Tea Market Commentary and Outlook

Research Intelligence Unit / Bartleet Produce Marketing


Prices stay sky high

Right up from the first sale of the month, prices witnessed a sharp hike at the Colombo Auction, as forecasted by us last month. Western high grown teas gained throughout, with the BOP best varieties starting from around Rs340 finishing at Rs550 by the last sale, gaining an incredible 61.7 per cent. Western Medium Grown best’s gained 51 per cent, Nuwara Eliya by 32 per cent, Uva 37 per cent and CTC bests by 19 per cent. The hike was witnessed across the board. Peokoe varieties started out strong and dipped by last sale but were up significantly over the month.

As supply concern remain

Quantities offered at the sale showed a clear downward trend and the total quantity sold of 19.9Mkg is well below the 28.1Mkg of January. The market is witnessing a clear sign that demand is price inelastic for Ceylon tea, at least for the present time. The shortage in supply combined with a steady demand from the Middle East, CIS and Europe was the overriding driver of the price hike. Of particular significance was the strength of continued winter season demand form the CIS and Europe where sub-zero temperatures and tea consumption have traditionally hade a positive correlation. The staying-power of demand over the coming seasons remains to be seen. Interest from the Middle East remained healthy with Iran and Syria once again at the frontline of Peokoe tea purchases.


ECONOMIC ENVIORNMENT


CTTA raises issue with the government

The month was also distinguished by a battle of words between the Colombo Tea Traders Association (CTTA) and the government. The CTTA leveled out that the Rs4. per kilo levy on tea exports are used for subsidizing inefficient public offices and making political appointments. Moreover, there is little benefit to the sector from the revenue as it is wasted on overstaffed and unproductive state institutions that serve only political interests. In reaction, the Ministry of Plantations said that the Treasury will allocate one billion dollars out of the $1.2 billion collected from the cess fund and plough it back into developing the tea industry. The Ministry also announced the preparation of a ten-year plan for the sector whilst the exporters demanded representation at the Tea cess Committee in order to have greater sway on revenue distribution. It is worth noting that following the complaints made by the CTTA, the Ceylon rubber Traders Association also cried foul at the government’s misuse of sector revenue fund usage.


The industry is in urgent need of proper backing from the public sector particularly in an environment where the Indian government is behind its tea exporters who compete for the same export market as Sri Lanka. Currently the producers are facing a though situation where the supply constrains are preventing them from capitalizing on economies of scale in crop production. Conversely, high tea sale prices are being completely off-set by spiraling costs of production.

Exchange rates remain stable

As forecasted by Bartleet Mecklai and Roy last month, the dollar / rupee exchange rate continued to edge upwards but the Central Bank moved to keep a lid on the rate below Rs109 per dollar. Exporter interests will continue to be served by a depreciating dollar that is set to weaken by the end of March as festive season import bills take their toll. However, the Central Bank will continue to intervene and will keep the dollar / rupee rate at below Rs109.20 during March. In any event, exporters have expressed a preference for macro-economic stability rather then a depreciating currency as a way of increasing revenues.


Whilst the governor ups the rate amidst a ‘junk’ sovereign rating

Sovereign Nuts and Bolts
Sri Lanka BB Median
GDP Growth 7% 5.60%
Inflation 11-12% 7.50%
Current account -4.9% GDP -1.9% GDP
Fiscal Deficit -8.7% GDP -2.7%GDP
Public Debt 92.9% GDP 40.4% GDP
Net external debt 35% GDP 15% GDP
Reserves (mo. import)2.7 4.5

Source: Fitch Ratings



Meanwhile, the months Central Banks Monetary Policy meeting resulted in a rate rise of 0.5 per cent probably spurred by inflation data that showed a month-on-month fall from 20.5 to 19.2. However, it did not impress the rating agency Fitch very much. The current rating of BB-, downgraded in April 2006 due to the re-ignition of conflict is up for review. The head of rating said that despite an unblemished record of debt repayment and a proved ability to withstand shocks, the countries public finance position is unlikely to result in an improvement in rating.

A volatile stock market waits for peace

Rights issues from the banking sector and heavy interest in Sri Lanka Telecom kept the stock market ticking over during February. However the underlying feeling was dominated by concern on the lack of progress on the peace front according to BMS Research. The month witnessed an overall gain of 3.6 per cent on the MPI and two per cent gain in the ASPI.

Plantation stocks picked up for the first two weeks before falling back to the same levels.


