Tea realisations to stay buoyant on higher demand

In 2016, the aggregate tea production across three major tea producing countries – India, Kenya and Sri Lanka – was up by nearly 3.5 per cent.

In India, the production was up around 2.5 per cent, which can be attributed to an increase in the north Indian crop. North Indian crop accounts for over 80 per cent of the total tea production.

According to analysts, the global tea production trend may not be the same in the current year.

“Initial weather forecasts indicate lower rainfall in Kenya during the first quarter of 2017, which is likely to impact production from the region. Since Kenya is the largest exporter of black tea, its production levels have a significant bearing on the availability of tea in the global market.

“Moreover, Sri Lankan production, which is primarily of the orthodox kind, is likely to continue to remain under pressure, leading to increased export demand for Indian orthodox tea. Such supply-side issues are likely to have a favourable impact on both international and domestic tea realisations,” said Kaushik Das, vice-president and sector head, corporate sector ratings, Icra.

India may have a large domestic consumption base for tea, but exports always play a vital role in maintaining the demand-supply balance in the domestic market. Tea industry officials and analysts point out that Kenyan tea prices soared 25 per cent to reach $2.92 per kg in last month’s auction, paving the way for Indian tea to increase its exports with a competitive edge.

India can actually offer tea at an average price of $1.8 a kg to eat into the Kenyan tea market. If India can make inroads into Kenyan export markets such as Russia, the UAE, the UK, the US and Egypt, the impact of strong rupee and concern over production may subside a bit.

Azam Monem, chairman of the Indian Tea Association, recently said some Indian exporters and producers have been receiving enquiries from Kenyan companies’ clients for this year’s procurement. That certainly is a good sign. The other good indication is that when it comes to Kenyan tea, low production volume is projected in that country, which, in turn, is expected to keep Indian tea auction prices up.

When it comes to pricing in the domestic market, Das of Icra said, “The buying patterns will also be a key determinant of domestic price levels in the current year as well.” An increased proportion of lower quality CTC tea purchases in 2016 led to a rise in prices for lower segment CTC teas, which, in turn, supported overall CTC realisations. Moreover, prices of bought leaf also increased on account of this change in buying patterns, while higher quality estate leaf prices witnessed a downtrend, he pointed out.

According to a recent report by Icra, in the current year, tea realisations are expected to remain buoyant following higher demand for tea, particularly given the expected supply-side issues in Sri Lanka and Kenya.

However, buying patterns across tea segments, which had witnessed a considerable change in 2016, will remain a key determinant of the overall price trajectory in the current year as well. Despite the buoyancy in prices, continuing cost pressures, and increases in wage rates are likely to keep the margins and debt coverage indicators of bulk tea producers under check, it said.

ritwikmukherjee@mydigitalfc.com