Local tea industry in a fix

By Cheranka Mendis
The volatility in Middle Eastern markets, coupled with the increasing issue of low quality due to competition and increasing costs, has placed the local tea industry in a big fix, which could, if unattended, immediately mark the end of a Sri Lankan legacy in four to five years.
Despite Sri Lankan tea known as one of the world’s best and commanding a premium price in the world market, the real situation of the tea industry is one of despair, the Sri Lanka Tea Factory Owners Association warned yesterday.  Given the uncertainty in the world market and burdened with the ever-increasing cost of production, the industry stakeholders, especially the tea factory owners who mainly manufacture green leaf of the smallholder sector, are currently facing a crisis situation.

Members of the Association noted that the industry needs to urgently improve productivity and generate new markers while the Government has to put in place a national policy addressing these issues.

Currently smallholders account for 46% of the national tea production. The number of registered smallholders is recorded as 450,000, on which some 1.2 million is dependent. Dependents on the entire tea industry in Sri Lanka amount to 4.3 million.
“Cost of production for the tea industry has increased by 30% since mid 2011, which is unbearable for the factories,” Sri Lanka Tea Factory Owners Association Chairman Kalana Dahanayake said.
“We operate under a Reasonable Price Formula introduced by the Government, under which we receive only 32% from the revenue. The remaining 68% goes to smallholders. However, with the increases in costs, especially labourer salaries, fuel, electricity and wood, manufacture costs have increased and are in a range between Rs. 110-Rs.120 per kg.”
He noted that factory owners were burdened with additional costs due to competition in getting leaves as well. These costs are made of outturn, transport and the increasing quality of raw leaves.
Listing the increases in costs, Dahanayake stated that labourer salaries had increased from Rs. 200 in 2005 to Rs. 515 in 2012. Cost of a yard of wood has increased from Rs. 850 to Rs. 1,100- Rs. 1,200. Electricity costs have risen from Rs. 8.17 per unit in 2005 to Rs. 10.47-Rs.13.50 this year while a litre of diesel has gone up to Rs. 115.30 this year from Rs. 42.20 in 2005.
Affecting the quality of the tea produced is also the large number of players in the local tea market. He stated that over 700 factories produce more than 328 million kgs annually. There are 400 tea factories of smallholders in the low country, which is 95% of the total smallholder community of tea. They are constantly engaged in competition to take the leaves produced. This has resulted in the quality standard of the tea leaves depreciating.
With Iran being one of Sri Lanka’s key importers of tea, the sanctions placed due to the unrest has placed challenges in financial trade even though the demand for tea still remains at a satisfactory level. This has been one of the reasons for the decreased demand at Colombo Auctions. Compared to 2011, low country tea is now at Rs.45-50 lower than the previous year.
“To face the rising costs, the industry must increase productivity and look for new markets to export tea,” he said.
For low country tea, average price called at auctions in January 2011 was Rs. 401.95 while the demand this year was at Rs. 365.11. In February the difference was Rs. 408.99 in 2011 as against Rs. 364.28. The average auction prices for the rest of the year in 2011 was Rs. 403.02 in March, Rs. 386.48 in April, Rs. 368.34 in May, Rs. 366.90 in June, Rs. 371.94 in July, Rs. 377.93 in August, Rs. 369.94 in September, Rs.372.46 in October, Rs.363.80 in November and Rs.380.34 in December.
Former Director of John Keells Tea Dr. Sarath Samaraweera stated that Sri Lanka was the highest priced black tea exporter in the world. In 2010 the country’s FOB price on average was US$ 4.35 per kg while the Indian figure was US$ 2.91 and Kenya US$ 2.80. While that can be viewed as good news, it has its own problems when the price is high when it comes to selling, he warned.
“We are also orthodox tea producers as against CTC types produced in India and Kenya primarily. Our quantity of CTC is fairly small.”
A major factor in the country’s market domain is that the country exports a high percentage of low grown and mid grown teas to CIS countries. In 2010 CIS imported 262 million kg for the country, of which 25% came from Sri Lanka, making it the number one supplier.
“However, when assessing the patterns of buying, in quantities purchased while total exports of tea have increased, Sri Lanka’s contribution as exports has decreased over the last five year period.”
He stated that for example imports to Russia increased by 6.9 million kgs per year but Sri Lanka’s exports decreased by 5.7 million. The rise was taken by China, Vietnam, India and Kenya, which increased their exports to Russia and CIS.
