Export demand, weak rupee to support tea market: Icra

Export demand for tea from Iran and weak rupee is likely to support the Indian tea market, says a report on Indian tea by rating agency Icra. The report also raises concerns that the new wage structure, that would be applicable for tea plantation workers in the states of Assam and West Bengal, could lower the margins for the bulk tea producers. India is the second largest producer of tea in the world and makes up 26% of the global tea production.

Icra reports that overall Indian tea auction realizations have remained tepid during the first few months of CY2018, primarily on account of the sale of end-season tea, which is inherent of a lower quality. North Indian weekly auction prices increased by a considerable 9% from April 2018. Going forward, a likely increase in export demand, particularly for the orthodox variety, together with the depreciation of the rupee, is expected to further support both export and weighted average realizations.

Commenting on it, Kaushik Das, vice president and sector head, corporate sector ratings, Icra said, “The recent trade sanctions imposed on Iran by the US, which affect US dollar trade, are likely to provide opportunities for higher exports of orthodox teas from India, given the payment mechanism between India and Iran, which puts it at an advantage relative to Sri Lanka, the largest exporter of orthodox teas to Iran”.

India exports the CTC (crush, tear, curl) tea variety mainly to Egypt, Pakistan and the UK and the premium orthodox variety to Iraq, Iran, and Russia.
The commodity report cautions that the increase in export volumes from Kenya may place some pressure on Indian CTC tea export volumes, given Kenya’s status as one of the largest exporters of CTC tea globally.

In light of the above, the ability of bulk tea producers to maintain adequate export volumes at remunerative prices going forward would be critical to the overall performance of the tea industry.
The other key factor to look out for is the likely increase in wage rates going forward. Although the revised wage rates are currently under negotiation, Icra understands, based on discussions with industry players, that a steep increase in wage rates is likely. If such an increase is indeed implemented, organized bulk tea players would witness a considerable decline in operating margins, unless there is a commensurate increase in prices of tea on a sustainable basis.

On the production front, aggregate tea production across the major tea-growing regions of Kenya, Sri Lanka and India increased by 21.3 mn kg, representing a 5.3% y-o-y growth during the first four months of CY2018, primarily due to the crop surplus witnessed in Kenya, the Icra report says. Sri Lankan tea production also increased slightly by around 2% in 2018 (till April), supported by favorable weather conditions. Indian tea production, however, declined by 2% during the first four months of 2018.

“Going forward, the trend in Kenyan production levels would be a particularly critical determinant of global tea market dynamics,” said Das. He added, “In terms of domestic production also, the full-year trend will primarily be determined by cropping levels in north India during the peak tea producing months of June to October .”

Source:-https://www.financialexpress.com/industry/export-demand-weak-rupee-to-support-tea-market-icra/1233140/

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