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Wednesday, 16 December 2015 00:00 - - {{hitsCtrl.values.hits}}
By Tea Exporters Association
Salient features of the tea industry in Sri Lanka
Sri Lanka produces approximately 340 million kilograms per year. Out of this amount 94% are orthodox type and the balance 6% CTC (cut-tear-curl) type teas. The production of green tea is minimal. The small holder tea growers segment numbering about 400,000 is now responsible for approximately 60% of the annual tea production in Sri Lanka.
Allowing a volume of approximately 25 million kg for local consumption the rest amounting to approximately 315 million kg is exported. Foreign exchange earnings from Tea exports amount to approximately $ 1.6 billion, based on 2014 statistics.
The share attributed to Sri Lanka from the world tea production of 5.17 billion kg is 6% in 2014 recording a decline from 10.5% in 2000, 
Sri Lanka’s share of world tea export is 17% of 1.83 billion kg in 2014, declined from 21% in 2000.
Sri Lanka has the distinction of being the largest supplier of orthodox tea in the world and also the largest exporter of value added tea among the tea producing countries.
The annual retail value of global tea market consisting of tea and tea based products is over $ 90 billion and Sri Lanka’s share is only 1.7% or $ 1.6 billion.
There are many tea derivatives in the world market catering to Ready-To-Drink or RTD teas, Pharmaceuticals such as Poly-phenols, Health care products such as soaps, shampoos, tea baths, facial creams etc.
Tea industry is a vital sector in the Sri Lankan economy. It provides direct and indirect employment to about 1.5 – 2.0 million people. The tea sector contribution to the GDP of the country is between 1 – 1.5% (unchanged for last 10 years). It accounts for 14% of total export revenue of the country (2014) and declined from 17% in 2010. Tea supports allied industries and services such as banking, insurance, shipping, logistics, packaging, Technology, IT, Port development etc.
What is a Tea Hub?
The concept of ‘Tea Hub’ has been debated for more than two decades among the stakeholders in the country. It is an over 100-year-old concept in world tea market.
United Kingdom (London), Germany (Hamburg) and The Netherlands (Rotterdam) are the popular world Tea Hubs in operation for over a century.
UAE (Dubai) established the Dubai Tea Trading Centre (DTTC) in 2005 as a dedicated tea blending, packing, branding Centre for re-exports. Today the DTTC handles approximately 50 million kg of teas from all origins from processing to re-export with substantial value addition.
The tea producing countries like Kenya, China, Indonesia & India also have exclusive Free Zones for importation of tea for blending and re-exporting purposes.
Need for tea blending
The requirement for blending teas from different origins is to create a final product that is consistent in brew performance based on consumer preferences. Having access to multi origin teas gives the advantage of:
What is the current position of ‘Pure Ceylon Tea’
‘Ceylon Tea’ which was synonymous with quality is losing its position in the world market due to a number of reasons.
Only about 30% of tea produced in Sri Lanka can be considered as Finest Ceylon Tea qualifying to carry the LION logo, the symbol of quality issued by the Sri Lanka Tea Board.
70% of teas produced in the country are of average or poor quality.
Traditional buyers of Ceylon Tea are looking for other competitive options due to economic reasons such as the situations now witnessed in Russia and the Middle East.
The economic growth witnessed in Gulf countries has paved the way for emergence of international tea brands at the expense of traditional Ceylon Tea brands. The younger generation in many countries is not aware of Ceylon Tea and their buying decisions are based on known brands rather than on origin.
Sri Lanka Customs data confirms that only about 40-45% of Sri Lanka tea exported as ‘Pure Ceylon Tea’ in consumer packages reach the end consumer in the same form.
Over 50% of tea exported from the country in bulk form ends up in multi-origin blends at the other end losing its identity. Thus, the argument of ‘USP of Ceylon Tea’ does not apply to nearly 55-60 % of Sri Lanka tea exports.
Producers’ concerns on the Tea HUB
The world competition can come to our doorstep and free import of foreign teas may reduce the demand for Ceylon Tea and lower the auction prices.
The reputation of Ceylon Tea may be diluted with the export of Ceylon Tea blended with other origin teas in the long run.
Contrary to producers’ concern, the importation will help to improve the quality of tea manufactured locally and to get higher prices.
The competition will compel them to improve the tea quality and get higher prices.
The reputation of Ceylon Tea has been in fact diluted by some tea manufacturers with various malpractices. The contamination of tea takes place in all sectors.
