Ceylon Tea Export Target Set at $1.5 B
BY SANJAYA HERATH
Tea, after apparel, is the second largest foreign exchange earner of the country. Its net foreign exchange revenue earnings could be more as it does not depend much on foreign inputs. The country achieved the highest tea export revenue of USD 1.6 billion in 2014 when the local tea crop reached 340 million kg.
Since then the tea crop has declined gradually due to a number of factors - adverse weather, lack of replanting etc. As the export volume of tea is directly related to the domestic tea production, the tea export volume and value too declined during the last six years and reached USD 1.3 billion and USD 1.2 billion in 2019 and 2020, respectively.
Tea is a vital sector in the Sri Lankan economy as it directly and indirectly provides employment opportunities for more than 1.5 million people. It also supports a number of other sectors such as banks, shipping, insurance, packaging, freight forwarding, flavour business, transport etc. Around 400,000 tea smallholder farmers and 23 regional plantation companies (RPCs) are engaged in the tea production and Tea export revenue trickles down to the growers’ level thus, supporting the rural economy.
The current annual average tea production in the country is between 300 and 320 million kg. The regional plantation companies (RPCs) account for 30% of the tea production while the smallholder growers contribute 70% of the annual tea production. Over 90% of Sri Lanka tea production is orthodox tea and CTC tea share is less than 10%.
However, the average yield per hectare is about 1,400 kg, comparatively lower than Kenya and India. It has the highest cost of production in the tea world. As the local tea production is stagnating since 2014, it affects the tea export capacity as well. Sri Lanka exported 290 million kg of tea in 2019 at a value of USD 1.3 billion. Approximately 35% of tea exports are in value added form of below 3 kg packages.
Sri Lanka exports more tea in value added consumer packages than any other tea producing country in the world. The share of export of value added tea exports in some other leading tea producing countries is – India (10%), Kenya (1 %) and China (estimated to be less than 10 %). Over 90% of Sri Lanka teas are sold through the Colombo Tea Auction that takes place every week.
It gives the best price to the producers as nearly 150 buyers compete with each other to secure tea to fulfil their contractual obligations to foreign buyers in more than 125 countries. The Colombo Tea Auction fetches higher prices than the prices realised at other tea auction centres. The price difference on some occasions exceed USD one per kg. It has been noted that prices received by the producers at the auction represent about 80 per cent of the average FOB price of bulk tea exports, a healthy situation for producers.
As per tea auction rules of Ceylon Chamber of Commerce/Colombo Tea Traders Association, the buyers are requested to pay for their purchases within seven days of purchase of tea, the fastest cycle to convert crop in to cash when compared with other agricultural products in Sri Lanka. Over 50% of Sri Lanka teas are exported to Middle Eastern countries.
Another 20% goes to Russia and CIS countries. Most markets in the two regions are volatile, high risk and low income countries. The international sanctions on some countries, civil wars and heavy dependence on oil income etc. are the reasons for instability in these markets. Sri Lanka tea exports to developed countries are comparatively low due to number of factors such as coffee consumption, high price, market preference for CTC teas for tea bags etc.
Impact of COVID 19 on Tea
Sri Lanka tea industry once again showed its resilience to internal or external shocks during the COVID-19 pandemic that started affecting Sri Lanka since March 2020. The tea industry was the only export industry that performed uninterruptedly from the beginning of COVID-19. With the Government blessing the growers continued with production of tea. All stakeholders got together to establish the first E-Auction platform for sale of tea to ensure the growers’ income and continuation of tea exports thus getting much needed foreign exchange for the country.
The tea exporters had to incur additional expenditure on staff welfare and safety by providing transport, meals, extra payment, sanitisation of office premises, PCR tests on staff etc. to keep exports going under the most difficult period of the country in the recent past. Although the tea production (278 million kg), exports (266 million kg) and revenue (USD 1.2 billion) declined in 2020 compared to 2019, the tea industry never stopped fulfilling its obligations to the country.
The tea industry has recovered to a great extent in 2021 despite the continuation of the COVID-19 pandemic. The tea production in the first half of the current year reached 161 million kg, an increase of 31 million kg or by 24% compared to last year.
The tea exports volume recorded for the first six months of the year is 137 million kg as against 124 million kg of last year. Meanwhile, revenue of Rs 127.83 billion of January-June 2021 has recorded an increase of Rs 21.75 billion vis-à-vis Rs 106.08 billion of January-June 2020. This converts to about USD 650 million compared to USD 571 million in the first six months of 2020 registering a growth of about 14%. Total FOB value of Rs 933.18 (USD 4.80) shows a gain of Rs 78.26 when compared to the Rs 854.92 (USD 4.65) of JanuaryJune 2020. The industry is on course to achieve at least 90% of the revenue target of USD 1.5 billion for year 2021 given by the Presidential Task Force, a significant gain under the current market situation.
