Business

Ceylon tea: A basketful of issues

By Madhusha Thavapalakumar

Sri Lanka is one of the oldest tea producing nations with a presence of over 150 years in the industry. With a global market share of 5%, Sri Lanka is the fourth largest tea producer in the world and has maintained its unique position among its global customer base for its aroma and flavour.

Being the largest agricultural product in the country’s export basket, the tea industry has been contributing drastically to Sri Lanka’s overall foreign exchange earnings. The industry consists of players at all levels from large-scale plantations to smallholders.

However, the manufacturers are now concerned about a number of issues that could possibly dampen Ceylon tea’s global significance, if left unaddressed.

The Sunday Morning Business spoke to several tea manufacturers and related institutions including Tea Exporters Association Sri Lanka (TEA), Sri Lanka Tea Board (SLTB), and Sri Lanka Tea Factory Owners Association (SLTFOA) where they provided insights into the challenges in the industry and suggested solutions.

Climate change

As per the comments we received from stakeholders, climate change is considered the biggest issue in the industry. Immediate past TEA Chairman Jayantha Karunaratne told The Sunday Morning Business that the quality of tea has declined drastically, mainly due to climatic changes.

He added that therefore, exporters are finding it difficult to offer tea at the usual quality standards to international buyers.

SLTB Chairman Lucille Wijewardena too noted that climate change has been an issue faced by the tea sector of the country for years, as it plays a vital role in tea crop yields.

There are no finance schemes for building brands and holding stocks without orders for longer periods. Therefore, the exporters have to purchase the minimum required quantity

A study done by Dilmah Conservation Centre for Climate Change Research and Adaptation points out that a number of climatic parameters such as rainfall, maximum and minimum temperature, sunshine hours, relative humidity, and wind velocity affect tea yield, quality, and the growth of pruned tea.

The Tea Research Institute of Sri Lanka (TRI) identified Deniyaya, Kalawana, Nuwara Eliya, and Ratnapura as the most suitable regions for tea plantation and Galle, Matara, Kandy, Matale, and Kalutara as moderately suitable areas. These regions receive monthly average rainfall which is suitable for tea cultivation.

According to the Food and Agriculture Organisation of the United Nations (FAO), increased temperature could cause soils to dry, which in turn reduces yields. The organisation suggests that new suitable land areas need to be found when the case becomes extreme.

Adulteration during manufacturing

With more and more factories adding sugar and glucose in the process of tea production, the number of companies involved in the adulteration of tea has hiked in recent times.

The marketing manager of a leading tea company, who wish to remain anonymous, told us that adulteration has brought down the value and trust placed on the quality of Sri Lankan tea in the global markets.

He added that such wrongdoing by private factories have caused worries among the buyers in terms of health and value for money. The comment was also backed by Karunaratne.

Meanwhile, Minister of Plantation Industries Navin Dissanayake recently noted that the SLTB would check tea samples on a regular basis to prevent tea adulteration.

Dissanayake added that the premises of the companies found guilty of adulteration would be temporarily sealed for three months and if the same companies get caught a second time, they might lose their license permanently.

Thirteen companies were sealed in July for tea adulteration.

Inadequate replanting

According to Wijewardena, tea yields have been on the decline due to the low tea replanting rate and lack of infilling.

Sri Lanka requires a minimum of 2% capacity of its total tea production to be replanted annually, which incurs a cost of at least Rs. 8 billion, but currently, barely 1% is replanted.

Despite the higher costs, tea replanting works as a solution for soil erosion in the tea estates. Over 70% of the tea is cultivated by smallholders.

Wijewardena noted that ageing tea bushes and low productivity levels are downsides of the sector. In addition to this, when replanting, the gestation period for a new plantation, including rehabilitation of the land, is around four years. During this period, tea sector workers have to be given concessions by the government.

According to sources, smallholders are provided with subsidies and low-interest loans for the replanting, while estates are provided with low-interest loans, with the government guaranteeing repayment.

Even though replanting consumes a large sum in government expenditure, there is a dire need to vigorously carry it out in order to ensure the industry’s viability.

Describing the perennial problems the tea sector has been confronted with over the past several years, Wijewardena stated that the number of tea bushes has reduced from 5,000 per acre to 3,000 per acre at present, owing to the failure in addressing issues of the sector.

According to data from the Central Bank of Sri Lanka (CBSL), tea exports suffered a significant hit in April. Tea export earnings fell from $ 109.6 million in April 2018 to $ 99 million in April 2019

International sanctions

Karunaratne noted that international sanctions have pressurised Sri Lanka’s main tea markets and depreciated the currencies of the respective countries, making it costly for both the exporter and the buyer.

“Average consumers look for cheaper options. Hence, the demand for Ceylon tea has come down,” Karunaratne noted.

According to latest available data by TEA, Iraq, Turkey, Russia, Iran, Libya, Azerbaijan, Syria, and China are the top tea export markets of Sri Lanka.

Iran is one of the countries that have been isolated through international sanctions, and it has been impacting Colombo tea auction prices. Therefore, Sri Lanka is now planning to export tea to Iran under the barter system over the next two years starting from this month.

According to Wijewardena, a mechanism is in the process of being established to settle an outstanding $ 240 million oil import bill to Iran through Ceylon tea exports. Under the system, tea will be exported to Iran and Ceylon Petroleum Corporation (CPC) will make payments to the Sri Lanka Tourism Promotion Bureau (SLTPB) on a monthly basis.

