By Asia Siyaka Commodities
World production of tea has shown a steady rise since 2012 from 4.6 b kgs to 4.9 b kgs in 2013; driven primarily by China.
China’s total production, which was at 1.3 b kg in 2009 has leaped to 1.9 b kg by 2013, an increase of 566 m kg (+42%). Of this total 68% or 1.3 b kgs comprise Green Tea and 615 m kgs or 32% are Black and Other Teas. Of interest is that tea retained for consumption has increased 51% from 1.05 b kgs to 1.59 b kgs.
Colombo Tea Auction, though performing better than all other auction centres in 2014, has experienced the unusual phenomenon of a weak Q4
From the point of view of Black Tea supply Kenya’s continual expansion to reach 432 m kg in 2013 and India’s reaching 1.2 b kgs are significant. India’s domestic absorption however, is estimated at around 82%. Kenya’s retention is not materially significant.
Increased production from other small African producers and mostly sold through the Mombasa tea auction in Kenya, has also contributed to the expansion of Black Tea traded globally in 2013. Available data for 2014 shows that these high levels of production had been continued.
Whilst there had been protests by Kenyan farmers in 2014 at the low prices realised; it is unlikely that production will decline in 2015. This assumption excludes the impact of weather on production.
Sri Lanka is almost a unique supplier of High-end Orthodox Black Tea and is sheltered to a great extent from increased supply of CTC Teas. The market for Small Leaf High Growns however, is more vulnerable particularly at the lower end of quality. In 2013 Sri Lanka achieved a highest ever crop of 340 m kg and 2014 would be around the same level.
All things being equal 2015 should see a similar volume produced. A caveat would be the continuation of fertiliser subsidy and the absence of disruption due to wage negotiations with RPCs scheduled for end Q1 of 2015.
Globally, in Q4 2014 and Q1 2015 climate change were initially projected in the Southern Hemisphere where most tea is produced. The relevant tracking centres have since reduced the probability significantly.
More than 90% of Sri Lanka’s tea exports are shipped to the Middle East, North Africa and Russia/CIS Countries. Many critical markets have significant domestic issues that will impact on prices at the Colombo Tea Auctions. The impact of crude oil prices on the price of tea has been studied by the FAO and confirms a linkage, which has been known by the trade for some time.
On the demand side for Sri Lanka, however, the impact is more significant. Markets such as, Russia, Iran, Saudi Arabia, Iraq, and Kuwait and to a lesser extend Libya and some of the Gulf Countries are all major oil producer, consumers of Ceylon Tea.
The impact on their currencies and other domestic factors resulting from sharp drop in national income could be significant; if oil prices continue weak in the medium term. Additionally social unrest in Syria, Ukraine and Libya has already had its impact on tea prices at the Colombo auctions.
Iran, a major buyer of high quality Low Growns, has seen a steading of its currency and is likely to improve its purchasing power in 2015 as tensions with the west diminish.
For Sri Lanka, behaviour of the Russian market would be critical in 2015. Weakening of the Ruble would place Sri Lankan tea exporters and Russian importers under extreme pressure. Sri Lankan exporters who have shipped on credit could have complications with receipt of full payment; whilst brand marketers of teas packed in Sri Lanka could see a sharp erosion of margins if tea prices do not reflect the changes.
On a positive note, with Russia’s accession to the WTO in August 2014. Tariff on value added imports have declined. In September 2014, the applicable rate dropped from 17.5% to 15% and in the same month of 2015 the rate would be 12.5%. Duty on bulk tea was brought down to 0% in 2013.
For Kenya and other producer exporters of CTC Teas, the ability of Egypt to absorb greater volume in 2014 would be a positive sign, with hopes that it could be continued. They would also count on Pakistan to continue its strong operations at the Mombasa auction in the year ahead.
The UAE has grown as a major hub for re-export of Kenyans teas and will play its part. Russia too would be counted on to continue absorbing greater volumes of African Teas.
Colombo Tea Auction, though performing better than all other auction centres in 2014, has experienced the unusual phenomenon of a weak Q4.
Contrary to the previous pattern of price decline for Low Growns in Q1, therefore we expect the market to hold during this period with some strengthening of categories as deferred orders come in. The strength of the market for Low Growns is that the extensive mix of grades and standards are often shipped to a mix of markets.
Seasonal dry weather and holidays during end Q1 and early Q2 could restrict supply and help maintain prices during the period. Increased supply thereafter and slower demand during summer months could cause a dip in the market till early Q3; when the market strengthens when winter demand picks up. Over all, given the volatile conditions in key importing markets, we expect short term price fluctuation to be a factor throughout the year.
For High Growns, the late commencement of the season would keep prices of average westerns at comparatively lower levels in January. With improved quality thereafter the market should improve for better liquoring teas and could continue for teas offered for sale in to April, subject to climatic conditions.
In the absence of any disputes resulting from wage negotiations; increased supply in Q2 would have its impact on prices until the Eastern Quality season kicks in. If winter demand follows, the market will continue to improve going into Q4.
Maintaining quality would be critical and we believe that teas not meeting these standards would be heavily discounted more so than in previous years.