Noting that the Middle East was the next important region, Samaraweera stated that Sri Lankan exports decreased by 2.8 million in UAE and Saudi while Kenya increased. There is a shift in the market which is worrying as far as Sri Lanka is concerned. In Iran known as a big importer of Ceylon tea buying approximately 30 million kgs, the same situation prevails. Imports by Syria which also buys about 30 million kgs are decreasing.
“There are many negatives we can see. We seem to be sending lot of tea to these countries but seem to be losing bit by bit. This makes it necessary for us to look for new markets.”
Samaraweera stated that the situation affects the smallholders greatly. He said that traditionally a dip remains for two to three months and picks up, but this time it has gone down for about a year and coming down by almost Rs. 40 which is 10% of the price, with the pickup seeming extremely slow.  Even with the rupee depreciation there were no major increases, he said, until last week.
“Due to uncertainty in the exchange rate, traders are reluctant to give their benefit to us not knowing what next week will be. Once it stabilises at a certain exchange rate they will factor that in with the orders.” However he noted that there is no stabilising seen in the near future owing to increases in fuel and electricity. “It is not going to be easy.”
Countries also now ask for long-term credit, Immediate Former Chairman of the Association, Paani Dias said. “Most tea countries like Russia has gotten into the habit of long-term credit which goes up to about six months. Only the Bank of Ceylon is open for LTs with the issues while private banks are not ready to take the risk. Issues prevail there as we do not know how the Bank of Ceylon can continue extending that facility to the exporters.”
“The industry is worried about the future,” Dias said. “We expect the Government to make some arrangements so that exporters can get some funds to participate at the auctions. It is depressing that even with escalating costs we receive almost the same level as before.” Referring to the Reasonable Price Formula placed by the Government, he stated that the formula could not operate successfully due to the increases in costs.
The scale of operation is also important, he expressed. “While in Sri Lanka 700 factories produce 300 million kgs, in Kenya 100 factories produce 400 million kgs of tea. Their costs are much lower due to the scale of operation.”
Sri Lanka’s cost of production is among the highest in the tea-producing countries, he said. While Sri Lanka adds 50% value addition to tea compared to the 10% by Kenya, the country should also increase value addition to fight better in the world market.
Dias also stated that the increases in labourer salaries have had its toll in the industry. While the Association is not part of the collective agreement for wage increases, they have been “forced” by authorities to comply with the same. With the agreement coming in to effect from December 2011 with Regional Plantation Companies introducing a 32% increases, the smallholders too must undergo the same.
With firewood cost rising due to a rubber factory being established in Horana which has caused mass environmental damage on top of reducing the number of firewood left for the tea industry, their problems have doubled, he said.
“Most factories will end with negatives. The foremost challenge is survival,” Dias said. “This is an industry serving a good proportion of the community. The State must take more interest in the matters to make things right.”
He also noted that a number of large blenders have moved out from Sri Lanka in the recent past and taken up operation in India and Dubai. The reason for the move was the request of certain policy changes that the authorities refused. The blenders now outsource the necessary tea from Pakistan, Egypt and Kenya.
Subsidies must be given for replanting as well, said Past President of the Association Nawarthne Pilapitiya. “Else the industry could be nonexistent in four to five years. It has come to a situation where the next generation is reluctant to think about the tea industry in a positive manner in the smallholder business. What was known as a lucrative business few years back is certainly not regarded with the same level of enthusiasm.”
He stated that certain factories were now looking at cinnamon and rubber for replanting rather than tea. “Smallholders can find a profit of Rs. 500 from one kg of cinnamon.”
He asserted that the Government should give one good quality tea plant to the smallholders as they do with coconut and cinnamon to encourage quality replanting for the future.
While the Plantation Minister has organised a Task Force to look in to the matter and come up with reasonable solutions to the problems, Dahanayake stated that the solutions needed by the tea industry were long-term ones.
“The smallholders must be educated and projects to support them must be encouraged and made popular,” he said. “Quality standard tea plants must be given to smallholders in addition to subsides that would actually benefit them.”
New markets such as India and other untapped Asian countries must be looked at. The growing black tea market in China is also a possible destination to export local tea, he said.