Forbes and Walker’s review of tea industry in 2013 and preview of 2014
Thursday, 9 January 2014 00:02
The year 2013 began in the backdrop of political/financial instability in the Middle East, a premier import destination of Ceylon tea. Despite the hesitant start, 2013 from a Sri Lankan tea industry perspective will go down in history as a better year in terms of auction prices, export earnings and production to a lesser extent.
Total Export earnings during 2012 reached Rs. 180 billion, which was the highest ever. However this figure was easily achieved by end November 2013 with total export earning reaching Rs. 180 billion. On the other hand, production too up to end November totalled 309 million kilograms. Hence if December 2013 production surpasses 22.5 million kilograms, the total for the year will reach 331.5 million kilograms, thus surpassing the previous best of 331.4 million kilograms.
Achieving 22.5 million kilograms for December 2013 is by no means a difficult task, given the production pattern for this month in recent years. Therefore, whilst auction averages have reached new milestones, tea production and tea exports are also likely to achieve all time records once the final figures are computed.
At the commencement of the year auction quantities maintained around 6.7 to 7 million kilograms which was slightly higher than the corresponding month of 2012 and the prices too were higher than the corresponding period. By the end of January and during early February, offerings from the Western region showed an improvement in quality. Consequently volumes from this region decreased.
Meanwhile Low Growns and the Uva region continued to offer moderate to high volumes which resulted in auction quantities maintaining around 6 to 6.5 million kilograms. During February, barring a few seasonal quality Westerns that attracted good demand, most other teas, particularly the plainer sorts declined in value.
Plainer teas from the Uva region too met with less demand, resulting in prices easing-off. Low Growns however witnessed improved demand, resulting in Auction averages reaching Rs. 450 per kilogram by end of February.
During March, volumes continued to be moderate. Quality on offer from the Westerns showed a further improvement, attracting more special inquiry from shippers, whilst offerings from the Medium and the Uva regions too showed an improvement and consequently prices increased to an average of over Rs. 400 per kilogram by the end of the 1st quarter.
Meanwhile Low Growns continued strong and by the last sale of March, Low Grown Auction average realised Rs. 472 per kilogram, which was the highest ever on record. It is also noteworthy that by the end of the 1st quarter, the total auction average secured $ 3.49 per kilogram which was much higher than 3.38 per kilogram realised during the 1st quarter of 2012. Prices of all elevations were much higher than the corresponding period of 2012.
During the 1st quarter of 2013 total production reached 81 million kilograms vis-à-vis 74.9 million kilograms of 2012. This in fact reflects an increase of 6.1 million kilograms as against production figure of 2012. It is also relevant to note that production in respect of all elevations, i.e. High, Medium, and Low Grown showed a growth vis-à-vis 2012.
Exports during the 1st quarter of 2013 totalled 70.9 million kilograms vis-à-vis 75.8 million kilograms of 2012, showing a decrease of 4.9 million kilograms. Total revenue however of Rs. 42.3 billion realised during the 1st quarter of 2013 showed a gain of Rs. 2.3 billion vis-à-vis 40 billion of 2012.
Volumes up but prices dip in 2Q
The 2nd quarter commenced with larger volumes on offer, particularly from High and Low Grown elevations. Quality too showed a decline particularly from the High and Medium elevations. Consequently the High Grown prices declined from around Mid April, particularly for the small leaf varieties. Meanwhile leafy teas from the Medium elevation and the Low Growns continued to attract good demand, although prices were marginally lower to that of the prices realised during the latter part of the 1st quarter. During the month of May volumes from High, Medium, and Low Growns increased resulting in auction quantities increasing to around 7.5 million kilograms until the last sale of the quarter.
Prices too continued to ease particularly for the small leaf varieties from the High and Medium Grown regions. Leafy varieties however attracted fair demand with prices maintaining particularly in respect of better teas. It is also relevant to note that the total auction average by the end of the 2nd quarter had declined to Rs. 422.77 ($ 3.34) in 2013 vis-à-vis Rs. 428.70 ($ 3.38) of the 1st quarter reflecting a decline of Rs. 5.93 ($ 0.04).
Production during the 2nd quarter of 2013 totalled 91.7 million kilograms vis-à-vis 89.2 million kilograms of 2012, showing a gain of 2.5 million kilograms. It is noteworthy that 91.7 million kilograms from the 2nd quarter reflects the highest ever production for the period.
Exports during the 2nd quarter totalled 73.3 million kilograms vis-à-vis 79.5 million kilograms of 2012. This reflects a decrease of 6.2 million kilograms. Therefore total exports of 144.3 million kilograms for the period January-June 2013 showed a decrease of 11.1 million kilograms vis-à-vis 155.4 million kilograms of 2012.
