Tea industry overview- 2011

January 5, 2012, 12:00 pm 

By Forbes & Walker Tea Brokers (Pvt) Limited

The year 2011 commenced in the backdrop of many milestones that were achieved in 2010.

If we are to analyze the events that unfolded during the 1st Qtr 2011, in retrospect and review the performance of the tea industry, it would give a great deal of relief and satisfaction. Colombo auction in January had volumes of 6 m/Kgs and above whilst maintaining healthy prices ie: marginally higher to the corresponding levels. By the end of January 2011 total auction average of Rs.394.29 recorded a growth of Rs.4.55 vis-a-vis Rs.389.74 of 2010.

A significant development during the 1st Qtr was the spate of social unrest that spread across the Arab world and North Africa affecting some of our key consumer countries. Tunisia, Lybia and Syria are some of the key destinations that were affected by these developments. Whilst, these developments were unfolding, Japan too was faced with a massive earth quake which resulted in a Tsunami. Needless to say, these destinations are important Export destinations. for Sri Lankan teas.

These events no doubt created a lot of uncertainty. Yet another draw back was the Western Quality season which was a disappointment, particularly in terms of quality, primarily due to the erratic weather that prevailed. Notwithstanding the above facts, Colombo auction prices steadily gained to record Rs.404.12 by the last sale of February to show a gain of Rs.29.50 vis-a-vis Rs.374.62 of the corresponding sale average in 2010. It is noteworthy to mention that prices from all elevations ie: High, Medium and Low showed a growth. This momentum was maintained during March with prices continuing to maintain healthy levels and more importantly higher than the corresponding period. However towards the end of the 1st Qtr, Low Grown prices appeared to lose its momentum, due to the uncertainty/unrest which was evident in some of our key consumer markets, ie: Libya, Syria and Tunisia

Sri Lanka tea production of 75.6 m/Kgs during the first Qtr showed a marginal gain vis-a-vis 74m/Kgs of 2010. It is also noteworthy that during March 2011, national production of 33.2 m/Kgs was infact the highest ever recorded for the month. Sri Lankan Tea Exports too showed a growth YoY. Total volume of 77.4 m/Kgs showed a growth of 7.2 m/Kgs or 10.2% vis-a-vis 70.2 m/Kgs recorded in 2010. However a more significant feature would be the total revenue realized of 40.96 bn which incidentally is the highest ever for the 1st Qtr showing a growth of Rs.6 bn, vis-a-vis Rs.34.95bn of 2010, a gain of 17.1% YoY.

2nd Qtr commenced with high auction quantities compared to the previous Qtr and significantly higher to the corresponding Qtr of 2010. This no doubt had an impact on quality too. Nevertheless during the month of April prices continued to maintain reasonable levels, particularly in the High and Mid Grown category. Low Growns however appeared unsettled and price levels were below the previous year’s levels. By May 2011, the events that kept on unfolding in our consumer markets, took its toll on the Colombo Auction prices. By this time the Medium Grown and High Grown prices too continued to slide with Low Grown’s clearly below that of the corresponding levels in 2010. Although, High and Mid Growns were able to sustain its price levels and were comparable with the price achieved during the corresponding period of 2010.

When analyzing the Sri Lankan production during the 2nd Qtr a total of 89.3 m/Kgs were harvested vis-a-vis 95.3m/Kgs recorded during the corresponding period of 2010. Although the production seems low in comparison to 2010, it could be considered acceptable as the 2010 2nd Qtr production of 95.3m/Kgs was the highest on record. Exports too continued to maintain and a total of 72.2 m/Kgs were exported which resulted in realizing Rs.36.7 bn vis-a-vis 36.4bn achieved during the corresponding period of 2010 after having exported 73.1m/Kgs. On cumulative basis total exports of 149.6 m/Kgs showed a growth of 6.4 m/Kgs over the previous high of 143.2 m/Kgs achieved during the corresponding period of 2010. In value terms too Rs.77.6 bn recorded for the period established yet another milestone being the highest surpassing the previous high of 71.3 bn recorded in 2010 by Rs.6.3 bn.

3rd Qtr commenced with Low Grown prices continuing to slide compared to the corresponding period whilst High and Mid Grown price levels too were lower and more so, during August and September. Yet again the Uva quality season was a disappointment due to the erratic weather conditions that prevailed with the exception of a few invoices which showed some quality, others were plain. Another significant development was the increase in the wages of the estate workers as per the collective agreement with the trade unions that came into effect during this period impacting on the cost of production. Consequently, the C O P’s surpassed the net sale averages of most plantations.

In addition to the highly volatile market. Around this period, another crisis was in the offing, that been the Euro-Zone debt crisis which too impacted tea prices worldwide. This was primarily due to the currency fluctuations of the Euro vis-a-vis the dollar.

