While major tea production countries have seen an increase in prices, India seen a decline of around 3.5 per cent during the seven months of the current year.
Sri Lankan prices touched $4.03/kg during the first seven months of calendar 2017, from $2.95 a kg in the corresponding period the previous year, and Kenyan prices touched $3 a kg in the current year, vis-vis $2.30/kg during seven months of 2016. Average Indian auction prices, however, registered a year-on-year decline of around 3.5 per cent, with tea prices varying considerably across quality grades.
Kaushik Das, Vice President and Sector Head, Corporate Sector Ratings, Icra, said while there was some moderation in average domestic auction prices, variation was seen across grades, with better quality teas selling at a considerable premium over last year; medium-to-lower quality teas have witnessed a softer trend.
Gobal tea production is likely to record a decline in 2017, primarily due to crop losses in Kenya, which accounts for around 16 per cent of the total black tea output globally. Given Kenya’s status as one of the world’s largest exporters of black tea, production levels from the country are likely to have a considerable impact on global demand-supply dynamics this year. Sri Lankan crop levels, which account for about 10 per cent of global tea production, are also low.
The reduced global availability of tea is likely to result in the continuation of an upward price trajectory across most international auction centres, which, in turn, would support Indian price trends going forward. The likely increase in realisations over the near term is expected to have some favourable impact on the performance of Indian bulk tea players in 2017-2018, notwithstanding the continuing cost pressures, mainly attributable to increasing wage rates.
In the first quarter of the current calendar year, all the major tea-growing regions of India, Kenya and Sri Lanka showed a considerable production losses.
While India and Sri Lanka have recovered those crop losses in the recent months, the loss of around 49 mkg, recorded by Kenya during First quarter of 2017, is unlikely to be made up in the latter half of the current year, despite some recovery in production during May- July, 2017. For the full year of 2017, Kenyan tea production is expected to remain around seven per cent lower than the previous year. Consequently, overall global tea production for 2017 is expected to be lower than that of the previous year, notwithstanding indications of increased Indian production in 2017.
On the exports front, the Icra report says while aggregate Indian volumes were up during seven months, all-India export realisations remained largely stagnant. This was due to sale of teas carried over from the previous season, unavailability of Darjeeling teas and the appreciation of the Indian currency against the dollar.
Going forward, however, Icra expects an upward trajectory in overall Indian export realisations, supported by high demand for Indian tea in the international market, given the supply side issues. This, in turn, is expected to provide support to domestic price trends as well.
After registering a considerable decline in financial performance from Fiscal 2015 onwards, profit margins and debt coverage indicators for bulk tea players are likely to see some improvement in Fiscal 2018 on the back of an expected increase in prices, especially for players operating in relatively higher quality tea segments. In addition, increased production, which, in turn, results in better absorption of fixed costs, together with input tax credit available under the GST structure, is also likely to support performance. However, the overall improvement would be limited by continued costs pressures, mainly on account of increasing wage rates, Das added.