Uncertainty in Sri Lankan tea business continues

Global tea prices are set to stay strong through 2012, with demand driven by growth in Asia, according to the United Nations Food and Agriculture Organisation (FAO).

The agency’s Intergovernmental Group on Tea said that the high price of tea, which averaged $2.85 per kilogram in 2011, reflects the fact that the demand for black tea – accounting for most of world production – has exceeded supply since 2009. The group added that the higher prices resulted in an estimated 2.2 percent increase in the export earnings of producing countries last year.

Global tea consumption grew by 5.6 percent in 2010 – the latest year for which figures were available – to four million tonnes. This increase was underpinned by the rapid growth in per capita income levels, particularly in China, India and other emerging economies. In China, total consumption reached 1.06 million tonnes in 2010 – the largest in the world – while in India it reached 828,890 tonnes, the FAO said in a news release.

Global production meanwhile increased by 4.2 percent to 4.1 million tonnes in 2010. Black tea output increased by 5.5 percent in response to record prices, while green tea output increased by 1.9 percent. China remained the world’s largest tea producing country with an output of 1.4 million tonnes and a 33 percent share of the world’s total.

Looking ahead to the next 10 years, the group estimated that world black tea production will grow at almost 1.9 percent annually to reach 3.28 million tonnes by 2021 and also come into equilibrium with demand at a price of $2.75 per kilogram – just under the current price

Global tea production reached 3447.57 million kilogram in 2011. While tea is produced in more than 35 countries, only a handful - China, India, Sri Lanka and Kenya are responsible for almost three-quarters of production. Almost 56 percent of all tea produced worldwide is consumed locally.

Sri Lanka in uncertainty

Sri Lanka’s tea production in 2011 fell 0.9% to 328.37 million kilograms from 329 million kilogram in 2010. Sri Lanka now occupies the fourth place in total production volume and is still one of the leading exporters, after Kenya. However, its declining importance has been observed. Its share of world trade has dropped from 40 percent in 1970 to 27.9 percent in 2000 and to 21.6 percent in 2011.

Furthermore, its 7.5 percent production volume increase in the last 11-year period is far less than the impressive increases of competitors in Asia and Africa, such as India by 21 percent and Kenya by 60 percent.

Meanwhile, the tea industry is facing problems over the reduced tea consumption in the European region due to the persisting eurozone crisis. According to the FAO, by 2021, Briton is forecast to consume 15% less tea than 15 years earlier, which is a concern for the tea industry. The British are the largest consumers of tea per capita.

Year 2012 story

Sri Lanka’s tea production in January to July, 2012 has been reported to be less by 4.4%, from 195.8 million kilogram in 2011 to 187.3 million kilogram in 2012, during the same period.

Rising cost of production in Sri Lanka is another worry. The total cost per kilogram of made tea has gone up from Rs.121.97 per kilogram in 2001/2002 to Rs.355.02 per kilogram in 2010/2011.

Average auction price at t he Colombo Auctions also dipped to Rs.355.77 per kilogram, equivalent 9.7% below the last year level.

Sri Lanka’s tea exports for the first quarter of 2012 reached 76238 MT, a 4.3% decrease over the first quarter of 2011. The year 2012 story is not very encouraging.

Continuing debate

Another issue- Sri Lanka’s tea industry is deeply divided over plans to boost earnings by importing cheaper leaves for blending and reexport, over fears the changes could water down the ‘pure Ceylon’ brand. The country has long been a leading exporter of the commodity, but now a section of the tea industry wants to import leaves from countries such as Kenya, Vietnam and Indonesia and blend them with higher quality local produce.

It has been argued that Sri Lanka could almost double its exports of 300 million kilograms (660 million pounds) annually by taking a ‘realistic’ view of the world market and blending its tea with cheaper imports. Sri Lanka does not currently allow unrestricted tea imports for blending.

They argue that the high quality and the correspondingly high prices have placed ‘pure Ceylon tea’ beyond the reach of the lucrative mass market, even if the industry enjoys an enviable brand reputation. It has also been said that we lose out because our tea is too expensive and that we don’t have a (cheaper) tea that can compete in the mass market.

