Sub-normal production during three consecutive years between 2020 and 2022 and a higher volume of export from India are expected to result in a significant tightness in pipeline stock, which is likely to provide some support to bulk tea prices going into the new season.
Buoyant tea prices, particularly of good quality CTC and orthodox, would lead to an improvement in the margin of North India (NI) based bulk tea players in FY23, despite the wage increase in CY2022, ICRA said in its latest quarterly report on bulk tea. Earlier in FY22, a moderation in domestic tea prices due to increase in production on a year-on-year basis, and increase in wage costs compared with FY21, had impacted the operating margin (OPM) of bulk tea players.
“Flattish production and strong demand for quality CTC and orthodox teas augur well for the sustainability of firm realisation for North India tea estates till at least the first half of CY2023. Besides the sharp rise in orthodox prices, the price premium for North Indian CTC for the top 50 estates also remained high at Rs 116 a kg in the first ten months of CY2022 vis-a-vis ₹80 a kg in CY2019. As a result, notwithstanding another round of wage increase in CY2022, the operating profit margin of bulk tea players is likely to improve in FY2023,” Sujoy Saha, Vice-President and Sector Head, Corporate Sector Ratings, ICRA said in the report.
Lower crop in Sri Lanka
The economic crisis in Sri Lanka has led to a production loss in the island nation, which is the largest exporter of orthodox tea globally. This has kept the supply tight in the international market in CY2022, which not only led to higher volumes of export from India but also drove the prices of orthodox tea in the domestic market upward. Cumulative prices for North India as well as South India (SI) orthodox teas during seven months of FY2023 increased by nearly 32 per cent to ₹300 a kg and around 9 per cent to ₹154 a kg, respectively on a YoY basis.
The price rise, in case of NI orthodox teas, was much higher compared with SI orthodox teas because of the formers’ superior quality. ICRA expects the prices of orthodox teas in the domestic market, for the full year, to remain at a substantially higher level, compared with the FY2022 levels, as Sri Lanka is likely to suffer further production losses, albeit at a decreasing rate, for the balance period of the year.
“The shortfall in production in Sri Lanka has enabled Indian producers to increase exports to meet the steady demand for orthodox teas in the global market. In the nine months of the current calendar year, tea export increased by nearly 16 per cent in volume terms with orthodox volumes increasing by nearly 22 per cent. In value terms, the value of crush-tear-curl (CTC) export is marginally down, but that of orthodox export increased by nearly 22 per cent. Export prospects of orthodox teas look favourable in the near term as well; the long-term sustainability of high volumes, however, remains to be seen,” Kaushik Das, Vice-President and Co-Group Head, Corporate Sector Ratings, ICRA, said in the report.
Shift to orthodox
In the first nine months of CY2022, cumulative all-India production of bulk teas increased by nearly 21 million kg (nearly 2 per cent) to 985 mkg . Lucrative orthodox tea prices led to a partial shift in production from CTC to orthodox variety of tea as reflected by a YoY production increase of orthodox teas by nearly 12 per cent to 100 mkg. However, production in North India in October is expected to be lower due to the festival season, which is likely to bring down the all-India production during the ten months of CY2022 at a level comparable with the same period last year.
ICRA expects the annual production in CY2022 to remain flat as no major recovery is expected for the remaining two months, which typically contributes close to 15 per cent to the annual production.
On the global front, in the first seven months of CY2022 aggregate black tea production (India, Kenya & Sri Lanka) is lower by around 54 mkg, reflecting a contraction of around five per cent, driven primarily by the production loss in Sri Lanka. With Sri Lanka likely to suffer further losses, albeit at a decreasing rate, for the balance period of the year, global production is likely to witness close to three per cent contraction in CY2022, it said.