Why the Sri Lankan crisis can be a boon for Indian tea companies


by 5paisa Research Team Last Updated: Apr 05, 2022, 05:49 PM IST

The Indian sub-continent has been in the midst of a political and economic upheaval with a virtual coup in Pakistan and a serious financial crisis in Sri Lanka.

On the flip side, the crisis in the Indian Ocean island-nation coupled with a decision there last year to ban the use of fertilisers in the country has opened a window of opportunity for Indian tea companies.

Sri Lanka happens to be the largest exporter of orthodox (ODX) teas globally. The current economic crisis is likely to impact its production and export of teas. Russia, which has been one of India’s largest export destinations for plain to medium grade tea, sources bulk of its premium category teas from Sri Lanka.

Production in Sri Lanka, which accounted for nearly half of global trade in ODX teas, has been impacted in recent months due to withdrawal of the use of chemical fertilisers around mid-2021. The current difficult economic situation is also likely to impact production and costs in 2022.

In the international market, ODX supplies from India directly compete with those from Sri Lanka. Key large common markets are CIS (mainly Russia), Iran and the UAE.

Notably, over the 2015-20 period, the entire increase in global production of ODX teas has been due to China. In 2020, the pandemic impacted production in India and Sri Lanka. And notwithstanding the higher production during 2021, it remained below pre-pandemic levels.

However, China consumes almost all of what it produces, just like Turkey, another key tea producing nation. Sri Lanka, on the other hand, exports 95% of what it produces.

Tea production in Sri Lanka peaked around 340 million kg in 2013, and has been on a gradual declining trend to reach its lowest production, in almost 15 years, of about 276 million kg in 2020 due to the pandemic.

While production recovered last year, the increase was limited due to withdrawal of the use of chemical fertiliser and its impact has been pronounced from November 2021 onwards. Cumulative production during the four-month period of November 2021 to February 2022 has declined by 18%. This trend is likely to continue.

The three markets of Russia, Iran and the UAE account for almost 30% of total Indian exports in volume terms. In value terms, these three geographies accounted for 35% of the total during 2016-21, although the share dropped to 32% in 2021.

While Iran is predominantly an ODX market, Russia and the UAE are a mix of CTC and ODX teas. Share of exports to Russia–both in terms of volume and value—has seen a declining trend over the last five years. This could, however, change given the current geopolitical and economic scenario.

The difference in prices of teas is due to two factors–mix of CTC and ODX, with ODX teas usually fetching significant premium over CTC, and higher proportion of packet/value-added exports from Sri Lanka as against bulk teas from India.

Indian ODX producers now have an opportunity to increase both the volume and value of ODX exports, particularly to Russia. This may, however, be contingent upon the ability to export in packet/value-added form, which would entail some investments and the success of the bilateral trade and payment mechanism that is being discussed between Russia and India.

SENSEX
52,973.84
180.22 (0.34%)
Nifty 50
15,842.30
60.15 (0.38%)
Nifty Bank
33,597.60
476.25 (1.44%)
Next Article

Open Free Demat Account

& get benefits worth ₹5100

 
Resend OTP
Please Enter OTP
  • Have Promo code?
  • Use code ACT5100
Enter Promo code

By proceeding, you agree to the T&C.

SENSEX
52,973.84
180.22 (0.34%)
Nifty 50
15,842.30
60.15 (0.38%)
Nifty Bank
33,597.60
476.25 (1.44%)

Start Investing Now!

Open Free Demat Account in 5 mins

Enter Valid Mobile Number