Sri Lanka conducts the world’s largest weekly tea auction where five to six million kilograms change hands, but turning the high-quality tea into humble and affordable tea bags is mostly done abroad by foreign companies.

Sri Lanka’s stance prompted Unilever to drop plans in the late 1990s for a factory in Sri Lanka and it instead set up its Lipton tea bagging plant in Dubai where they blend teas from East Africa and Asia -- including Sri Lanka. The factory currently produces 1.1 million bags of tea an hour and is set to be the world’s biggest plant by 2015.

Sri Lanka’s export lobby argues that the country’s refusal to import leaves is only helping to further establish Dubai as a tea hub. As things stand, millions of kilograms of Sri Lanka tea are blended abroad and many argue that the island could have better control over the product if the blending were done at home.

Another opinion for liberalization

Exporters within the industry proclaim that through liberalization, the exports of value-added teas can be maximized, given the provision of cheaper orthodox teas used for blending, which will enable exporters to reduce the FOB price of their teas.

The use of foreign teas for blending will enable producers to control for variations in agro-climatic conditions which affect the quality consistency of locally grown teas. This consistency in produce will increase the brand ability of the value-added exports, thus increasing competitiveness amongst brand-conscious consumers who seem to make up the majority of the global market.

Also, liberalization of i mports would lead to, increasing the export of value-added teas which will result in a number of additional benefits to the society. These include greater employment, increased foreign exchange and the potential of strengthening industrial clusters in the economy via forward and backward integration.

From the corporate sector’s point of view, plantations may be able to invest more into their CSR programmes, increasing the overall welfare of poor plantation workers, whilst reducing the need for government intervention in wages. Higher profit margins will also enable the corporate sector to invest in enhancing their production and productivity.

Another section of the industry, who makes up more than 80 percent of Sri Lanka’s tea exports says that the island should harness its local blending expertise and reclaim its role as a tea hub, a position being eroded by competition from Gulf nations.

They also say that tea is not indigenous to Sri Lanka. But, after a Scotsman named James Taylor planted the first tea bush -- the Camellia Sinensis in 1849 -- tea became a primary export and the nation’s main foreign exchange earner, initially as ‘pure Ceylon tea’.

The Treasury Secretary has said that, this nation should ban altogether importation of tea in order to ensure absolutely regulatory controls and supervision to maintain the integrity of tea, which should increase its export earning potentials three times from the current level at least over the medium term.

Dilmah is among key opponents of greater liberalization of tea imports. The firm and sections of the island’s industry fear that a ‘pure Ceylon tea’ brand identity may be hurt by allowing more imports.

Smallholders opine

We have to be very clear whether this is the gross sales value of tea sales, or the net value of Sri Lankan origin tea in favour of our motherland. We, the tea smallholders are certainly not interested in volumes of sale, but only interested in the total net revenue of sales values achieved in the Colombo tea auctions, this being the only realistic advantage to the farmer, processor and the labour force involved in the industry. The cheap tea imported to Sri Lanka will only be a win-win situation to blenders and exporters.

India’s worry

A Parliamentary panel has said recently that it is “gravely concerned” over the issue of re-export of cheap quality of tea by some exporters under the brand of tea of Indian origin, affecting the image and value of the country’s beverage in export markets.

It has been said that the committee is concerned on the unpreparedness of the Department of Commerce to deal with the unscrupulous exporters importing cheap tea from other countries and re-exporting it without any significant value addition under false certificate as quoting the genuine exporters of Indian tea.

The committee report opined that the “apathy of t he department” towards such practices has seriously undermined the image as well as value of Indian tea in the export market. It has asked the department to take urgent steps to redress the situation through a strict monitoring of the quality of tea being exported. Conclusion In trying to resolve the ongoing debate, concerning whether or not imports of orthodox teas should be liberalized, the prospective of both producers and exporter should be closely assessed in order to decide whether such a policy can be introduced, with minimum damage to the county’s economy.

(The writer can be contacted at treecrops@gmail.com)