Sri Lanka’s coconut substrate sector increasingly contributes to the country’s overall export economy, accounting for 22–25% of total sector exports. As the global coco peat market is projected to grow to $ 3 billion by 2030, Sri Lanka remains a key player.
In an interview with The Sunday Morning Business, former Secretary and incumbent Executive Committee member of the Exporter Association of Coconut-Based Substrates (EACBS) Chamara Udayanga noted that the potential for the industry was vast.
Udayanga highlighted the need to address the industry’s pressing concerns, including the prominent raw material shortage, as well as improving productivity and efficiency. He also emphasised that addressing certain fiscal burdens and improving husk-collection mechanisms were essential to grow Sri Lanka’s position in the global market.
Following are excerpts:
Could you provide an overview of the substrate industry and its main classifications?
Sri Lanka’s coconut industry is divided into two main sectors: the kernel-based industry and the husk-based industry.
The kernel industry, which focuses on coconut oil and related food products, was established first, while the husk-based industry emerged later. The latter, which developed as an industry in the 1980–’90s, focuses on utilising the coconut husk to create two primary raw materials: fibre and coco peat (pith). Today, the substrate industry represents a major segment within the husk-based sector.
Initially, the husk-based industry mainly focused on fibre production. Through various milling processes, fibre was extracted to manufacture traditional goods such as brooms, brushes, rugs, and mats for both local and export markets.
During this period, coco peat was merely a byproduct that had no commercial value. However, innovation changed that course. Researchers began testing whether this waste could serve as a growing medium, which led to the discovery of its potential as a substrate.
Notably, the patent for coco peat as a commercial product originated in Sri Lanka. Following this breakthrough, major industry players invested in the necessary technology, and by the 1990s, the country had begun producing and exporting coco peats to the global market. Today, it is widely used as an in-house growing medium, and it is also used to improve soil conditions, alongside a range of other applications.
What makes coco peat a preferred choice in the global market?
While several substrates are available – including rockwool, peat moss, and perlite – coco peat stands out for its superior properties. It is entirely natural, biodegradable, and has better air porosity, creating ideal conditions for plant growth. These qualities have driven its popularity among farmers worldwide, contributing to an annual global growth of around 68%.
Although Sri Lanka pioneered the coco peat industry, countries such as India, Indonesia, and the Philippines have also developed industries from the product. Despite this competition, Sri Lanka’s coco peat remains a globally recognised brand, highlighting opportunities for further growth. Coco peat from Sri Lanka and Kerala in India are widely regarded as the highest quality options available in the market.
What is the current economic contribution of the coco peat sector to Sri Lanka’s export economy?
Coco peat currently accounts for approximately 22–25% of Sri Lanka’s total coconut sector exports. The country’s coconut export sector reached a turnover of over $ 1.2 billion, with the substrate industry contributing around $ 250 million to this figure.
There remains significant untapped potential, as only 50–60% of coconut husks are currently being utilised by the industry. By improving collection and processing mechanisms, the sector’s growth capacity could be substantial. The global coco peat market is valued at approximately $ 1.8–2 billion, with predictions suggesting it could reach $ 3 billion by 2030.
You mentioned coco peat as a product that originated in Sri Lanka. How is Sri Lanka positioned in the global market as of now, particularly in comparison to competitors such as India and emerging players like China?
Currently, Sri Lanka is positioned as the second-largest player in the coco peat industry, as India has overtaken the country in terms of volume due to its larger supply of raw materials.
To remain competitive, Sri Lanka must focus on high-end value addition. Instead of exporting coco peat merely as a growing medium, the country needs to move towards specialised growing media. This involves additional processing, such as washing and buffering the peat with calcium nitrate to ensure a pure medium. Further value addition initiatives are being explored, which have the potential to significantly improve Sri Lanka’s export turnover.
Meanwhile, China has emerged as a unique competitor. It imports raw materials at low costs from Indonesia, Vietnam, and the Philippines, processes them, and then exports finished products to the US and European markets. Its operational efficiency poses a challenge to the Sri Lankan industry. To protect the country’s market share, Sri Lanka must reduce its overhead costs and emphasise the high quality and technical sophistication of Sri Lankan processed substrates through international certifications.
Thus, Sri Lanka must prioritise achieving such international certifications and support individual companies in obtaining them. Additionally, there is a need to modernise the industry by increasing technology. Sri Lanka has a large number of opportunities in the global market, but capturing them requires a collective mechanism to improve raw material collection and a stronger focus on innovation in value-added products.
