Global tea shortfall and currency depreciation silver lining for Sri Lanka tea in 2016 ?
View(s):A global tea shortfall of approximately 80-100 million kg of tea in early 2016 should, in normal circumstances, boost prices, with a further depreciation of the Rupee against the US dollar provide a mixed-bag future for Sri Lanka’s struggling tea sector, industry analysts say. According to tea broker Forbes & Walker (FW), global tea production up to end of the 3rd quarter and the forecast for the last quarter estimate a global crop deficit of 80-100 million kg next year.
“A significant feature would be the sharp decrease in production of approximately 50 million kg from Kenya (primarily CTC teas) and India recording a shortfall of approximately 20 million kg and to a lesser extent Indonesia, Malawi and Sri Lanka. From a Sri Lankan perspective, an important factor in the supplier equation is that Orthodox tea which accounts for 90 per cent of our total tea crop would record a decline of approximately 8 million kg compared to 2014. However, tea production in 2016 is also unlikely to record any appreciable change in the backdrop of the likely change in the fertilizer policy.
From a global angle, rising concerns of an El-Nino impact would also warrant due consideration,” the report reviewing developments in 2015 and offering an outlook for 2016, said.It said the decline in US Dollar terms would record an even sharper decline compared with 2014 following the devaluation of the Sri Lankan Rupee against the US Dollar during 2015. “This brings in to focus the sharp decline in auction averages brought on essentially by economic and political issues in Sri Lanka’s key tea exporting markets which mostly impacted Sri Lanka’s Low Grown teas,” FW said.
The country’s plantation companies (RPCs) are struggling to cope with rising costs, falling tea prices and unbearable debt. Some are seriously considering the viability of continuing or selling off to profitable companies. Recently workers from Mackwoods Group plantations protested in Colombo outside the group office over wage demands and delayed payments.The FW report said the global commodity crisis emanating from political issues between Russia/Ukraine, turmoil in the Middle Eastern markets (decline in oil and gas prices – which is the lowest since Jan/Feb 2009), drastic currency depreciation in key tea importing countries, economic sanctions, etc have affected the Colombo tea market in particular and to a lesser extent demand for tea in general during 2015.
Consequently, tea prices particularly in Colombo which reached a record high in 2014 ended the year substantially weaker. The Colombo Auction average for calendar 2015 is approximately Rs. 62 lower than the corresponding average in 2014, the report said.On a positive note however, the tea broker said a turnaround in auction averages was recorded particularly in the last 2015 quarter which could be correlated to the depreciation of the Sri Lankan Rupee. However, the full impact of the currency advantage is not reflective “as we have seen in the past” possibly due to the continued weakening of crude oil prices.
“Under normal circumstances in the back drop of approximately 80 million kg tea shortfall, the year 2016 would have commenced with buoyant prices. However, in this instance, the weak Russian Ruble, Regional turmoil in the Middle East, drastic currency depreciation, economic sanctions etc. continues to prevent the optimism. In this back drop, China becomes an important destination for growth. Currently, other than Japan, all other major tea importers among the top 10 importers rely on oil and gas for the stability of their economies. Therefore, with crude oil prices between US$40-45 a barrel, a buoyant market forecast for 2016 may be optimistic,” the report said.