Sri Lanka tea review 2013 and outlook for 2014

Thursday, 2 January 2014 00:01 - - {{hitsCtrl.values.hits}}

By Asia Siyaka Commodities Plc Tea Auctions/market Sri Lanka had an extraordinary year, with prices for Ceylon Tea moving on their own and seemingly out-of-sync with the rest of the world. Sri Lanka’s unique range of orthodox black teas attracted strong demand throughout the year; even as some of the county’s key markets such as Iran, Syria and Libya were in turmoil. Additionally Egypt, a major buyer of African Black Teas, went through a bad patch politically and economically. High supply and slow demand saw prices at the Mombasa auction in Kenya slump to a four-year low. In Sri Lanka the market for Low Grown Teas took a dip early in Q4 2012, but picked up in December in that year and strengthened in Q1 2013. By April, sanctions against Iran began to take effect and together with increased supply during Q1, prices slide during the summer months of June and July. Thereafter, bad weather that set in from July stayed through till September and restricted supply. From August demand increased steadily as channels of supply to key markets improved. The market that was looking for direction during Q2 improved rapidly from early Q3 and remained strong all the way through to the end of 2013. The market for teas from higher elevations is driven by some key factors. The two quality seasons in Q1 and Q3 together with increased demand during the pre-Winter buying period from mid Q3 to Mid Q4 play a critical part from the point of supply quality and increased demand. The Dimbulla season did not gave the anticipated weather pattern and prices were not as strong. High grown teas at the plainer level in particular were discounted as they are substitutable with other origins and are vulnerable to global market forces. Prices peaked during Q4 2012 and held on till January 2013. The market weakened thereafter following higher global supply. This trend continued until June. Excessive rain and continual over cast conditions from mid-May until July on the Western Slopes had quantities drop sharply. The market responded and prices for Westerns rose steadily from June. Even with a recovery in production, stronger pre-winter buying demand kept the market steady until November, but dipped during December. Overall prices at the Colombo Tea Auctions remained higher than other centres during most months of the year.