March expected to see similar pattern

With brand buyers playing an active role at the auctions, demand for quality teas should hold firm during the month despite supply constraints that will continue. Consequently, the cost of production at the estate level will continue to cause problems as producers will be unable to capitalize on any economies of scale.

Demand factors are not expected to change significantly, especially with regard to the Middle East markets. However, with the conclusion of the winter season in Europe and Russia, and the dawning of spring, demand factors could experience some fluctuations.

In the long-term, Sri Lanka will face stiffer competition from its rivals such as Indian and Kenya while newer entrants in the region will start gaining on the fringes. In this connection, Ceylon tea cannot continue to be complacent with regards to a world-class quality reputation that has held firm thus far. However, now that sector is facing heightened marketing campaigns from rivals. Also, production cannot continue to slack on a long-term basis. Whilst some of these issues are entirely in the hands of the sector players, other variables like the weather are in the realm of non-human forces.



NEWS HIGHLIGHTS

Ministry probes tea tampering: Newly appointed Minister of Plantation Industries has called tea researchers and authorities to investigate the adulteration of locally sold teas. He said that some persons in the sector engage in mixing tea sweepings and selling them to the local market in attractive packets. He also expressed concern on the possible damage to the islands reputations from mixing of cheap teas that are then exported as Ceylon Teas. The Minster is also upbeat about expanding tea growing areas to include other districts like Moneragala. The Ministry monitors 23 formerly state owned estates that were handed back to the private sector.

India re-thinks game-plan: As the Rs4500 crore Indian branded tea market only expanded by three per cent last year, the big players are reviewing their strategy. The world’s number two tea company, Tata Tea has announced its intention to heighten its acquisitions in the beverage sector. Analysts are expecting plenty of action this year that is expected to result in eight per cent growth. Godrej Beverages & Food has also claimed it will kick start a campaign to promote its tea brand from April this year that will include intensified TV campaigns featuring the Bolliwood star Saif Ali Khan.

Dubai Tea breaks record: Aggregate tea trade in Dubai rose by 9.21 per cent to a record 105.5Mkg in 2006, up from 96.6Mkg in 2005 according to the latest data out from the Dubai Tea Trading Centre (DTTC). An estimated 27 per cent of global tea imports arrive in the Middle East region. Since the DTTC was formed in 2005, 6.7MKg it has traded 6.7Mkg and expanded its range to process teas from 13 producing nations that include Kenya, India, Sri Lanka, Indonesia China and Iran.

Poverty growing in Sri Lankan estates: A World Bank report claims that the prevalence of poverty amongst Sri Lanka’s estate community has grown during the period 1990 – 2002 and is currently seven per cent higher than the national average. The headcount for 2002 according to the report was 30 per cent. Much of the cause can be attributed to remoteness and lack of useable year-round roads linking the estate household to towns. The report recommends policies that will link and mainstream the sector as the long-term solution to alleviating poverty.

Kenya to focus on quality: The Kenyan Agricultural Minister has requested the tea sector to focus on improving quality rather than trying to increase acreage. He was speaking at a world tea meeting at the Kaptumo Division during a ground breaking ceremony for a large tea factory that was being built by the Kenyan Tea Development Agency and small-scale farmers. He also suggested that where possible the farmers should venture into horticulture in order to fight poverty as there are large tracts of under-utilized fertile land.

Meanwhile, the Kenyan tea Unions have asked the government to find them new markets instead of discouraging them from increasing crop acreage. The Union stressed that new markets in Western Europe have not been explored properly.

Indian data: India’s tea industry has reported record production and exports after being cowed by international competition and weak domestic demand for the past nine years. "The Indian tea industry (is) beginning to look up, with overseas demand on the increase, mainly due to very good quality teas produced by us," said a senior Indian Tea Association official in Assam state where over half of India’s tea is produced. Since 1998, the $1.5 billion tea sector had been struggling, but now the mood is said to be vibrant. Last year a record 955Mkg’s was produced, an improvement of 29Mkg whilst exports rose 8Mkg to 200Mkg. India is further supported by a resurgence of domestic demand, rising from 620Mkg in 2004 to 805Mkg in 2006. It is claimed that global demand for Indian tea is picking up due to considerable effort on the part of the industry to promote and reposition its self as a top-quality supplier. Countries like Pakistan, Egypt, Iran and Iraq are now figuring prominently amongst India’s export destinations.

Myanmar collaborates with India: Myanmar, who produce around 90Mkg of tea each year, announced that it was collaborating with India in order to develop its tea industry. In particular, it was seeking support from the northern state of Assam where the majority of Indian teas are produced. Over half of Myanmar crop is green tea and around 31 per cent consists of black tea.