Higher realisation from auctions is seen providing some relief to tea plantations in India hit by the rise in wage rates, said a report by Icra. India is the second largest producer of tea in the world and makes up 23-26% of the global production.
Higher realisation from auctions is seen providing some relief to tea plantations in India hit by the rise in wage rates, said a report by Icra. India is the second largest producer of tea in the world and makes up 23-26% of the global production. Icra reports that all-India auction average realisations increased 4% during 11 months of CY18 over the previous year, with the uptick being driven by the rise in North Indian (NI) tea prices at the year’s beginning and a sharp increase in South Indian (SI) tea prices from the second half (H2) of CY18.
Kaushik Das, vice-president and head, Corporate Sector Ratings, ICRA, said, “Better prices are expected to ease the pain associated with the sharp increase in input costs, particularly labour and energy costs, for North Indian-based bulk tea producers this year. Nonetheless, the operating profitability is expected to remain under pressure, although the exact trend would depend on the prices of end of season teas sold over the remainder of the fiscal as well as the level of production in March 2019 when the production of the new season restarts.”
Possibilities of lower tea availability at the end of season, owing to the Tea Board of India’s directive to stop plucking after mid-December, have supported a firm price trend in the recent weeks. While auction prices have historically witnessed a sharp decline towards the end of the season on account of quality in the current year, such a sharp decline seems unlikely, given the lower availability. Icra estimates a crop reduction of approximately 20 million kg in December 2018 on the account of the same.
The reports on tea market adds that overall global tea production witnessed an increase of 1.8% during 10M CY18, driven by an increase in the Kenyan crop. This has adversely impacted the Kenyan auction realisation, which corrected by around 12% during 10M CY18. The Sri Lankan auction realisations, in spite of low production, witnessed a considerable decline of around 10% during 10M CY2018, primarily because of the uncertainties arising from the impact of the impending sanctions on Iran, one of the biggest consumers of orthodox teas.
Although India only exports nearly 20% of its production, exports play a vital role in maintaining the overall demand-supply balance in the domestic market. “An expected low carryover stock, coupled with increasing domestic demand, is likely to support a firm trend in realisation at the beginning of new season. Any further material increase in labour costs over the current interim hike would, however, have an overall negative impact on the financial performance of tea companies, going forward,” Das added.
Higher export volumes from Kenya and uncertainty over the demand from Iran, given the likely impact of the economic sanction, adversely affected Indian bulk tea export performance, particularly of high quality orthodox teas, from North in the current year. However, subsequent clarity on the extent of sanctions, with India getting a conditional waiver, and a favourable payment mechanism are likely to support the export volume in the near term. Icra reports the ability to maintain healthy export volumes at remunerative prices would continue to be a key factor in determining the overall performance of the domestic tea industry.