The total revenue of Rs. 44.5 billion reflects a marginal decrease when compared to Rs. 45 billion realised in the 2nd quarter of 2012. However on a cumulative basis, January-June 2013 earnings of Rs. 86.7 billion shows a gain of Rs. 1.7 billion vis-à-vis Rs. 85 billion realised during the same period of 2012.
High 3Q prices
The 3rd quarter commenced with reasonably high volumes from High and Medium elevations being offered at the auctions, whilst Low Grown offerings were only moderate. By the end of July, High and Medium Growns showed a significant decrease in volume, whilst Low Grown volumes maintained. This trend continued till mid September.
Meanwhile Low Grown volumes by early September showed a decrease. Prices too at the commencement of the quarter did not show any appreciable change. However by end July prices commenced to improve and it is relevant to note from this point onwards the market strengthened from sale to sale, to end the 3rd quarter at very high levels.
It is also noteworthy that at the last sale of the quarter Low Grown average surpassed the Rs. 500 mark to secure an average of Rs. 506.66.
Similarly leafy teas from the High and Medium elevations continued to attract good demand to end the quarter at attractive price levels. Meanwhile small leaf varieties from the High and Medium elevations, although showed a progress in prices were disappointing vis-à-vis 2012 prices.
Uva quality season was disappointing due to the erratic weather pattern. Consequently, the customary high prices that are generally experienced during this period was not evident, although a few invoices achieved long prices. Notwithstanding the above, the total auction average which was Rs. 422.77 ($ 3.34) by end June had moved up to Rs. 429.09 ($ 3.35) by the end of the quarter.
Production during the 3rd quarter of 2013 totalled 74.2 million kilograms vis-à-vis 76.2 million kilograms of 2012, showing a decrease of 2 million kilograms. High and Mid Grown elevations have shown a growth YOY, whilst, Low Growns show a decrease vis-à-vis 2012.
Exports however during the 3rd quarter totalling 90.1 million kilograms showed a fairly significant increase of 9.8 million kilograms vis-à-vis 80.3 million kilograms of 2012. Hence total exports by end September 2013 reached 234.4 million kilograms vis-à-vis 235.8 million kilograms of 2012, recording a marginal decrease.
Total revenue however of Rs. 55.1 billion during the 3rd quarter showed a growth of Rs. 8.9 billion vis-à-vis Rs. 46.2 billion of 2012. Cumulative exports too showed a growth following the increased prices in 2013 vis-à-vis 2012. Although a lesser volume was exported by end September 2013 cumulative export earnings totalled Rs. 141.8 billion showing a gain of Rs. 10.6 billion vis-à-vis Rs.131.2 billion of 2012.
4Q brings best prices
The 4th quarter commenced with offerings from Low and Mid Grown regions, being significantly depressed, whilst High Growns continued to show an improvement. This trend continued up until early November and there after witnessed a gradual increase for Low and Mid Growns. Meanwhile High Growns continued to maintain moderate to high volumes till December.
The 4th quarter can be considered the best quarter thus far in terms of prices, particularly for the leafy teas. Small leaf varieties (BOP/BOPF) too maintained useful levels throughout the quarter. However the feature could be attributed to the Low Grown prices as barring the 1st sale of the quarter, Low Grown averages were throughout in excess of Rs. 500 per kilogram.
Orthodox leafy teas from the High and Medium elevations too followed a similar trend with record prices being achieved during the 4th quarter.
Furthermore, the total auction average for the month of October of Rs. 494.88 is the highest ever recorded. Although the November average showed a slight decline, it is the second highest so far.
In December too, orthodox leafy teas together with Low Growns maintained the same levels as November, with Low Growns in particular continuing to maintain averages of Rs. 500 in each sale. Small leaf varieties (BOP/BOPF) however witnessed a decline in prices during December following quality. However, it was encouraging to note the strong demand for teas at the bottom end of the market.
Exports for the month of December have not been released at the time of compiling this report. However up to end November 190.4 million kilograms were exported with total export revenue realizing Rs. 180 billion. Hence it is evident that with the December revenue, total exports will reach a new milestone in terms of value in 2013.
Production figures released up to end November totalled309.01 million kilograms. Therefore if the December production exceeds 22.5 million kilograms, it will surpass the previous best of 331.4 million kilograms, thus establishing a new record.
The progress of the economy in 2013 was described by the Governor Central Bank of Sri Lanka in an analysis of the National Budget 2014. It was aptly described as the year for the ‘3 C’s’. Consolidation, Consistency and Continuity of the economic fundamentals which drive the economy. Both monetary policy and fiscal policy were kept constant throughout the year and the National Budget for 2014 also promises to keep the policies unchanged.
