A golden era in plantations…


New National Policy

An official plantation policy was launched earlier this month following a presentation made by the Plantation and Industries Minister in Colombo. The National Plantation Industry Policy covers the traditional tea, rubber and coconut cultivation as well as sugar cane, cashew and Palmyrah. These crops together account for a large share of foreign exchange earnings and provides one fifth of the national income. The Minister claimed that he is eyeing an increase in productively of five per cent.

A key facet of the new strategy is the aimed at increasing productivity and profitability of both the corporate and small holder stakeholders. The Minister of Coconut Development said that the new program introduced last year with the objective of promoting self sufficiency and enhancing the coconut processing industry has already had an impact. The coconut sector achieved a growth of 6.7 per cent during last year.

Given the international trend towards increased tea consumption, the need to cash-in by focusing on quality teas was also emphasized. Players in the sector have long been calling for the local industry to place a greater emphasis on value addition areas as it can fetch much higher earnings.

Other elements of the policy include measures to address the aging workforce, out-migration, empowerment of the workforce and the introduction of new technology. The Project Director of the Plantation Development Project claimed that the new policy will pave the way for a new era in the history of the plantation sector in Sri Lanka. The island’s plantation sector is well over 150 years old whilst the Ministry of Plantation Industries was established in the early 1970’s.


In depth -Tea

April witnessed some improvement in the quantities sold at the Colombo Tea Auction where, despite the festivities, four sales were still squeezed in. Pekoe teas started the month on a high and maintained throughout as interest from Syria, Dubai, Saudi Arabia, CIS and Russian held firm. Tippy teas also experienced good demand from Iran, Syria, Dubai as well as moderate interest from the CIS. Overall, the market remained buoyant as buyers seemed to anticipate a year of reduced crops. As compared with March, April saw a widening of price parity between the best and below best varieties for most teas according to analysts at Bartleet Produce Marketing.

The high grown tea prices started to descend from the dizzy highs of the first quarter whilst the low growns maintained and in some cases finished at a higher selling price. As the supply concerns started to ease, the price parity between the best and below best teas started to narrow in many categories. For instance, the difference between BOP Best and BOP Other teas narrowed from Rs150 to Rs100 during April whilst the difference between BOP1 Select Best and BOP1 Secondaries narrowed from Rs68 to Rs40.




Exports down, earning up

The latest data indicates that tea shipments during the first quarter of 2007 witnessed a drop of four per cent to 74.4Mkg as compared with the all time high of 77.8Mkg achieved during the first quarter of 2006. Nevertheless, export earnings rose as a result of a hike in prices arising from supply-side fears. The first three months of 2007 earned a total of Rs23.6 billion ($217m) compared with Rs21.7 billion ($213m) in 2006. Whilst the rupee has depreciated by around 6.9 per cent, it was the sharp rise in tea prices across the board that has resulted in the earnings hike. Whilst the figure represents a record, surpassing the $207 million earned in 1998, players in the industry have had to endure various challenges arising from industrial action and poor weather during the quarter.

The currency strengthened during the early part of April due to a spike in demand for rupees as the festive season drew nearer and people sought more liquidity. Consequently more dollars were converted into rupees and the money rates increased by more than three-fold. Following the holidays the rupee depreciation returned to the regular pattern. According to analysts at Bartleet Mecklai Roy, exporters can expect the exchange rate to be between Rs110.80 and 111.00 till the end of May 07.




Outlook favorable, conflicts remain

The macro-economic outlook for 2007 is favorable to the plantation industry according to some analysts, with the Sri Lankan economy predicted to maintain its growth momentum and expand at 7.5 percent and inflation projected to moderate during the year. Although the global economy is facing a cyclical slow down in 2007, demand for other plantation crops like rubber is expected to grow, largely fuelled by rising Asian demand, thereby improving the prospects of those plantation companies with a diversified crop range. Low inventories in most tea importing countries and high oil prices would also be expected to contribute to strong demand for Sri Lankan teas by the Middle East and the market scenario is projected to be buoyant through 2007.

However, some officials have warned that the full impact of the wage increase granted with effect from November, will be felt in 2007 on individual plantation companies. The danger comes from higher costs of production and the absence of a productivity linked wage regime that will continue to hinder Sri Lanka’s global competitiveness. It could pose a major challenge to the long term viability and sustainability of the plantation industry.

