Prospects for 2012

In the backdrop of the uncertain conditions that exists in some of Sri Lanka’s key tea exports destinations, attempting to analyse market prospects could have a strong element of ‘crystal ball’ gazing. Nevertheless, a logical approach would be to analyse the past performance of the industry and equate it to supply/demand scenarios that are likely to emerge during the year.

Supply

In 2010, global tea production crossed a new milestone of four billion kgs, consequent to some key producer countries achieving all time record crops. However, based on the availability of data as of now, 2011 is likely to record a positive variance of approximately 90 m/kgs, which would mean global tea production is mostly likely to better its previous record. However, the majority of this increase is from China which is predominantly a ‘green’ tea producer.

Furthermore, with the normal increase in global consumption per annum at a conservative 2.5%-3% would require a further 60-70m/Kgs. Therefore, we could even predict a tight supply position as we approach 2012.

The political unrest which in turn affected the economics in the Middle-Eastern region had a cascading impact on the Sri Lanka tea market in particular and demand for tea in general during the second half of 2011. This could be considered the most significant adverse development impacting tea prices. Consequently, prices which commenced on a strong note, ended the year substantially weaker.

December 2011 would have recorded even a sharper decline compared with December 2010 if not for the 3% devaluation of the rupee in November last year. This brings into focus the sharp decline in the Colombo Auction averages which have eased off to a greater extent when compared with certain other auction centres which could be attributed to Sri Lanka’s dependence and its affects following the uncertain conditions/downturn of the Middle Eastern economies.

Significant 2012 factors

With this background, the following factors are significant in looking forward to 2012:

Global tea production during the first quarter is normally the lowest during the year and all indications as of now, is that this year would be no exception. Therefore, the weekly auction quantities during the first quarter of 2012 are likely to be low in most auction centres.

From a Sri Lankan point of view, additional buying interest is likely to emanate for seasonal teas from the Western slopes.

Greater interest from some of Sri Lanka’s key export destinations, showing some element of stability following the political unrest last year which disrupted the smooth flow of tea.

The 3% devaluation late last year which created an immediate impact on prices at the auctions that followed will help to make Sri Lanka tea more competitive in the export market, it would be relevant to note that most other key producer/consumer nations have experienced devaluation in their currencies during the last year.

The growth in tea consumption from India and China as a combination of its increasing population and the rising per capita income levels would result in the availability for exports declining from these countries, due to their internal consumption increasing. Yet another development is the increase in popularity of black tea in China, particularly amongst the younger age groups.

Improved market activity from most importing countries is likely to emerge as the current price levels are significantly lower than the corresponding levels in 2010 and 2011. In addition, inventory levels in most importing countries are unlikely to be higher than the corresponding level of the previous year particularly the tea importing nations from the Middle-Eastern regions.

The above factors would enable to project a cautiously optimistic market scenario for 2012 with the expectation that the Colombo Auction averages should move up from the low levels decreased to during the last quarter of 2011, whilst it may be over optimistic to predict the dizzy heights that we reached during the first quarter of 2011 at this point of time.

It is also important that the cautious optimism for the tea market in 2012 be linked with the accent on maintaining reasonable and consistent quality throughout the year.