Panic buying triggered by black tea crop failures in competitive countries gives relief
Recovery unlikely given low volumes, high production costs
A glimmer of hope emerged for Sri Lanka’s beleaguered tea industry this week when demand picked up at the auctions due to black tea crop failures in other countries and raised hopes of prices strengthening in the fourth quarter despite low volumes, brokers said yesterday.
Tea prices are likely to stay strong in the last quarter of 2016 owing to strong demand caused by crop failures in some black tea producing countries, observed John Keells in their weekly tea report. Although Sri Lankan tea prices have been high, it has come against the backdrop of production shortfalls.
“As often seen in the past, increased prices coinciding with an increased production are not a common occurrence. The buoyant prices from all three elevations have somewhat compensated for the high production costs on most plantations,” it said.
Forbes and Walker noted ex-Estate offerings had declined to a 0.6M/kgs and the current auction volumes were the lowest since 2013. Western BOP/BOPF’s appreciated by Rs. 30-50 per kg and Rs. 50-60 per kg respectively. Nuwara Eliya BOP’s on average appreciated by Rs. 10 per kg while the corresponding BOPF’s recorded a sharp increase. Udapussellawa BOP/BOPF’s recorded price gains of Rs. 20-40 per kg while Uva’s appreciated Rs. 40-50 per kg and more. CTC teas too witnessed a firm to dearer trend although they appreciated to a lesser extent.
“In a scenario of ‘panic buying’ following the limited availability of teas, the price parity between the better teas and the poorer/plainer types has narrowed considerably thus leaving little encouragement for a better product. Needless to say this trend will correct itself no sooner auction quantities return to normal,” it said.
There was improved demand from shippers to CIS, China, Hong Kong and Japan whilst UK and the Continent appeared to be selective.
Low Growns comprised approximately 2.6M/kgs in the Leafy/Tippy catalogues. There was good demand all round. In the Leafy catalogue BOP1/OP1’s continued to sell well and were dearer by Rs. 10-15 per kg compared to the preceding sale.
OP/OPA’s too gained Rs. 5-10 per kg and more on last. Better PEK’s were irregular while better PEK1’s were mostly firm, the balance were steady. In the Tippy catalogue, FBOP’s were fully firm to dearer with the below best types gaining Rs. 10-20 per kg. FF1’s too were fully firm to dearer.
At the lower end, prices were maintained, particularly for the cleaner types. In the Premium catalogue too a fair selection of teas were sold at fully firm to dearer rates while others were irregular following quality. Shippers to CIS, Dubai, Saudi Arabia, Iraq and Kuwait together with Turkey were active this week.
According to the Economist magazine, global tea consumption is growing steadily, driven mainly by China, which accounts for one-third of world tea consumption with green tea being the variety most consumed. However, demand is also growing in other major tea-consuming regions, including India, the US (more RTD), Iran and even the EU.
The magazine forecasts further growth of 4.5% a year in 2017-18, roughly on par with estimated growth in 2016. Global demand for black tea will continue to grow, but the pace of growth will be outstripped by that for green tea, fruit tea, herbal tea, rooibos (from South Africa) and high-end organic tea, reflecting their greater reported health benefits and heavy marketing. Iced tea and ‘ready-to-drink’ tea beverages continue to account for a small share of the total tea market but have enjoyed rapid growth in sales, will also contribute to demand growth.
It is expected that tea production growth will slow down in 2017 as stronger production in China is largely offset by falling output from Vietnam, Indonesia and Sri Lanka. Production growth will slow to 0.9% from an estimated 1.1% in 2016. On the assumption that weather conditions improve in 2018, tea production growth is forecast to recover to 3.2%, with virtually all of the main producing countries likely to register firmer growth.
However, the pace will remain weaker than rates in recent years, reflecting several structural factors. In inflation-adjusted terms, farmers’ profits are much lower than in past decades because of the higher cost of inputs. This has resulted in a fall in investment. With many currencies set to remain fairly weak against the US dollar in the medium term, this will continue to hamper operating conditions for local farmers.
British tea brands look to China
As tea sales in Britain continue to decline, British tea companies are exploring new opportunities overseas for their brands.
According to the latest industry reports, Britons are drinking 64 million fewer cups of tea in 2016 than last year and tea sales will drop by nearly 5%. With the narrow profit margins due to increased production costs and an unfavorable exchange rate following the Brexit vote, UK companies are looking to China and Hong Kong to boost their tea sales.
The upmarket tea brands of Twinning and Taylors of Harrogate are increasing their presence in Chinese supermarkets and also at restaurants and online sales shops. It is reported that the UK has doubled tea exports to China and Hong Kong in 2016. Imported premium British tea brands are perceived as being of high quality, a reason for the growing popularity of British tea brands in China.