Tea outlook for 2016 volatile: brokerage
Projecting a possible market outlook for Ceylon tea in 2016 would have a strong element of “crystal ball gazing” due to turmoil in Sri Lanka’s key export markets and their drastic currency depreciations, commodities brokers Forbes and Walker said.
Political issues between Russia and Ukraine, turmoil in the Middle Eastern Markets due to lower oil prices, drastic currency depreciations and economic sanctions imposed on key tea importers from Sri Lanka have taken a toll on the country’s tea industry in 2015. Consequently, tea prices particularly in Colombo which reached a record high in 2014 ended the year substantially weaker. In fact, the Colombo auction average for 2015 is approximately Rs.62, lower than the corresponding average in 2014.
“The decline in US dollar terms would record an even sharper decline compared with 2014 following the devaluation of the Sri Lankan rupee against the US dollar during 2015,” Forbes & Walker said.
Highlighting supply side constraints Forbes & Walker said tea production in 2016 is unlikely to record any appreciable change in the back drop of the likely change in the fertilizer policy.
According to the brokerage, orthodox tea which accounts for 90 percent of Sri Lanka’s tea crop would record a decline of approximately 8 M/kgs in 2015 compared to 2014.
In total, the brokerage expects a tea shortfall of 80 M/kgs in global tea markets. From a global angle, rising concerns of an El-nino impact would also warrant due consideration,
“Under normal circumstances in the back drop of approximately 80M/kgs tea shortfall, the year 2016 would have commenced with buoyant prices.
However, in this instance, the weak Russian ruble, regional turmoil in the Middle East, drastic currency depreciation, economic sanctions etc. continues to prevent the optimism,” Forbes & Walker noted. They pointed out that in this backdrop China becomes an important destination for growth.
Currently, other than Japan, all other major tea importers among the top 10 importers rely on oil and gas for the stability of their economies.
“Therefore, with crude oil prices between US $ 40-45 a barrel, a buoyant market forecast for 2016 may be optimistic.”
On a positive note, a turnaround in auction averages is recorded particularly during the last quarter which could be correlated to the depreciation of the Sri Lankan rupee.
However, the full impact of the currency advantage is not reflective as we have seen in the past possibly due to the continued weakening of crude oil prices.