2008: good year for tea producers

Sri Lanka’s world of tea has had its fair share of shocks over the past 10 years.

The Russian currency and banking crisis in 1998, invasion of Kuwait in August 1990 till Liberation in January 1991 and invasion of Iraq in March 2003, all took their toll on Sri Lanka’s tea industry.

In each instance issues were restricted to one or a cluster of countries in a limited geographic area. The Russian problem was reduced in intensity by continuation of normal commercial activity in the Middle-East / North Africa and other markets. The reverse was the case when the Middle-East was destabilized.

The global financial crisis does not need any further description at this point, but it would be necessary to focus on its consequences and relevance to the tea industry in 2009. What damaged the tea industry the most was the global nature of the crisis and its impact on most of Sri Lanka’s critical customers.

The problem was two fold - direct impact on the value chain at micro level and macro issues such as weakening of currencies, banking crisis, declining oil prices and recession.

The market for orthodox black tea is the foundation for Sri Lanka’s Tea Industry. Petro Dollar economics of Russia / CIS and Middle-East / North Africa have always paid a premium for Orthodox Ceylon’s. Further these markets absorb a significant proportion of all value added exports from Sri Lanka.

These pure Ceylon tea brands play a major part in keeping Colombo’s tea prices above global levels, but could loose heavily in markets that have currencies that are weak against the SL rupee, on the positive side tea is an essential food item globally.

Movement of product off the shelves during the recession is evidence of this. Challenge for suppliers would be the Summer months when consumption declines. But inventories would be low.

Supply Factors

Fertilizer will be more accessible to tea growers due to lower cost which are forecast to remain at least till Q3 ‘09. Tea prices, margins and historic losses, will however determine the number of applications during the year.

If the weather holds true, production from main producer exporter countries will remain steady.

Meanwhile the dry Q1 conditions in Kenya, winter in North India and Vietnam will ensure that the supply side remains tight until April. Impact on tea production caused by dry weather in Argentina (40 MnKg in 2007) is not yet known. Any short fall in Kenya would have an impact on prices for small leaf High Growns in Sri Lanka.

In Sri Lanka, Q1 production will be low due to extended dry weather across the Island, low fertilizer application since Q4 2008 and pruning of some Small Holder fields during the market crash.

If rains resume mid March crop increases could be expected after New Year in April. Regional Plantation companies (RPC) are due to negotiate wages by march ‘09. There could well be a break down given the heavy losses made by RPCs and pessimistic market out look for 09.

Shipping

Rates have declined with more ships chasing less cargo and fuel costs sharply lower, Industry sources anticipate that rates will remain in favour of the shipper at least till Q3 2009.

Money and Banking

We believe that a further deterioration of the currency and banking situation in Russia and Iran, strong buyers, will have a direct impact on the market for Ceylon’s Dubai a major trading center and trans shipment port for Low growns is not very stable at the moment. Pakistan is in trouble, but is the major player in Kenya.

A crash at the Mombassa auction will hurt High Grown Ceylon’s. The strong Rupee in Sri Lanka will continue to add cost to our overseas buyers in comparison with India and Kenya whose currencies have shed value.

On the other hand Sri Lankan Exporters lose margin to top of high interest rates while facing inflationary pressure on costs. The global credit crunch will continue to stifle trade and will restrict traders more than producers. In Sri Lanka producers and Traders are increasingly finding it difficult to raise credit.

Out look

The World Bank in its Commodity Markets Review of February 2009 commented “Tea prices rose 13.8 percent on higher imports by China and several European countries. Cocoa prices rose 9.6 percent on reports that the cocoa market is heading into deficit for a third consecutive year, and as arrivals at the port of Abidjan were 27% lower than a year ago, Coffee (Arabica) prices rose 7.8 percent on reports that the 2009/10 season may face a deficit of 5 million bags (about 4% of global production) because of reduced output in Brazil”, unquote Elsewhere in the report it shows that other food prices such as Rice 9.1%, Sugar 7.1%, and Wheat 8.6 have also risen in value. Price increases for tea are therefore consistent will other essential food items.

On the balance the positive factors out weight negative ones. We believe therefore that tea prices will hold firm throughout Q1 with a probable dip in values mid Q2. With pre winter buying resuming in Q3 we expect a gradual recovery thereafter.

Low growns with a mix of leafy orthodox teas have a more diversified customer base with few substitutes. If the SL Rupee does not concede much ground in 2009 these teas would settle at a level in line with prices that prevailed pre Q4 2007.

High growns are more vulnerable to global forcers and reliant on pure Ceylon Tea brands to ensure a premium. Q2 and Q3 could be a difficult period unless supply is Interrupted.

Overall we expect prices to fluctuate over short spells as buyers will tend to operate on low Inventories, confirmed orders and payment on sipping. Credit businesses in restricted by the Central bank and will be at high risk in 2009.

Market review 2008

Auction Performance Overview

It was a good year for tea producers spoilt by a fourth quarter price slump caused by the international financial crisis. The global commodity price rise during the year did benefit tea as well in terms of sentiment. Retailers were able to increase shelf prices after many years and packers to absorb higher tea costs. The market for Orthodox Ceylon Teas however had a life of its own.

Sri Lanka sold a total of 300.7 MnKg marginally higher than the quantity of 299.3 MnKg the previous year. Of this quantity 264.8 MnKg was sold through the Public Auctions, a significant 9% more than the previous year.

With the collapse of the market in Q4 2008, the Sri Lanka Tea Board and the industry collectively agreed to ban Private Sale of Orthodox leaf tea out side the auction. As a result tea sold by private contract declined 38% from 55 MnKg in 2007 to 34 MnKg in 2008.

This step proved effective and concentrated all demand in the auction room. The trading restriction through curtailing freedom of buyers and sellers has remained in place in Q1 2009 and could well be continued thereafter.

In the last quarter, 2007 Kenya’s post election violence and disruption in tea growing areas and the Mombassa port, curtailed production and movement of tea within and out of the country in Q1 ‘08. Other African producers were also prevented from reaching the Mombassa auction as the land route through Kenya was risky.

The Dar es Salam feeder port and Mombassa were also severely congested. North India was in winter. In Sri Lanka, the Western quality season had curtailed production and improved quality on the Western slopes of the higher elevations.

The interruption to supply had its impact on the market in December 2007 and well in to February 2008. Rising oil prices since 2007 boosted earnings amongst Sri Lanka’s biggest client base; the Middle-East / North Africa and Russia / CIS. These markets absorb more than 85% of the country’s exports and ensure than Colombo Auction price levels are at a premium over other centers.

Sri Lanka’s own pure Ceylon Tea Brands, and International packers loyal to Ceylon Tea added a further dimension to unique demand at the Colombo Auction. Colombo price gains were not in isolation. Indonesia, India and Kenya all had a bull run.

The Colombo auction average for Low Growns kept rising till July and then the slide began and accelerated in October. Comparatively the High Grown market was maintained in October but slipped in November and following the general trend crashed in December.

To be continued

(All details extracted from Asia Siyaka Commodities (Pvt) Ltd., Annual Report 2008 and Outlook 2009)