However, the Government is yet to come up with solutions for exporting tea to other sanctioned countries including Russia, Syria, and Iraq.

Lack of financial support  Interest rates and bank loans

According to Karunaratne, there is no financial assistance from the local banks for most of the major markets of Ceylon tea, as the top exporting markets are somewhat sanctioned countries.

He further added that the banks are hesitant and scared to get involved in any sort of transactions or handling financial documentation pertaining to these countries. He also said the industry has been raising this issue with the Government for a very long time.

“Exporters cannot have large orders and process and ship to these markets. Furthermore, there are new restrictions for credit terms to overseas buyers, and exporters are discouraged to continue offer to such buyers and in such markets,” Karunaratne added.

He also noted that there are no finance schemes for building brands and holding stocks without orders for longer periods. Therefore, the exporters have to purchase the minimum required quantity.

Meanwhile, speaking to The Sunday Morning Business, SLTFOA Chairman U.K.H.R. Ranasinghe noted that the industry is forced to pay higher interest rates which are almost double the amount they paid four years ago. He added that they were also requesting for a special loan system for the industry.

“Interest rates have increased by over 6% when we compare with the rates they charged prior to 2015.”

Moratorium

The industry has been requesting for a moratorium for a long time now as a number of factories are heavily burdened with financial difficulties and therefore are at the edge of collapsing.

However, although the moratorium on capital and interest payments of loans was promised for local tea manufacturers by the Government two months ago, it has not been provided due to the lack of a proper mechanism.

Sri Lanka has over 700 tea factories, out of which around 130 are on the verge of collapse and almost 10 factories have already closed down operations. According to SLTFOA, factories are struggling to settle outstanding loans worth Rs. 5 billion and are in urgent need of the moratorium.

Ranasinghe emphasised that the moratorium is an urgent requirement put forward by the companies.

“We spoke to the Ministry of Plantation Industries last week and told them that this is a very urgent matter as the number of financially burdened tea factories keeps increasing. They are going bankrupt,” he added.

According to Ranasinghe, the financial burden of the companies has been created by a drop in tea prices and less crops, especially the shortage of green leaves.

Cost of production

The next major concern for the manufacturers is the cost of production in the industry. The marketing manager of the leading company told us that due to the high cost of production, companies are finding it difficult to pay wages to their workers.

According to him, the high cost of production and not-so-high international prices have resulted in a lower profit margin for companies. He highlighted that firm tea prices would address this issue to a certain extent.

According to Forbes & Walker Tea Brokers (Pvt.) Ltd., the prices of a kilogram of tea remained above Rs. 550 during the first four months of this year. During the month of May, it dipped below Rs. 550 but remained above Rs. 500.

During the first week of June, tea was auctioned at a price of Rs. 510 per kilogram. Since then up to now, prices have dipped below Rs. 500. In the second week of July, tea was auctioned at a price of Rs. 489 per kilogram.

Meanwhile, tea production increased drastically to 34 million kilograms in May this year, compared to 23 million kilograms in the month prior.

Speaking to The Sunday Morning Business in June, Wijewardena noted that it would take over three years to reap the benefits of the replanting process, which was a massive task which demanded a costly initial investment.

“It costs Rs. 2.5 million to plant a hectare of tea, and this can be a difficult task for small-scale tea farmers as well as industries,” he stated.

Economic Service Charge and other taxes

According to Karunaratne, various taxes on tea exports including cess, promotion and marketing levy, and Economic Service Charge (ESC) are considered burdens to the industry as such costs, when added up, make Ceylon tea uncompetitive in international markets.

Ranasinghe told us that they requested for a reduction in the ESC and raised this issue with the relevant authorities a number of times, but had not received any response so far.

He pointed out that manufacturers have to pay Rs. 0.50% per kilogram, whereas the exporters pay a reduced Rs. 0.25% ESC.

The payment should be made by taking into account the total turnover of the company, where 68% the turnover has to be shared with the smallholders. Ranasinghe suggested that factory owners should only be charged based on their share of the earnings.

The Budget 2019 proposed a reduction of ESC applicable on the sectors, from 0.50% to 0.25%, with effect from 1 June 2019, but it had not kicked in still.

When we asked Wijewardena about this, he noted that the relevant gazette was being prepared at the moment.

Export trend

According to data from the Central Bank of Sri Lanka (CBSL), tea exports suffered a significant hit in April. Tea export earnings fell from $ 109.6 million in April 2018 to $ 99 million in April 2019. However, export earnings from tea increased to $ 125 million for the first time in May 2019 since April 2018 due to higher export volumes despite lower average export prices when compared with $ 121 million in May 2018. In June 2019, tea exports dropped to $ 113 million from $ 129.6 million a year ago.

With a Ceylon tea promotional campaign set to launch in Russia this month, total tea exports are expected to be higher than last year’s export total of $ 1.4 billion.

Conclusion

Ceylon tea, which has been part of the nation’s pride, is gradually losing its global market share and being pushed towards becoming the fourth largest tea exporter. Kenya was behind Sri Lanka but has now surpassed even India, becoming the world’s largest tea exporter.

The industry is now calling for a competitive environment and timely and prompt adaptation of long and short-term strategies to address the issues listed above and many others that prevail in the industry, as these have the potential to push Sri Lanka further down the list of global exporters of tea.