tight supply situation as a projection of better weather conditions in tea producing countries. According to World Bank estimates the global tea prices in 2008 averaged at US$ 2.42 per kg. which is a 19 percent increase over 2007. They estimate the 2009 global tea price to be around US$ 2.35 per kilo. The average price of tea in the world market during 2010 to 2015 is projected at US$ 2.20 per kilo.