Amidst the gloom and doom in the Sri Lankan and the global economy, there is a silver lining.
Commodities, once Sri Lanka’s biggest export earner, has been hitting record levels in the past several months and are expected to show good returns this year too.
Record earnings last year saw tea pass the $1billion-mark for the first time in history while rubber, a couple of years ago considered a losing crop, is at the $3 per kg level – a far cry from the days in pre-2003 when it was a measly 0.50 US cents per kg!
Separately migrant remittances are also making sure Sri Lanka’s bank balance internationally is reasonably sound.
In the pre-free markets reforms era (before 1977) it was tea, rubber and coconut that generated foreign income and held the economy together. In fact these commodities and its command in the world economy was the mainstay of the then Ceylon economy and propelled the country to amongst the top in Asia.
Come post 1977, and commodities (tea and rubber in particular) complained of step motherly treatment while successive governments shifted the focus to non traditional sectors like garments for example. Currently garments is the biggest export earner. However a sizable component of its finished product is imported.
Current trends also show that migrant remittances may soon reach garments’ earnings levels given the increasing number of jobs available in Middle East for skilled and male categories, and wage levels rising particularly for housemaids.
Are we returning to a period where commodities are regaining their lost glory in Sri Lanka? Possibly so in the context of a burgeoning middle class in China and India, the fastest growing economies in the world.
While rubber is seen as the major beneficiary of the growth in these two modern-day economic giants, tea is benefiting from rising incomes in the Middle East where buoyant fuel prices is also spurring investments. This in turn is triggering massive employment opportunities for Sri Lankans and other labour sending countries. Ironically Sri Lankan and other foreign communities in the Middle East may be propelling the demand for tea which is raising the bar in price levels.
Traditionally the May to July period is a low-price, low-consumption phase in the Middle East and the CIS region. But this year, prices are soaring. This is partly because of good fuel prices and lifestyle changes.
Average prices of low growns, the most popular tea, at the Colombo auction have fetched US$3.38 per kg in May from $2.55 in May 2007, while the April 2008 price was $3.22 against $2.51 in the same 2007 month.
High growns have traded at an average $2.65 in May 2008 against $2 in the earlier year and $2.62 in April against $2.09 in the same 2007 month.
With demand rising, Sri Lanka is most likely to surpass the $1 billion export earnings mark in 2008, for the second successive year. However with all these positives in the tea industry, the trade continues to complain over rising production costs largely due to the exhorbitant cost of energy.
Rubber went through a bad patch in early 2000 and led to some companies moving from what was perceived as a ‘sunset’ crop to palm oil known as the ‘sunrise crop’. There was opposition from some quarters over the shift which was essentially in small rubber areas and mainly unproductive land.
Now even palm oil is doing well and with rubber hitting record levels, some plantations are laughing all the way to the bank! Stock prices of some of these companies have soared to Rs 70 per share from Rs 7.
The prognosis on rubber is very encouraging for Sri Lankan policy planners and the economy. Current estimates show that demand will rise to 2020 with the commodity being in short supply; that means prices will either rise or stay at these levels. Growth in China is boosting motor vehicle sales.
China is the biggest global consumer of both natural and synthetic rubber, beating the US. This August’s Beijing Olympic games is going to fuel another economic boom in China.
Synthetic rubber prices have also gone up and keeping pace with natural rubber prices due to high petroleum costs. Weather is also a factor in prices and if there is rain in parts of Asia, production would be affected. Some 70 percent of global rubber output comes from Thailand, Malaysia and Indonesia.
While Sri Lanka goes through its host of political, social and economic crises, lucrative export earnings in tea and rubber are likely to continue for several months and help keep the balance in the import-export equilibrium. On the other hand it’s something to cheer about for the country’s traditional industry which has long maintained that commodities will be the mainstay of the economy for another century!