The ongoing war of words between the government and the sector players also continued as the Cabinet agreed to release all funds of the tea export cess that included Rs.233 million from last year. The move follows earlier complaints by players who leveled that the Treasury’s delay in releasing funds had affected promotional work, re-planting, factory moderizations and other aspects of business. Moreover, the Tea Small Holders stressed that it was illegal for the government to withhold these funds that are meant to be utilized for the industry’s benefit.

Whilst the news was met with relief, stakeholders were alarmed by a new government proposal seeking to increase cess to six rupees per kilo from its current rate of four rupees. Prior to April 2006, the cess was only Rs.1.50 per kilo. It is claimed that the new increment is required in order to subsidize fertilizer for both Small Holders and regional plantation companies. The Planters Association and other stakeholders have expressed their dislike for the initiate.

April witnessed the ASPI gain by 31.84 points whilst the MPI increased by 21.48 points. Overall, the market was described as dull and lacking in activity according to BMR Research.




Copyrights Reserved (RIU 2007). Prepared exclusively for the Business Standard.






NEWS HIGHLIGHTS

Ceylon tea in Karachchi: A tea promotion center will be set up in Karachchi, Pakistan to increase tea exports. Sri Lanka’s cost of production have escalated resulting in high prices that may be less competitive in the Pakistan market.

“Focus Sri Lanka 2007”: Sri Lanka demonstrates its wide-ranging appeal in the areas of commerce, tourism and marketable products ready for the US market and beyond. “Focus Sri Lanka 2007” exhibits exotic and marketable Sri Lankan products and services that this beautiful country has to offer something to everyone. Focus Sri Lanka brought 40 innovative Sri Lankan exporters together with serious American buyers in search of extraordinarily unique imports and also demonstrate the nation’s attractive investment opportunities and world-class manufacturing and fulfillment abilities.

Agalawatte profit up: Agalawatte Plantations posted its highest ever turnover of Rs.1.32 billion and a net profit of Rs.90.3 million for 2006 which is a near three fold increase compared to 2005. The annual statement, attributed this to the company's focus on product quality and strict financial discipline, while noting that the results would have been much better, if not for the cumulative adverse impact of the island-wide plantation sector ‘go slow’ campaign and strike, increased wages which came into effect in November, removal of the fertilizer subsidy and escalating input costs. The company posted a much improved earnings per share (EPS) of Rs.3.61 compared with the EPS of Rs.1.26 in 2005. The turnover was 17 per cent above 2005. The company expects to see a positive contribution from the major crop diversification project of oil palm, following the commissioning in January of a state of the art palm oil factory

Labor crunch: A World Bank study claims that the number of tea workers in each family living on the estates has statistically dropped from 2.6 workers to 1.9. Some experts expect plantations companies to face a labor shortage and expect a switch to mechanization like the use of shears for plucking 'two leaves and a bud', instead of manual plucking. One more option under discussion is to lease out plantation lots to workers, buy their leaf and only run the factories. Changing lifestyles have also deterred managers from taking up jobs in the estates. The result of this is that each year estates suffer a 10per cent reduction in both middle management and labors.

India eyes Egypt: India has achieved a breakthrough for 6 Mkg of CTC tea in the Egyptian tea market. Tea Board Officials believe that private imports from India would also increase to about 6 Mkg from 2.7 Mkg now. For India, this means an incremental 9 Mkg of CTC tea exports to the African country which has been mostly dominated by Kenya.

Peace tea: An Indian tea delegation comprising tea producers from South and North India is likely to visit Pakistan on the invitation of the Pakistan Tea Association (PTA). Pakistan is the second largest importer of tea in the world following Russia, with around 140 Mkg imports each year of which is around 85 Mkg is from Kenya. In recent years Pakistani tea imports from India has been rising. Figures showed that in 2005 Pakistan imported around 10 Mkg of tea from India which rose to 12 Mkg in year 2006 and this year India is likely to touch 16 Mkg. Indian tea exporters are striving hard to enhance their share of Indian tea brands in Pakistan. However, the issue of the shipping services is one of the factors that makes Indian tea uncompetitive in Pakistan. Despite the signing of a shipping protocol, regular direct sailing between the two countries is yet to materialize while in this respect, Kenya has a clear advantage. The shipping services between Mombasa and Karachi ports are direct and regular and freight is competitive.


Source: The Research Intelligence Unit.