The exporters are required to invest in tea cleaning machinery to remove impurities in already manufactured tea.
Sri Lanka’s pride as the producer of ‘Most cleanest tea in the world in terms of agro-chemical residues’ has been dented due to number of shipments rejected in some EU countries after the detection of high residue levels.
The price of tea is determined by demand & supply in the world market. Since about 95% of our tea is for exports, the prices are heavily influenced by external factors. The current situation is a good example.
Multi-origin blends – Are they cheap?
It is possible to offer a price competitive blend to capture a particular market segment but brand owners usually go for multi-origin blends to add value to their brands.
In United Kingdom the value addition is 142%. It has imported tea at an average price of $ 2.91 per kg and after adding value, re-exported at an average price of $ 7.04 per kg in 2014.
In Germany, the value addition is 120%. It has imported tea at an average price of $ 4.03 per kg and the re-export price of same has been $ 9.15 per kg in 2014.
The exact prices of Dubai re-exports are not available but it is a known fact that Dubai is the fastest growing tea hub in the world due its commercial viability.
Rationale for liberalisation of tea imports
The tea production in Sri Lanka has been stagnating at around 340 million kg a year for some time. This has restricted the exporter’s ability to increase their volume.
The liberalisation will help to increase our exports volume to around 500 million kg by 2020 and earn more foreign exchange.
Over 50% of Sri Lanka tea exports are in bulk form which ends up in multi origin blends at the importing country. Value addition to part of this volume can be done locally with imported tea.
The current scheme for importation of CTC tea, green tea and some specialty teas for value addition has brought positive results for the industry and today Sri Lanka exports approximately 28 million kg of tea bags registering highest FOB prices for the category. It has also supported the prices of Green, CTC, Dust teas etc. manufactured locally. The liberalisation of tea would support the expansion of other categories as well.
Sri Lanka is not the only supplier of tea to the world. Our brands have to compete with international brands, which are offered at much more competitive prices.
Some exporters are unable to cater to certain market segments due to non-availability of suitable type of tea locally and high prices of average type Ceylon tea. It has a negative impact on the growth of a brand.
The cost of production in Sri Lanka is going up every year and currently the highest in the world. We cannot expect our buyers to support this production cost increase indefinitely as they have to compete with products coming from other origins at much more competitive prices.
Liberalisation will expose the tea production/manufacture sector to real competition. This will help to improve tea quality, reduce COP, improve management efficiency etc. and earn good prices. It may reduce their dependency on government subsidies.
A number of international tea brands have moved away from Sri Lanka due to the current policy and country has lost a substantial amount of foreign exchange, capital investment and employment opportunities. The opening of tea imports may help the local brands to grow significantly while attracting the other brand owners to Sri Lanka for value addition earning more foreign exchange.
Sri Lanka lost some markets such as Pakistan and Egypt as we were unable to offer competitively priced tea to these markets. It may be possible to regain some of the lost markets with the offering of multi origin teas at competitive prices.
The increase of tea export volume with the liberalisation will also support the expansion of other sectors such as banking, insurance, warehousing, transportation etc. and create more employment opportunities.
Currently, Sri Lanka tea exports are highly dependent on vulnerable Middle East markets and Russia. It has failed to get a fair share in more secure Europe or USA. The liberalisation would help to offer the right type of tea mix at competitive prices to gain a bigger share in these markets.
SWOT for a tea hub in Sri Lanka
S - Sri Lanka is strategically located to cater to any market in the world. It has a good seaport and an airport in Colombo. The weekly tea auction also takes place in the heart of the city.
Country has a well developed packaging industry to support the value addition of tea through the liberalisation. Sri Lanka is also known as a reliable supplier of tea among the tea buying countries.
W - The 400,000 small holder grower segment influences the government policy makers on the tea sector due to their strong political leverage. The decisions are always taken from the point of producers’ view without giving consideration to the market factors.
O - The brand owners will be able to expand their product portfolios and cater to a wider range of customers which cannot be achieved through marketing of ‘Pure Ceylon Tea’ due to certain market factors.
T - The international tea brands may increase their marketing activities to curtail the expansion of sale of multi origin Sri Lankan tea brands.
Proposed model
The government should introduce a demarcated area for the proposed Tea Hub. The Free Zone in Katunayake is a suitable location as it is close to the Colombo harbour and Airport.
