ICRA Lanka sceptical of sustained higher tea prices

„Strong correlation between tea and oil prices identified

When all else seemed gloomy and commodities prices were set to take a plunge from the coronavirus-induced economic damage, one commodity stood out unscathed, i.e. Ceylon Tea, but analysts said all is not well with it as many factors were at play and thus questioned the sustainability of the record high prices going forward.

Ceylon Tea, which was forced to shift its weekly auctions into an electronic platform since the beginning of April due to mandatory social distancing measures, set record prices throughout the month with the monthly average hitting an alltime high in April.

According to data released by Sri Lanka Tea Board (SLTB), the national sales average for Ceylon Tea reached Rs.689.18 per kilogram, the highest ever recorded in a calendar month eclipsing the previous best of Rs.648.52 recorded in April 2017.

“Prices at Colombo tea auction rose during 2020 Q1. This was largely attributable to the global supply shock from unfavourable weather conditions in most black tea exporting nations”, said the research team at ICRA Lanka in a special note after observing soaring tea auction prices during April.

The rating agency, which is part of Moody’s Investors Service, expressed skepticism over the sustainability of the medium to long-term trajectory of the current level of prices, which had been pushed up by multiple factors.

They said the current prices were induced by the tumbling global supply of tea due to labour deployment issues caused by the pandemic and adverse weather.

At the same time Sri Lanka’s tea production declined by nearly 30 percent quarter-on-quarter basis.

Further, they also said the prices had seen a tailwind from the weaker local currency against the US dollar, which depreciated by 3.9 percent year-to-date and the pandemic induced additional demand for tea.

“Weaker local currency, demand induced by the perceived health benefits of black tea and higher tea consumption amidst lockdowns have also helped the Ceylon tea prices to stay buoyant for the said period”, they added.

ICRA Lanka expects these higher prices to a larger extent to compensate the financial performance of the producers, who are impacted from the lower tea production.

John Keells PLC, the tea broker recently said Ceylon Tea is less susceptible for global economic downturns and projected higher prospects for the leading agricultural export commodity in 2020 and beyond.

However ICRA Lanka, which analysed the past data observed a, “relative strong correlation between oil prices and Sri Lankan tea prices,” said they would continue to watch the, “sustainability of the current price levels”.

The rating agency in a comprehensive report, which looked at the sector-wise impact of the coronavirus in mid April forecast the tea prices to be impacted due to the economic instabilities of the main exporting markets caused by the economic shutdowns and the record low oil prices.

Global oil prices have plunged during March intensifying the fall in April due to the absence of demand as the economies and businesses were in hibernation.

But since May, prices have begun to rise due to countries easing stay-athome orders and lockdowns as people are returning to work and factories are resuming operations.

Sri Lanka exports 48 percent of its tea to five markets highly linked to oil; Turkey, Iraq, Russia, Iran and Libya.

In a commodity market outlook report released at about the same time to that of ICRA’S, the World Bank said although the commodities prices are set to remain subdued in 2020, led by energy and metal, the prices of agricultural produce are likely to remain broadly stable through 2020.