By Forbes and Walker Tea Brokers
Tea industry overview 2014
The year 2014 commenced on an upbeat, consequent to the revenue from tea exports, together with production reaching record levels in 2013 and prices continuing to maintain attractive levels from all elevations. This was despite the fact that some of our key Middle Eastern markets were faced with political unrest and financial instability.
These record price levels however could not be sustained throughout the year, due to continued instability in the Middle Eastern region and the drop in oil prices to a great extent, particularly towards the latter half of the year.
Yet from a Sri Lankan perspective, 2014 could be considered as another good year for the tea industry as revenue from exports and Auction averages would achieve a new all-time high in LKR terms as well as in USD terms, whilst production too may establish a record once the December statistics are released.
At the commencement of the 1st Quarter Auction quantities were maintained around 6.5M/kgs. Quality from the High and Medium Grown sectors improved from around end January. Notwithstanding the quality on offer, prices from all elevations were very attractive and substantially higher compared to the corresponding price levels of 2013. This was very evident in orthodox Low Grown and the leafy High and Medium Grown varieties as they had a distinct price gain over the orthodox/rotovane teas.
Consequent to quality levels showing a further improvement in early February, particularly in the Western High and Medium categories, a fair selection of BOP/BOPFs showed a substantial gain in prices. During February and March, the seasonal quality teas continued to attract good demand and sold at premium levels whilst the plainer Westerns together with the bulk of the Uvas declined in value.
Meanwhile, commencing from around mid-February, prices for Orthodox Low Growns and the leafy varieties from the High and Medium Growns declined. This was mainly applicable to the Tippy grades such as FBOP/FF1s and the high selling FBOPF-‘Sp’ grades.
Although prices declined for these Tippy grades, overall Auction prices of High, Medium and Low Growns continued to be higher than the corresponding period of 2013. By the end of the quarter January-March 2014 the total Auction average of Rs. 486.65 was Rs. 57.96 higher vis-à-vis Rs. 428.70 of January-March 2013
First quarter production for 2014 totalled 73.5m/kgs vis-à-vis 81.6m/kgs of 2013, showing a decrease of 8.1m/kgs. All elevations showed a decline in production during January-March 2014 vis-à-vis January-March 2013.
Exports however in the 1st quarter of 2014 totalled 75.2M/kgs vis-à-vis 70.9M/kgs of 2013, showing a gain of 4.3M/kgs. Total revenue of Rs. 50.5 b realised in 2014 shows a significant gain of Rs. 8.3 b compared to Rs. 42.2 b of 2013.
The 2nd quarter commenced with high volumes from all three elevations being offered. This trend continued throughout the quarter and by the end of the quarter further increase in volumes were evident from High, Medium and Low Growns, resulting in Auction volumes increasing to over 7.5M/kgs per sale. As customary during this period, quality for most High and Medium Growns showed a decline. Consequently prices for the high and mid grown BOP/BOPF declined, particularly for the plainer sorts commencing from early May.
Meanwhile, better BOP/BOPF from the High Grown region continued to attract a premium over the plainer sorts. Towards the end of the quarter however, plainer clean leaf types met with better demand and prices strengthened. Low Grows too met with better demand and prices improved with Auction averages once again reaching Rs. 500 and above to end the quarter on a stronger note. High and Medium Grown leafy teas too followed a similar trend. By the end of the quarter total Auction averages for January-June 2014 realised Rs. 477.55 vis-à-vis Rs. 422.77 of 2013, showing a gain of Rs. 54.78.
Production for the 2nd Quarter totalled 98.9 m/kgs vis-à-vis 92.3 m/kgs of 2013 showing a gain of 6.6M/kgs for the period under review. During this period all elevations showed an increase in production vis-à-vis the corresponding period of 2013.