The policy interest rates continued to slide over the year, despite the year beginning with a relatively low rate in the Sri Lankan historical context. See table 1
Inflation remained largely controlled during the year although at levels above the previous year. However the rate of inflation slowed down as the year went by and the gap seen in January between 2012 and 2013 was closed by almost a percentage point. See table 2
The exchange rate which is a key driver for the tea trade was kept constant within a broad band against the USD, which is the nations’ major trading currency.
Clearly the depreciation of the LKR against the USD has been less than 5% which is a historically low level of depreciation for the LKR. See table 3
Personal and corporate direct taxes were reduced to ensure greater compliance and greater commitment of the payers to make these tax payments. The number of tax holidays were reduced to a very few specific growth industries such as agriculture and agro processing. Reduced rate of tax was continued to support the export trade. The rest of the corporate world had a flat rate which was still lower than previous years.
Indirect taxes however were made more broad based. VAT on retail trade was introduced, albeit a very high threshold. This threshold was reduced in the 2014 budget indicating the will of the Government to continue in the same direction set four years ago.
Growth of the economy
The economy grew by 6.4% in 2012. The 1st two quarters in 2013 saw a growth of around 6% and 6.8% respectively. Although the statistics of Q3 & Q4 are not published at the time of writing it is reported that the growth would end up around 6.7%.
The disappointment in the growth is the contribution from the agriculture sector. This sector grew only by 2% in the first quarter of 2013 and then slowed down further to record a negative growth of 1.1%. In the light of a 5.8% annual growth in 2012, the set back in agriculture is concerning to the tea and plantation industry.
This is further compounded by the fact that the Agri sector grew by 12% and 8.5% in Q1 and Q2 of 2012 and then slowed down rapidly in the following quarters to record the growth of 5.8%. Therefore 2013 which had very poor first two quarters could see a negative growth in the agri sector by the time the statistics are published.
The economy was steady and most factors were within control. Policies over the past years have remained consistent and are being driven in that direction even in 2014. The only negative sentiment is in the slowdown of the agriculture sector which is affected by uncontrollable factors such as climate change, pest and diseases and even political interference at national and international level (Indian fishing etc).
The outlook for 2104 is very positive with the expectation of reduced interest rates, reduced inflation, a stable exchange rate, no changes to the fiscal policies and positive growth in all sectors.
Prospects for 2014
Based on the available statistics as of now, world tea production is likely to record a surplus of approx. 90-100 million kilograms in 2013, compared to the corresponding period in 2012. A year-on-year gain of approx. 100 million kilograms is significant, though in this instance needs to be viewed in the backdrop of 2012 being a low cropping year.
In further analysing the supply and demand equation it will be relevant to take in to consideration that 2013 commenced with a shortfall of approximately 30 million kilograms and the growth in tea consumption, which is estimated to be around 2.5%-3% mainly emanating from the producer countries.
This would mean retention from producer countries continues to increases and the volume of tea available for export continues to decline, for example even though total exports have grown by 27% over a 10 year period only approximately 35%-40% of global production is exported.
The latest developments indicate that there is a likelihood of sanctions being eased off on Iran, at least on key items, such as food and medicine. Since Iran is a key importer of Sri Lankan tea, this would definitely encourage trading of tea to Iran. Furthermore, volatility that prevailed in the Middle East in the past year is also easing off, thereby bringing about more stability to the region. This too will help the free movement of goods in the region.
Another aspect would be that if more stability returns to the region, it will in turn help the smooth functioning of the respective economics that will avoid the unnecessary risks which are being faced by traders with regard to currency shortages/fluctuations. With China emerging as a potential consumer of black tea, more so in the high value category, this too will generate greater competition for Ceylon Tea.
In addition the 1st quarter is considered a lean period for cropping in most producer countries. From a Sri Lankan perspective, during this period High and Medium elevation from the Western region produce seasonal quality teas, whilst, the Low Grown Planting districts will have limited offerings due to the customary dry weather that generally prevails. With the onset of the Western quality season, customary buying from the Continent and Japan will intensify which will also have a positive impact on prices.
Unfortunately a prolonged spell of reasonably high prices, generally results in producer countries endeavouring to step-up production at the expense of quality. Should this happen, it could result in a surfeit of poor quality teas during the 2nd half of the year, which in turn could result in a drop in prices, particularly, in the “Tea for Price” category, which may have a cascading effect across the entire price spectrum The above factors enable us to predict a cautiously optimistic market scenario for the 1st half of 2014. The market demand for teas thereafter would greatly depend on how the global tea industry would perform during the 1st half. It may be over optimistic at this point of time to predict the dizzy heights that were reached during the last quarter of 2013 would continue in to the New Year.
Nevertheless in the current supply and demand scenario and barring any unforeseen circumstances such as an Economic downturn in any major tea importing country, we could confidently predict another good year for the Sri Lanka Tea Industry.
Therefore the cautious optimism for the tea market in 2014 must be linked with the accent of maintaining a reasonable and consistent quality throughout the year.