Indian tea prices are likely to witness some buoyancy as exports are expected to pick up on the back of the brewing economic crisis in Sri Lanka and the current geo-political situation in Eastern Europe.
According to industry sources, Indian orthodox tea producers are likely to benefit from the lower crop in Sri Lanka, both in terms of volume and value of exports particularly to countries such as Iraq, Iran, CIS (mainly Russia) and the UAE.
The impact of a possible spike in exports emerging from higher demand from some of these countries is already reflecting in prices. Tea prices in South India have gained over the last few weeks, while those in North India are witnessing a strong opening.
Prices up over 5 per cent
Tea prices at the Kolkata auction centre is up by nearly 16 per cent at ₹225.79 a kg (₹195.14 a kg) while that at Guwahati auction centre is up by around five per cent at ₹242.09 a kg ₹231.06 a kg), Tea Board data suggests.
This apart, the drop in production of first flush crop in the North India estates, including West Bengal and Assam, and a lower carryover stock from last year are also expected to keep prices firm, sources said.
There has been a near 40 per cent decline in production of first flush crop in the North India gardens in the months of February and March due to lower rainfall and unfavourable weather conditions. Tea production has been lower in 2020 and 2021 and this has taken out excess supply of teas from the pipeline. Nearly 180-190 mkg of tea has been sucked out of the system because of the lower production during last two consecutive years.
“A lower crop coupled with the possibility of higher exports, is likely to keep prices firm this year,” a senior industry official said.
Exporters to benefit
Sri Lanka, which produces 280-300 million kg (mkg) of tea annually, is the largest exporter of orthodox teas globally. It ships out 94-95 per cent of its annual output. However, the current economic crisis is likely to impact its production and thereby export of teas, industry sources said.
According to Kaushik Das, Vice-President and Sector Head, Corporate Sector Ratings, ICRA, production in Sri Lanka has been impacted in recent months due to the withdrawal of the use of chemical fertilisers around mid-2021. The current difficult economic situation is also likely to impact production and costs during the calendar year 2022.
“In the international market, orthodox supplies from India directly compete with the low grown orthodox in Sri Lanka, which accounts for nearly 65 per cent of total production. Key large common markets are CIS (mainly Russia), Iran and the UAE. With production in Sri Lanka likely to be impacted, this provides an opportunity to Indian orthodox players to increase exports in the current year,” Das told BusinessLine.
During January-December 2021, India exported around 44.57 mkg of tea to total CIS countries of which exports to Russian Federation was the largest at around 34.09 mkg. It also exported 26.18 mkg to Iran and 17.08 mkg to UAE, Tea Board of India data suggests.
Russia, Iran and the UAE account for almost 30 per cent of total Indian exports in volume terms. In value terms, these three geographies accounted for nearly 35 per cent of the total value between 2016 and 2021, although the share has dropped to 32 per cent in 2021, the ICRA study said.
While Iran is predominantly an orthodox market, Russia and the UAE are a mix of CTC and orthodox. “Russia has been one of India’s largest export destinations. However, teas exported are of plain to medium categories, with Russia meeting its requirement of premium category teas from Sri Lanka. The likelihood of lower availability of teas from the island nation could see Indian producers replacing Sri Lanka as suppliers of quality orthodox teas, particularly to Russia if a bilateral trade and payment mechanism is established,” he said.
Apart from these markets, there is a strong potential to increase the share of exports to countries such as Iraq, Libya and Turkey.
According to Anshuman Kanoria, Chairman, Indian Tea Exporters Association, there is a huge opportunity for Indian producers to tap a significant share of these markets. “Iraq was once a good market but India has lost its share in the last few years. This (lower production in Sri Lank) is likely to give a huge opportunity for exporters to regain that share,” he said.
Quality, the key
Teas exported from Sri Lanka are at a premium over that from India. So there is an opportunity for India to increase both value and volume of exports.
“The difference in prices of teas is due to two factors - mix of CTC and orthodox, with orthodox teas usually fetching significant premium over CTC and higher proportion of packet and value-added exports from Sri Lanka as against bulk teas from India. The current situation of declining tea production in Sri Lanka and the geo-political scenario in Eastern Europe, gives Indian producers an opportunity to increase both the volume and value of orthodox exports, particularly to Russia,” Das said.
However, this may be contingent upon the ability of Indian manufacturers to export in packet or value-added form, which would entail some investments and the success of the bilateral (between Russia and India) trade and payment mechanism that is currently being discussed, which would put Indian players at an advantage compared to their Sri Lankan counterparts, he said.
Industry sources, however, caution that this could only be an opportunity if Indian tea makers focus on quality and avoid undercutting and shipping cheap teas.