Financial Times

Tea prices tumbling while production costs climb

By Dilshani Samaraweera

The Colombo Tea Auctions are slowing down with the high tea prices seen earlier in the year, reversing.
“Earlier this year, the market was very good. But now the market has declined significantly,” the Chairman of the Private Tea Factory Owners Association, Anil Perera, told The Sunday FT.

“During the last 4 – 5 weeks, between 25% - 30% of tea on offer at the Colombo Tea Auction, has remained unsold. These percentages are very high. It indicates that demand has dropped, and prices are already declining, particularly for low-grown teas. Prices in September, on average, dropped by about Rs 30 – Rs 40, compared to July-August. The prices of high-grown teas show a similar downward trend,” said Mr Perera.

By July this year, tea exports brought in US$ 756 million. The Tea Board is targeting a US$ 1.4 billion income by the end of the year. “If tea prices continue to decline, the US$ 1.4 billion target may not be possible, although we can certainly do better than last year” said Mr Perera.

Demand for tea generally improves in the last half of the year when cold weather returns to major tea export destinations like Russia and the CIS countries. So tea factories are anxiously watching the market, because production costs, mainly fuel and electricity prices, are erasing the gains from high prices earlier in the year.

The tea factories estimate that compared to August 2007, in August 2008, the cost of electricity had increased by 56%, produce transport (cost of transporting made tea to Colombo) had increased by 55%, cost of leaf transport had increased by 31%, labour costs by 29% and firewood by 22%. (The costs are per kilo of tea, based on production per month.)

Productivity problems
The tea industry is now looking for alternative energy sources to cut down energy costs.
“Yes, the factories are all affected by cost increases. Because oil prices increased they are using firewood, but even firewood prices are increasing because the supply is not enough. So we are giving incentives for mini-hydro projects,” said the Chairman of the Tea Board, Lalith Hettiarachchi.
The rising cost of living is also pushing up the cost of labour.

“In addition to fuel, labour costs are a major concern. For plantation companies, almost 60% of the production cost is labour. But compared to our competitors, our productivity rates are lower. For instance, the output per head in India is 35 kilos and in Kenya it can go up to 80 kg. In Sri Lanka, it is 15 kilos, and at most 20 kg with incentives,” said Mr Hettiarachchi.

The Tea Board is also worried about tea production.
“Because of the high cost, tea re-planting and use of fertilizer is not up to the required level. Re-planting should be around 2% of the total acreage. But actual re-planting is only about 0.7%. It is the same with fertiliser use. Because of the high cost people are not applying the required amount of fertilizer. These factors will eventually reduce tea output,” said Mr Hettiarachchi.

The cost of re-planting is estimated at around Rs 1.2 million – Rs 1.5 million in the highlands, and is only slightly lower in the lowlands. Meanwhile factory owners suspect that extreme weather patterns could already be hurting tea plants in the island.

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