• High tea prices to compensate for potential volume loss

Fitch Ratings said yesterday cautioned the fertiliser ban would weigh on plantation sector productivity in the near term.

In a new report on corporate sector of Sri Lanka, Fitch said that the current ban on the importation of chemical fertilisers was a credit negative for rated corporates such as Kotagala Plantations PLC and Sunshine, given their exposure to palm oil plantations. 

On 6 May, Sri Lanka banned the importation of chemical agricultural inputs such as fertilisers on health grounds, and the government estimates this will conserve around $400 million of outflows per annum.  

Fitch said according to The Colombo Tea Traders Association, local tea output could fall by as much as 40%-50% if the ban continues. 

Industry sources believe the Government has sufficient stocks to supply chemical fertilisers for the next 12 months, but there is limited visibility beyond that horizon.  

Fitch said unlike Kotagala, Sunshine could resort to using readily available organic fertiliser from its dairy operations as an alternative to chemical fertilisers, which should help to mitigate the drop in crop yields to an extent. 

Fitch believes tea plantations may find it challenging to offset the decline in yields via higher tea prices. “We estimate that tea prices of more than $ 5 per kilo will be required to offset the potential output fall resulting from the inability to use chemical fertiliser in the near term,” Fitch said. 

“We expect local tea prices to rise if the ban on imported fertiliser remains in place for an extended period due to supply constraints as well as its new organic appeal. However, the highest recorded tea price at the Colombo auction historically was $ 4.30 per kilo in September 2017,” Fitch added.

Weakening external finances to pressure corporate ratings: Fitch