Tea Production of 71.09m/Kgs (3rd Qtr) 2011 shows a deficit of 7.8m/Kgs vis-a-vis 78.9m/Kgs of 2010. The total cumulative production of 245.1 m/Kgs showed a deficit of 3.1 m/Kgs vis-a-vis 248.2m/Kgs of 2010. Exports totaled 86.3m/Kgs during the 3rd Qtr realizing Rs.42.63bn in revenue thus showing a gain of Rs.0.9bn YoY. Another noteworthy feature is that January-September 2011, total exports of 236m/Kgs showed a gain of 5.9m/Kgs vis-a-vis 230.1m/Kgs 2010. By the end of the 3rd Qt, revenue totaling 120.3bn was realized showing an increase of 7.3 vis-a-vis 113.0bn of 2010. This too is the highest ever revenue for the period under review.

4th Qtr commenced with no appreciable change as prices continued to be lower than the corresponding level. Low Growns too by this time were significantly lower to the corresponding level and this trend continued well into November with Low Grown’s in particular showing a substantial decline. By end November/early December however subsequent to the de-valuation of the Rupee , there was a resurgence in prices for Low Growns which showed a positive gain Month on Month. However High and Medium prices did not show any appreciable change.

At the time of compiling this report, the export/production figures were available only upto end Nov. Hence when analyzing the cumulative production for the period Jan- Nov 2011 of 302.1m/Kgs shows only a marginal decrease of 1.9m/Kgs vis-a-vis 304.1m/Kgs of 2010. Therefore in the event December crop for 2011 exceeds 29.4m/Kgs the total production for the year will surpass last year’s figure of 331.4m/Kgs, thus establishing a new record. Exports too for the period Jan-Nov, totalled 292.4m/Kgs vis-a-vis 285.9m/Kgs. The total revenue too of Rs.149.5bn for Jan-Nov 2011 show a gain of Rs.8.5bn vis-a-vis Rs.141bn of 2010. Here again, if the December total revenue exceeds Rs.5.9bn which is very likely, yet another record in terms of revenue realized will be established.

Prospects for 2012…

In the backdrop of the uncertain conditions that exists in some of Sri Lanka’s key tea exports destinations attempting to analyze market prospects could have a strong element of ‘Crystal ball’ gazing. Nevertheless, a logical approach would be to analyze the past performance of the industry and equate it to supply/demand scenarios that are likely to emerge during the year.

In 2010, Global Tea Production crossed a new milestone of 4bn Kgs, consequent to some key producer countries achieving all time record crops. However, based on the availability of data as of now, 2011, is likely to record a positive variance of approx 90m/Kgs, which would mean the Global Tea Production is mostly likely to better its previous record. However, the majority of this increase is from China which is predominantly a ‘Green’ tea producer. Furthermore, with the normal increase in global consumption per annum at a conservative 2.5%-3% would require a further 60-70m/Kgs. Therefore, we could even predict a tight supply position as we approach 2012.

The political unrest which in turn affected on the economics "in the Middle-Eastern region" had a cascading impact on the Sri Lanka tea market, particularly and demand for tea in general during the 2nd half of 2011. This could be considered the most significant adverse development impacting tea prices. Consequently, prices which commenced on a strong note ended the year substantially weaker.

December 2011, would have recorded even a sharper decline compared with December 2010 if not for the 3% devaluation of the SLR in November last year. This brings into focus the sharp decline in the Colombo Auction averages which have eased off to a greater extent when compared with certain other Auction centers which could be attributed to Sri Lanka’s dependence and its affects following the uncertain conditions/downturn of the Middle Eastern economies.

With this background, the following factors are significant in looking forward to 2012:

= Global Tea Production during the first quarter is normally the lowest during the year and all indications as of now, is that this year would be no exception. Therefore, the weekly Auction quantities during the first quarter of 2012 are likely to be low in most Auction centers.

= From a Sri Lankan’s point of view additional buying interest is likely to emanate for seasonal teas from the Western slopes.

* Greater interest from some of Sri Lankan key export destinations showing some element of stability following the political unrest last year which disrupted the smooth flow of tea.

= The 3% devaluation late last year which created a immediate impact on prices at the Auctions that followed will help to make Sri Lanka tea more competitive in the export market, it would be relevant to note that most other key producer/consumer nations have experienced devaluation in their currencies during the last year.

= The growth in tea consumption from India and China as a combination of its increasing population and the rising per capita income levels would result in the availability for exports declining from these countries, due to their internal consumption increasing. Yet another, development is the increase in popularity of Black Tea in China particularly amongst the younger age groups.

= Improved market activity from most importing countries is likely to emerge as the current price levels are significantly lower than the corresponding levels in 2010 & 2011. In addition, inventory levels in most importing countries are unlikely to be higher than the corresponding level of the previous year particularly the tea importing nations from the Middle-Eastern regions.

The above factors would enable to project a cautiously optimistic market scenario for 2012 with the expectation that the Colombo Auction averages should move up from the low levels decreased to during the last quarter of 2011, whilst, it may be over optimistic to predict the dizzy heights that we reached during the first quarter of 2011 at this point of time. It is also important that the cautious optimism for the tea market in 2012 be linked with the accent on maintaining a reasonable and consistent quality throughout the year.