Fertiliser Ban Weigh on Plantations’ Productivity in the Near Term – Fitch
Fitch rating Lanka recently stated that the current ban on the importation of chemical fertilisers as a credit negative for rated corporates such as Kotagala Plantations PLC and Sunshine, given their exposure to palm oil plantations. On 6 May 2021, Sri Lanka banned the importation of chemical agricultural inputs such as fertilisers on health grounds, and the Government estimates this will conserve around USD400 million of outflows per annum.
According to The Colombo Tea Traders Association, local tea output could fall by as much as 40%-50% if the ban continues. Industry sources believe the Government has sufficient stocks to supply chemical fertilisers for the next 12 months, but there is limited visibility beyond that horizon. Unlike Kotagala, Sunshine can resort to using readily available organic fertiliser from its dairy operations as an alternative to chemical fertilisers, which should help to mitigate the drop in crop yields to an extent.
High Tea Prices to Compensate for Potential Volume Loss
Fitch believes tea plantations may find it challenging to offset the decline in yields via higher tea prices. Fitch estimate that tea prices of than USD5 per kg will be required to offset the potential output fall resulting from the inability to use chemical fertiliser in the near term. Fitch expect local tea prices to rise if the ban on imported fertiliser remains in place for an extended period due to supply constraints as well as its new organic appeal. However, the highest recorded tea price at the Colombo auction historically was USD4.30 per kg in September 2017, Fitch Ratings concluded.