Exports during the 2nd Quarter totalled 82.2m/kgs vis-à-vis 73.3M/kgs of 2013 showing a gain of 8.9M/kgs, whilst total exports for the period January-June of 157.43m/kgs showed an increase of 13.1m/kgs vis-à-vis 144.3m/kgs of 2013. Total revenue for the 2nd Quarter of Rs. 53.4 b showed a significant gain of Rs. 9 b vis-à-vis Rs. 44.4 b of April-June of 2013, whilst the cumulative exports for Jan-June of Rs. 104.07 b of 2014 showed a gain of Rs. 17.3 b vis-à-vis Rs. 86.7 b of Jan-June 2013.
The 3rd Quarter commenced with over seven m/kgs of teas being offered at the Auctions. Offerings from all elevations were substantially higher at the commencement. During August-September High and Mid Grown volumes declined considerably.
At the commencement of the quarter quality on offer did not show any appreciable change from the High and Medium grown areas. By early August however, teas from the Uva/Udapussellawa region showed an improvement with the onset of the Uva quality season though overall the season was a disappointment due to the erratic weather pattern that prevailed. Hence the high prices which are generally associated during this period could not be achieved.
Meanwhile, Western BOP/BOPFs too commenced the quarter with price levels being lower than the preceding quarter. By early August, consequent to the improvement in quality, prices strengthened to end the quarter on a stronger note. On the other hand, Low Growns that commenced the quarter on a high note became highly volatile with prices declining sharply around mid-August, resulting in auction averages continuing to dip to reach the lowest levels in the year by September 2014.
It is relevant to note that the monthly Auction average for September 2014 of Rs. 439.59 was lower than the corresponding period’s average of Rs. 475.83. This incidentally was the first time that the Auction average for a single month in 2014 was lower than the corresponding month’s average of 2013. Notwithstanding the above, the cumulative average for January-September 2014 of Rs. 475.83 was still higher by Rs. 46.74 when compared to Rs. 429.09 of January-September 2013.
3rd quarter production totalled 83.2 m/kgs in 2014 vis-à-vis 74.4 m/kgs of 2013 thus showing a gain of 8.8 m/kgs. High and Low Grown elevations showed a significant increase in production compared to the corresponding period of 2013 whilst Medium Growns showed a decrease vis-à-vis the 3rd quarter of 2013. Cumulative production too for the period January-September 2014 of 255.7 m/kgs showed a growth of 6.9 m/kgs vis-à-vis 248.4 m/kgs of January-September 2013.
Total exports for the 3rd quarter of 83.9 m/kgs have shown a decrease of 6.2 m/kgs when compared to 90.1 m/kgs of the 3rd quarter of 2013. Cumulative exports however for the period January-September 2014 of 241.3 m/kgs show a gain of 6.8 m/kgs vis-à-vis 234.5 m/kgs of 2013.
In value terms too the total revenue realised during the 3rd quarter of 2014 of Rs. 54.6 b show a decrease of Rs. 0.5 b when compared to Rs. 55.1 b of the 3rd quarter of 2013. Cumulative revenue from exports for the period January-September 2014 however of Rs. 158.7 b show an increase of Rs. 16.9 b when compared to Rs. 141.8 b of the corresponding period of 2013.
The 4th quarter commenced with reasonably high volumes being offered from all elevations and the Auction quantities were maintained around 6.5M/kgs. These levels were maintained throughout the quarter.
At the commencement of the quarter prices for the High Grown BOP/BOPF varieties were maintained in line with the closing levels of the 3rd quarter. Subsequently these levels declined and by early November a substantial drop in prices were evident. Thereafter a slight improvement was witnessed in the quality of offerings from the Western region and the better made teas commenced to gain in value particularly following quality. Offerings from the Uva region too were irregular and prices declined from the commencement of the quarter. Here again a few improved teas were selectively dearer, particularly following quality.