Only reputed tea exporting companies with their own brands should be allowed to operate in the proposed zone. A minimum investment of Rs. X million may be introduced. It is necessary to create a high entry barrier to eliminate unnecessary parties getting into the Tea Hub.
SLTB should establish a monitoring office in the Free Zone Tea Hub to ensure import / export criteria are met such as strict labelling requirement differentiating ‘Pure Ceylon Tea’ and ‘Ceylon Tea blended with other origin teas’.
Tea imports should be exclusively for re-exports and free of any taxes or rates. The Free Zone operation should be strictly monitored to prevent foreign teas getting into the domestic market.
SLTB should allow fully liberalised operation within the Free Zone as the brand owner will be responsible for the export and the success thereof against their registered brands.
In order to allow the domestic tea industry to get adjusted, the Government may permit gradual importation of tea, e.g. 10% of the tea production volume of the country for year one. (This should be outside the current scheme).
The percentage can be increased by 10% every year for the next five year period and allow a free float for maximum strength of the Tea Hub. This will allow the country to target a volume in excess of 500 million kg a year.
Re-export of blended tea to be confined only to consumer packs of less than 5 kg to ensure value addition within the country.
The import license fee currently charged by SLTB and additional Cess Income generated from the extra volume may be used to establish a Revolving Fund to support the producers when required.
A long term policy decision is required to attract investment into the proposed Tea Hub; the Government assurance that it will not change the policy on the Tea Hub at least for 10 years to gain the confidence of the tea export sector.
Available options for establishment of a Tea Hub
Follow the current system – Under the prevailing scheme, exporters who import CTC, green and other specialty teas for re-export purposes can take the tea in to their respective factories for processing. Same system cannot be applied for proposed new scheme due to the possible risk of imported orthodox tea getting in to local market or to the auction system. It may also be difficult to confine the operation only to reputed brand owners.
Exclusive Free Zone/ Bonded warehouse – Government can demarcate an area for the Tea Hub with basic infrastructure facilities under SLTB and Customs supervision. The selected tea companies will have to set up their own factories for the blending operation. The disadvantage of this option is that all companies will have to invest in new blending and packing facilities.
Establishment of a centre similar to DTTC – The Dubai Tea Trading Centre provides facilities for storage, blending, packing, bagging etc. for the tea trade members. The teas imported by the traders are directly brought in to the centre for processing.
A similar centre can be established here by a Consortium of businessmen or any other investor which should operate under the SLTB and Customs supervision. The selected exporters can use the facility at a fee depending on the usage. The finished product should be re- exported directly from the centre. This model will save money for exporters but a possible disadvantage could be that confidential information may get leaked out to competitors.
On the other hand, the main advantage is that SLTB and Customs will find it easy to monitor the system and ensure that importation will not have any adverse impact on the local tea industry.
Lessons from apparel industry
The textile industry of Sri Lanka was monopolised by state owned factories and weaving mills until the economy was liberalised in 1979.
The incentives and facilities offered by BOI in 1980s attracted private sector investments.
Initially the industry benefited from MFA (quota for developing countries) which terminated in 2005.
Since then it has been exposed to the global competition. In the last 10-15 years the sector progressed well and has transformed from ‘a contract manufacturer to a complete solution provider’.
Its success is based on a few fundamentals:
Today its reliance on imported material is about 40% of the requirement. It provides direct and indirect employment to between 300,000-600,000 people. The export revenue target by 2020 is $ 8.5 billion.
Conclusion
If the policy makers intend to keep the current status, the sustainability of the industry is at risk due to low productivity, high cost of production etc. for which the international consumer may not subscribe paying a premium when many options are available in the global market. Further, the government may be required to continue with subsidies to compensate the management inefficiencies among the tea growers and manufacturers.
The liberalisation of imports will lead to expansion of tea export volume, higher revenue, new employment opportunities, bigger contribution to the economy etc. It is expected that volume of tea exported from Sri Lanka would be increased up to around 500 million kg in the next five years and additional employment opportunities will be created in all sectors.
The value of global tea market is to grow up to $ 100 billion by 2020 and country should target getting at least a 5% share from the mega business opportunity.
The members of TEA are aware that country should continue to support the export of good quality ‘Pure Ceylon tea’ which is about 100 million kg of the total tea production. This will be the finest of Ceylon teas qualifying to carry the SLTB quality symbol LION LOGO and establish as the market leader in the global niche for finest teas.