Usually more tea is exported in the second half of the year and accordingly exporters are confident that it can achieve revenue of USD 1.350 to 1.400 billion by end of this year. Turkey has emerged at the No. 1 position as the major importer of Ceylon Tea, followed by Iraq and Russia with the UAE moving up to the 4th position having increased imports significantly (210% YoY). Iran, which has moved down to 6th position from the 4th position it occupied in 2020, records a fairly significant decrease (30% YoY) in imports during January-June 2021.
The US sanctions on Iran oil exports and financial institutions severely affect Sri Lanka tea exports to this market which annually imported more than 35 million kg of tea from Sri Lanka prior to impose of sanctions in 2011. Other notable importers are China, Azerbaijan, Libya and Syria. Meanwhile, destinations such as Saudi Arabia and Chile have recorded a decrease in imports during the first half of 2021.
It is noteworthy that imports to China have increased significantly YoY (47%). The tea industry is currently facing many other challenges locally and internationally. The increase in cost of packaging materials, tea flavours etc. due to temporary suspension of imports and shortage of hard currency has put additional pressure on the industry. The suspension of import of herbs and spices are affecting the local value addition to tea.
The shortage of empty containers and lack of shipping space/opportunities are causing delays and exporters have been compelled to reschedule shipments on a number of occasions. Internationally the freight charges have gone up by more than 400 per cent, increasing the cost of tea to end consumer. One concerning factor of the tea exporters is that some producers do not adhere to required tea quality standards.
Sri Lanka Tea Board (SLTB) and Tea Research Institute (TRI) have introduced Good Agricultural (GAP) and Good Manufacturing (GMP) practices to ensure compliance with minimum tea quality standards but unfortunately some tea growers and manufactures do not comply with those guidelines that adversely impact on the quality of the end product.
Due to severe competition among the tea factories for green leaf, the accepted tea plucking norms are also not maintained and as a result about 50 per cent of the tea produced locally does not fall under the ‘quality Ceylon Tea’ category. Further high chemical residues in tea, high moisture and foreign matters (sand, grit etc.) in tea are also worrying the tea exporters.
As tea is considered as a food product, strict food safety regulations are applied by tea importing countries at the point of clearance of tea shipments. Tea exporters invest heavily and spend more time on cleaning tea to meet importing country requirements and as a result have less time to concentrate on marketing of tea. New Trends in Tea Marketing Green tea consumption is growing at a faster rate than black tea.
• Growth in RTD sector – fastest growing tea segment in China.
• Emerge of Tea Houses –Demand for specialty, premium quality and innovative tea products.
• Younger generation demand for new Flavours and Ingredients (herbal, fruit etc.).
• Interest in Certifications / Sustainability in tea.
• Consumer preference for functional tea, organic tea and health products.
• The Netherlands, UAE, UK, Germany, Poland (Non tea producers) are prominent tea re-export centres. An available option for Sri Lanka to enhance tea export revenue.
• The changing consumer perception from country of origin to brands in the mass market.
Global tea production reached 6.1 billion kg in 2019 as against 5.9 billion kg registered in 2018 and expected to increase YOY subject to favourable weather conditions in major tea producing countries. China (46%), India (18.3%), Kenya (7.5%), Sri Lanka (5%) and Turkey (4.3%) are the major tea producing countries in the world.
The black tea accounts for about 69 % and green tea 31% of the annual world tea production. The black tea segment further divides in to orthodox (40%) and CTC teas (60%). Sri Lanka is the leading producer of orthodox tea in the world and Kenya and India dominate the CTC tea market. China is the leading manufacturer of Green tea.
As per available information nearly 70% of the tea produced globally is consumed within the tea producing countries and only 30-32 % is available for export. In 2019, the total world tea export volume reached 1.8 billion kg. Kenya (26%), China (20%), Sri Lanka (15%), India (13%) and Vietnam (7%) are the major exporters of tea in the world.
The FOB value of world tea exports was about USD 7 billion in 2019. China (USD 2 billion), Sri Lanka (USD 1.3 billion), Kenya (USD 1.1 billion) and India (USD 756 million) were the highest foreign exchange revenue earners from tea exports in 2019. China registered higher revenue due to high price of Green tea exports