The industry’s overall market potential is vast, as Sri Lanka has already established itself in key European markets such as the Netherlands, Germany, France, and the UK. North America remains a major destination, particularly the US and Canada, with the US currently being the industry’s largest export market.
In Asia, Japan and South Korea are key partners, while Australia and New Zealand too represent strong markets. There are also significant opportunities in the Middle East, as well as in Turkey, Israel, Russia, Belarus, Azerbaijan, and Georgia, all of which show considerable potential. Thus, demand is strong in any market that adopts smart farming practices.
The industry is increasing value addition and exports, while lack of raw materials has been flagged as an issue. What are the measures currently being taken to address this and issues pertaining to supply chain bottlenecks?
Sri Lanka’s total annual nut production typically hovers around three billion; however, harvests have declined over the last three years. As a result, the industry is currently facing a decline in raw material availability. Several factors have contributed to this situation, including the prevalence of the whitefly disease, which has also led to rising production costs.
Furthermore, there are also logistical issues that impact husk collection. While the industry currently utilises around 60% of the available husks, the goal is to increase collection to a maximum of 80% in viable areas. If these issues are addressed, exports could be further expanded, given that a substantial global market for the product remains untapped.
The Ministry of Plantation and the Ministry of Industry and Entrepreneurship Development are currently developing a strategic plan for the coconut sector with a key focus on increasing annual yield. One major reason for the decline in yield is a lack of proper fertilisation of the coconut trees.
At present, the average yield in Sri Lanka is about 45 nuts per tree, whereas in India, the average is closer to 80. If improved fertilisation and better management practices are implemented, and yields increase to even 60 nuts per tree, Sri Lanka’s total output could rise to 4.5 billion nuts. This increase in raw materials is essential to capturing a larger share of the global market.
While the lack of raw materials remains Sri Lanka’s primary challenge, the high cost of production driven by factors such as electricity, maintenance, and financing expenses places further pressure. While certain solutions, such as low-interest schemes, have been introduced, the industry requires steps to lower the cost of production. If the Government could facilitate programmes to improve production efficiency and overall productivity, that would be vital for staying competitive.
What are the policy-wise or institutional changes required for industry growth?
The coconut industry is regulated by the Coconut Development Authority (CDA), Coconut Research Institute (CRI), and Coconut Cultivation Board (CCB). While the marketing needs of the industry are already supported, there is also a great need for improved industry regulation.
Given the potential, the industry attracts many players, some who might lack certain requirements, expertise, or quality. If manufacturers export without understanding the basics of product quality, it can damage the reputation of Sri Lanka as a brand. While regulation already takes place, there is a need to further improve it and ensure that new exporters acquire the necessary industry knowledge and adhere to quality standards.
Through the EACBS, which represents Sri Lanka’s manufacturers and entrepreneurs, a formal grading system for the approximately 350 factories currently operating in the country has been proposed.
This system would use a specific set of parameters and criteria to scale and grade factories based on their infrastructure and quality control. By establishing these benchmarks, factories are encouraged to improve their operations to achieve a higher grade, which would lead to overall industry growth.
How successful has the substrate industry been in attracting Foreign Direct Investment (FDI) lately?
The substrate sector is perhaps the most attractive area for foreign investment within the broader coconut industry. Sri Lanka has already seen a great number of joint ventures and investments, including those from France. These investors bring both advanced technology and access to new markets.
However, to remain attractive, Sri Lanka must streamline its licensing and approval processes. At present, an investor must go through a system that remains fragmented. At times, they are made to visit the same institution several times for the same purpose. Thus, creating a single window for approvals would remove this administrative burden and make Sri Lanka a more competitive destination for foreign capital. Other concerns include strict labour laws and cost of production.
On the fiscal side, one key issue concerns Value-Added Tax (VAT). The coco peat industry was not VAT-liable, but this changed last year, mandating manufacturers to pay 18% VAT, increasing production costs significantly. With 99% of coco peat products being exported, this industry is almost exclusively export-oriented.
Competing in a price-sensitive global market, Sri Lanka cannot simply pass these costs onto international customers without losing its competitiveness. If the Government wants to encourage exports, it is important to reconsider these tax burdens, especially given that it is an export-oriented industry.