A tea industry report says the global credit crunch will continue to stifle Sri Lanka’s tea trade this year. As it is, local tea factories and traders are already in a cash crunch and are also finding it difficult to raise credit.
The annual industry report from Asia Siyaka Commodity brokers, notes that further deterioration of the financial situation in Russia and the Middle East will add to existing problems in Sri Lanka’s tea sector.
“We believe that a further deterioration of the currency and banking situation in Russia and Iran – who are strong buyers -, will have a direct impact on the market for Ceylon's. Dubai, a major trading centre and trans-shipment port for low growns, is not very stable at the moment. Pakistan is in trouble, but is the major player in Kenya. A crash at the Mombassa auction will hurt high grown Ceylon's,” the report said.
Sri Lanka’s strong Rupee will continue to work against the local tea sector by making Ceylon Tea more expensive against Indian and Kenyan output, as these countries have de-valued their currencies.
Meanwhile, a new round of wage negotiations between plantation sector trade unions and plantation companies, are also due by March this year. Analysts are expecting trouble at the pow-wow that could result in strikes and lower output.
“Regional Plantation Companies (RPC) are due to negotiate wages by March '09. There could well be a break down given the heavy losses made by RPCs and pessimistic market out look for 09,” said the report.
Extended dry weather has already made drastic cuts in tea output this year, so far. Other factors, such as inadequate fertiliser application and pruning of some smallholdings, are expected to add to the production drop in the first quarter. Recovery, is left to the weather gods.
“If rains resume mid-March crop increases could be expected after New Year in April,” says the report. However, 2009 is not all doom and gloom. The reduction in fertilizer prices will help cut costs and increase outputs. Shipping costs have also dropped with more ships chasing less cargo and fuel costs sharply lower. Shipping rates are expected to remain in favour of the shipper, at least until the third quarter of 2009. Tea prices too, are expected to follow the general global trend of increasing food prices. “On the balance the positive factors out-weigh negative ones. We believe therefore, that tea prices will hold firm throughout Q1 with a probable dip in values mid-Q2. With pre winter buying resuming in Q3 we expect a gradual recovery thereafter,” said the report.
However, tea prices are expected to fluctuate over short spells, as buyers will tend to operate on low inventories, confirmed orders and payment on shipping. Doing business on credit is seen as high risk in 2009.