Record tea crop projected Sri Lanka Tea Production during the year 2013 could have well reached an all time high of 335 Mnkg. Sri Lanka Tea Board published data for November shows a total of 309 Mnkg and December would be in the region of 26-28 Mnkg. In 2012 328 Mnkg was achieved and the highest-ever was 331 Mnkg in 2010. The final figures for 2013 on the face of it indicate a year of steady production, but in reality it was far from this. Q1 saw good crop intakes with March peaking at 33.5 Mnkg. Q2 got off to a good start with April and May continuing the good cropping trend. From mid May however the weather pattern changed dramatically with heavy rain and overcast conditions continuing to July on the Western slopes of the Central Hills and some Low Grown areas experienced short very heavy shows and almost continual overcast conditions. Production from the Western High Growns and Western Mid Growns dropped dramatically. There was some compensation with better weather being reported on the Eastern slopes with crops improving when compared with the drought effected same period in 2012. Low Growns should achieve an all time high of around 205 Mnkg; against 202 Mnkg. High Growns could reach 75 Mnkg against 73.6 Mnkg in 2012 and Mediums 56 Mnkg against 52 Mnkg the year before. Sri Lanka tea exports 2013 Exports Available data for November analysed by Siyaka Research suggest that Sri Lanka will achieve the country’s tea export USD earning target of $ 1.5 b in 2013. By November the country had exported 290.6 Mnkg of tea and earned $1.40 b. Final figures for the year therefore would be close to 320 Mnkg at an approx. USD value of $1.54 b. In 2011 the country earned $1.49 b and in 2012 the figure was $1.40 b making 2013 USD earnings the highest ever. In SL Rupees the income figure would be in the region of Rs. 197 b. Well above the 2012 figure Rs. 164 b. A review of different segments that make up tea exports and following amendments to the specifications of packet tea from three to 10 Kgs. Mid 2010, value added shipments have risen to 61%. In 2012 similarly the figure was 55%. Based on the universal classification of a packet at three Kgs, the Tea Board estimates that total value added exports in 2013 is 41%. Of this 8% was shipped in tea bags. Russia/CIS continues as the prime destination for exports of Ceylon Tea with absorption of 22% of all exports down from 24% the year before. Iran 12%, Turkey 10%, Iraq 7% Syria 7% makes up the top five destinations. High Grown quality tea buyer Japan absorbed 3% and Germany 2% of all exports respectively. Imports by Libya have slumped dramatically from 5% of all exports in 2012 to 2% this year. Outlook 2014 Supply 2013 was a good year for tea production with most of the world’s leading producer exporting countries achieving surpluses over 2012. In Asia available data indicates that Indian YoY gains could be 90 MnKg mostly from the North. China based on recent trends could well push past the first ever 2 b Kg mark though gains have mostly come from the Green Tea segment. Sri Lanka too is heading for a record crop figure of around 335 Mnkg. In Africa Kenya is set for a record production figure that could reach 432 Mnkg. The cumulative gain for the 12 month period could be around 68 Mnkg. Interestingly, exports by October 2013 had reached 415 Mnkg and the 12 month figure will likely exceed the highest 441Mnkg exported from Mombasa in 2010. An indication that there is no large build-up of stock and prospect of carry over. Kenyan exports usually include a percentage of teas of other African origins. Malawi and Ugandan production are at 2012 levels. Sri Lanka Though figures indicate a good year for tea production, the lack of predictability of distribution monthly, has resulted from extremes of weather. The unprecedented heavy rains and overcast conditions from mid-May to July restricted Supply from the Western slopes of the Central hills and from some Low Grown areas. This unpredictability will be a key determinant throughout 2014; even as the dry Western quality season sets in during Q1 2014. Continuation of the fertiliser subsidy and questions over this key ingredient’s availability will also play an important part in an industry grappling with ageing bushes and depleted soils. In 2013 production loss often coincided with slack periods in the market and improved later when demand picked up. For Low Growns, this factor and stronger demand took prices up to record levels. Demand Some important tea consuming countries are likely to continue unsettled in 2014. Syria, a 90% Ceylon Tea market whose imports peaked at 32 Mnkg, will see direct imports drop well below 23Mnkg in 2013 and could slide further. Libya, similarly a market dominated by Ceylon Tea, had imports drop30% in 2013. Iran, one of Sri Lanka’s most important markets, had direct imports to the country decline 20% in 2013. Most of the slack however has been taken up by other channels serving this destination. Latterly however, there has been a strengthening of demand in this market not just for Ceylon Tea, but India too has taken advantage of its Rupee/Riyal settlement agreement with Iran and boosted exports to this destination. Easing of sanctions and strengthening of the Iranian currency would at least sustain demand through 2014. Egypt, the largest buyer of African Teas, has diminished as a force in the Mombasa auction. Conditions in that country could continue unsettled in the medium term. In Colombo we have seen a strengthening of demand for tea from other Middle Eastern and North African countries and projections are that this demand would continue in 2014. Economic strength of Russia has helped grow its demand. For Sri Lanka, Russia’s ascension to the WTO had its first positive outcome, with duty on value added imports being reduced from 20 to 17.5% in September 2013. On 1 September 2014, the next scheduled reduction will bring duty down to 15%. We are optimistic that the revival of the Japanese economy will stem the erosion of demand seen in the recent past and improve its purchasing power, which is critical to the better liquoring High Grown market segment. Outlook 2014 The market for Ceylon Orthodox Leafy Black teas particularly from the Low Grown segment that closed 2013 on a high note will see demand sustained through Q1 2014. Seasonal dry weather during this period could keep Low Grown supply tight. Post the Iran New Year in March and an easing of some consumption during the warmer summer months, there could be a price dip during Q2, but levels would yet be higher than last year due to stronger underlying demand factors and perhaps irregular supply. The market for High Growns though enjoying additional demand from the pure Ceylon Tea brands and international packers loyal to Ceylon Tea is more vulnerable to global price trends at the lower level of quality where cheaper other origin substitutes are available. Early cool conditions in December hint at a good Dimbulla season, which would attract additional demand at the Colombo Tea Auctions for these teas. Kenya has so far not had two consecutive production boom years. Should the easing of production reported in November and December 2013 continue into Q1 2014, we could see a settling of the market. Already buyers in Mombasa seem to anticipate this trend and prices have picked up to levels not seen in many months. Those High Grown Ceylons not maintaining quality will be vulnerable however, particularly during Q2 when weather conditions change.