Business Tea Report

Seasonal and brighter teas in high demand

Bartleets Weekly Tea Surveillance up to February 19:

The quantity of tea arriving at the Colombo Auction this week increased to 6.800 mkg from 6.466 mkg traded in the previous sale. The Ex-estate crops too have increased to 0.856 mkg from 0.755 mkg.

Market segments: In the Ex Estate segment, seasonal teas and brighter teas were in demand and sought after by Japan and the UK. The immediate impact of the Kenyan crisis is set to ease-off somewhat and lead to a normalization of the prices for most varieties in the upcoming sales.

However, the brighter teas will not be affected. Meanwhile plainer varieties too are witnessing an overall lower demand. In the Tippy market segment, lower demand was witnessed for most types with buyers from Iran and CIS playing a very selective role at the sale whilst Turkey and Saudi Arabia maintained a moderate buying pattern.

In the Leafy-grade segment, the market showed an improvement with the Best OP, OPAs and Pekoes in particular meeting with strong demand. The bottom teas too had a higher demand with most of the shippers to Iraq being active. With the offerings of the future sales maintaining a figure of approximately 6 mkg most local buyers have confirmed their orders with their foreign counterparts.

Crop Analysis: Total tea production in January topped 26.277 mkg as against 21.301 mkgs in the corresponding month of 2007. Whilst the CTC teas experienced a net fall in production, the Orthodox teas gained by a healthy 26.33 per cent, year-on-year. Elevation-wise, production was significantly higher all round with the High-grown teas gaining by 22.8 per cent, the Medium-grown crops by 53 percent and the Low-gown by 18.25 per cent.

Supply analysis: According to industry sources, Sri Lankan tea prices are anticipated to stay strong in 2008 due to international supply disruptions caused by the violence in Kenya which may have long-term repercussion as thousands of Kenyan tea estate workers are said to have fled their lands due to fear of tribal violence.

The first quarter of the year will reflect this trend impacting on global supply whilst long term repercussions will unfold in the second quarter and third quarter of the year. Commentators have also noted that out of the 304 mkg of tea manufactured per annum, almost 300 mkgs is being exported overseas, representing over 90 per cent of the production.

As this is a low import input industry which can demand a BOI status just like any garment factory it should be extended BOI concessions and facilities that will help to drive exports to $2 billion by 2017 and firmly establish the island as the worlds’ favourite tea source.

Demand analysis: From the demand perspective, the forecast is of rising demand from consumers in oil-rich countries who have started to enjoy a higher standard of living in recent years from the increased oil wealth. This will serve to boost Sri Lankan tea according to most sector analysts.

Another market filled with promise in 2008 is to be found in China where the impact of a number of promotional activities has appeared to have had an impressive impact as exports have grown by 65 per cent. All the more remarkable when considering that the Chinese are essentially green tea and Oolong tea drinkers.

However, since 2003 black tea consumption has grown from 172 tonnes to 880 metric tonnes up to November 2007. The islands tea also enjoys a preferential tariff rate of 7.5 per cent under the APTA as against the general tariff of 15 per cent. Currently, there are 35 tea exporters to China as compared to 26 in 2006.

Trade Data: External trade performance for 2007 indicated a relatively moderate growth of 5.6 per cent with a trade deficit of US$ 3560 million. Exports had recorded a growth of 12.5 per cent for the entire year amounting to US$ 7740.5 whilst tea had been the largest contributor in the agricultural sector amounting to 16.3 percent growth.

However, according to the Plantation Ministry, the past three years had witnessed a gradual decrease in production from 317 mkg in 2005 to 310 mkgs in 2006 and 305 mkg last year.

The main reasons for the drop have been given with reference to climatic changes, soil erosion, increase in cost of production, lack of re-plantation and labour unrest.

Meanwhile, according to some research a five percent drop in the use of fertiliser can have a foreign exchange earning loss of Rs. 2.8 billion for Sri Lanka.

Yet, performing against all odds, the tea industry demonstrated a record performance in 2007 reporting an export growth of 22 per cent to reach a magical number of Rs. 112 billion, where as the revenue had increased by nearly 42 per cent year-on-year.

Company news: As Coca-Cola is diversifying beyond carbonated beverages it has agreed to pay $43 million for a 40 per cent stake in Honest Tea Inc. Sources claim that it is also looking to buy the rest of the company following a three year period. The strategy is aimed at improving Coca-Cola’s stake in the beverage market and winning back consumers who have cut back on sugary sodas.

Stocks/Currency: The positive market forecasts in the industry has served to revive the plantation stocks that surged early this week helping to prop-up the ASPI and MPI. The charge was led by Madulsima plantations on Monday which shot up 4.75 rupees or 42 percent to 16.75 rupees.

With reference to the weekly surveillance of the 19 plantation stocks, 18 were high in value whilst one reported static. Madulsima, Horana and Bogawanthalawa witnessed a significant gain of 51, 36 and 30 percent respectively week on week. The dollar traded at between Rs. 107.85 and Rs. 107.86.