Meanwhile demand for Orthodox Low Grown varieties and the leafy teas from the High and Medium region continued to meet with less demand and prices declined for most grades during the quarter. This could be attributed to the drop in oil prices which impacted most of the premier importing destinations (i.e. Russia, Ukraine and the Middle East).
Production figures released up to end November 2014 totalled 313.8 m/kgs. Therefore, if the December production records an excess of 26.4 m/kgs, it will surpass the previous best of 340.2 m/kgs achieved in 2013, thus establishing a new record.
Exports for the month of December have not been released at the time of compiling this report. However for the period January-November 297.5 m/kgs were exported with total revenue realising Rs. 194.2 b. Therefore it is very likely that with the December revenue total exports will reach a new mile stone in value terms.
Sri Lanka macroeconomic update
GDP was maintained at above 7% along with low interest rates and low inflation. The Lankan currency too held its own against the US Dollar and appreciated against many of the other currencies.
Exchange rates: The Sri Lankan Rupee which is pegged against the USD fluctuated in a very narrow band and marginally depreciated by the year end. However it has appreciated against most other currencies which gaining significantly against some of the major tea importing countries.
Inflation: The Colombo Consumer Price Index (CCPI) for December 2014 was 180.2 points. The index for December 2013 was 176.5 points. Annual inflation measured by the movement in the CCPI was at 3.3% for the year which has been one of the lowest levels in Sri Lanka. The second half of the year actually saw a deflation in the country. The CCPI index in July 2014 was 183.2 and consequently the inflation for the last half was a negative 1.6%. The lowering of fuel prices and concessions provided in October 2014 had a significant impact in this regard. (Source – Department of Census & Statistics)
Growth: The GDP has grown at over 7% in the first two quarters. It has been estimated that the overall GDP for the year would be around 7.8%. Tabulated are the comparative figures for the published data.
Market projections are usually based on anticipated supply/demand scenarios. However predicting tea prices for 2015 will be more complex given the current scenario. Global production in 2014 records a further growth which is essentially from China (predominantly Green Tea) and the African region (Black Tea of CTC origin).
Demand for tea on the other hand is not showing any significant growth, particularly from a Sri Lankan perspective as most of the prime export destinations are currently experiencing economic setbacks owing to the declining oil prices which are presently at lowest levels since 2008.
Since 2008, global tea prices have witnessed a growth with the exception of Kenya. Kenyan prices too have recorded reasonable improvement year on year up until 2013 and the decline thereafter is possibly a reaction to the substantial increase in production which would have impacted adversely on quality as well. All other auction centres however witnessed a healthy growth up until 2014.
Commencing from the second half of 2014, with oil and gas prices declining rapidly the Russian Rouble depreciated against the US Dollar and by the end of the year it was devalued over 50% with November – December showing the steepest devaluation. Russia being our largest importer of tea, this trend had a negative impact on prices and will continue to impact negatively in the coming year as well.
Further, most of the Middle Eastern countries which import teas from Sri Lanka are also experiencing trading constraints and since over 70% of our teas are exported to these destinations, it is very likely that prices in 2015 will be adversely impacted.
The Sri Lankan tea industry has in the past been resilient and has found new markets when needed. China, which is considered the second largest economy in the world, has seen rapid socio economic growth in the recent years and if explored could be a potential market for Ceylon Tea. The Indian economy too has expanded and therefore could be looked at positively as an avenue to market value added teas.
From a producer’s perspective, given the current scenario and the impending wage hike due this year, it is imperative that we strive to devise methods of reducing costs whilst maintaining quality at an optimum level.
This could also mean adopting new methods in harvesting whilst maintaining product quality as a surfeit of poor quality teas would add further pressure on prices. This would be relevant both to Low Grown teas as well as small leaf teas from the High and Mid Grown regions.
In these circumstances, tea prices in 2015 should be projected cautiously as it is very likely that in addition to supply and demand scenarios, prices will also be determined by the unfolding economic factors that are faced by major importers of Ceylon Teas.