Orthodox tea prices in India have started firming up and are expected to maintain an uptrend going forward given the production loss in Sri Lanka, the largest exporter of the orthodox variety in the global market.
In its latest quarterly report on bulk tea, ICRA has highlighted that prices of new season teas have demonstrated a mixed trend in recent auctions. While prices of orthodox teas have firmed up considerably, that of CTC (crush, tear, curl) teas have largely witnessed a softening trend.
Within the overall CTC teas also, while prices of quality teas have witnessed a firm trend, those of plain and medium category teas, particularly made from purchased green leaf, have softened.
This is a continuation of the trend witnessed during the financial year 2021-22, when producers of quality CTC teas earned a significant premium compared to industry average prices, which cushioned the impact of a sharp increase in wage rates from January-February 2021 for producers.
Domestic tea prices had witnessed a considerable uptick in 2020-21 due to a significant supply-demand mismatch. While tea prices remained strong during the first quarter of 2021-22l, they softened following an improvement in production during the peak production months of 2021-22. The decline in price has, however, been more pronounced in the bought leaf segment as teas of relatively better quality (primarily made from own estates) continued to fetch a high premium.
During the calendar year 2021, the premium for the CTC teas produced by the top 50 tea estates in North India, which includes estates of Assam and West Bengal, widened to ₹ 122 a kg from ₹84 a kg in 2020.
At the South India auction centres, tea prices softened significantly during the financial year 2021-22, particularly from the second quarter onwards, due to higher growth in supply relative to demand. The average price of South Indian CTC teas was down by nearly ₹33 a kg on a cumulative basis in 2021-22 compared with 2020-21.
“Price premium for top quality CTC tea is likely to sustain going forward, given the limited supply base of the same. Recent auction trends show firming up of orthodox prices in India, which is likely to continue going forward, given the drop in production in Sri Lanka since November 2021 on a y-o-y basis,” Kaushik Das, Vice President and Co-Group Head, Corporate Sector Ratings, ICRA, said in the report.
Going forward, producers of quality CTC teas would continue to benefit from the premium. In addition, orthodox tea producers are likely to gain from the expected firmer trend in prices, given the drop in production in Sri Lanka. Consequently, the financial performance of quality producers is unlikely to witness any material moderation, on a y-o-y basis, in 2022-23. However, any material increase in wage rate would have an adverse impact on the operating profitability, Sujoy Saha, Vice President and Sector Head, Corporate Sector Ratings, ICRA, said.
Production to improve
While overall domestic production during the first quarter (January-March) of calendar year 2022 remains flat at around 100 million kg (mkg); production is expected to improve during the current year, although, the extent will be determined by the cropping levels during the peak producing months of June to October, the study said.
After the sharp decline in domestic production by nearly 10 per cent during calendar year 2020 on the back of Covid-related restrictions and adverse agro-climatic factors, production increased in 2021. Notwithstanding the increase in 2021, the overall production still remained lower than pre-pandemic levels as adverse weather conditions impacted production in the first few months.
Although the overall production in 2022 is likely to improve, after two consecutive years of lower-than-normal production, the same will be determined by the cropping levels during the peak producing months of June to October, it said.
June 16, 2022