Firming up. Tea prices in North India likely to rule firm amid lower-than-expected production, steady demand

Tea prices in the North Indian estates of Assam and West Bengal are likely to rule firm on the back of lower-than-expected production, particularly of quality estate teas in the current season, and increasing demand for good quality teas.

According to the latest report by the ICRA, the impact of increase in wage rates in the current calendar year in North India estates is likely to be nullified by the healthy realisations of teas, particularly producers who are focused on producing quality teas.

Prices of orthodox teas are ruling at an all-time high level on the back of a demand-supply mismatch in the international market due to production disruptions in Sri Lanka due to the current economic crisis. The island country is the largest exporter of orthodox teas globally. The production loss in Sri Lanka is likely to continue for some more time, which would keep supply tight in the international market, thus supporting the prices of Indian orthodox teas, the report said.

CTC prices up

Prices of North India CTC (crush-tear-curl) tea during the five months of the current financial year are also up by nearly five per cent (₹9/kg) on a YoY basis, primarily driven by the sharp rise in auction prices in August 2022. The uptrend in CTC prices is supported by lower-than-expected production, particularly of quality estate teas, in the current season and increasing demand for good quality teas.

The price premium for top-quality CTC tea is likely to sustain going forward, given its limited supply base. However, prices of South Indian CTC teas during the first five months of the current fiscal remained lower compared to the previous two fiscals due to sustained production levels from bought leaves in North India.

“With orthodox prices expected to sustain at a significantly higher level on a YoY basis, some quality producers have increased its production. Consequently, production of quality CTC is likely to remain flattish, which will continue to support prices of such teas as well. An analysis of tea prices indicates that the price differential of North India CTC teas, manufactured by the top 50 estates over average auction prices, increased to ₹137 a kg during the first eight months of the calendar year 2022 from ₹122 a kg same period last year,” Kaushik Das, Vice President and Co-Group Head, Corporate Sector Ratings, ICRA, said in the report.

Till May 2022, cumulative all-India production was up by nearly 16 per cent to around 320 million kg (mkg) on a YoY basis. However, crop loss in June and July 2022, due to unfavourable weather conditions and floods, led to a two per cent drop in production to close to 614 mkg during the first seven months of the current calendar year.

Given that nearly 54 per cent of the annual production typically takes place during the last five months of any calendar year, the ICRA expects the overall production in CY22 to remain flat compared to last year, although the same would remain dependent on the cropping levels till October, after which production will start to fall. In CY21, all-India production was up by around seven per cent at 1,343 mkg on a YoY basis, recovering from the lows of the pandemic-impacted CY20 season. However, it still remained around three per cent lower compared to the record crop of CY19. 

Global prices firm up

On the global front, although production in Kenya during the first five months of the calendar year 2022 was lower marginally by around two per cent on a YoY basis, it has been significantly lower (by nearly 11 per cent) compared to the same period in 2020. Limited supplies in the global market led to a sharp rise in cumulative Kenyan auction prices by 29 per cent to $2.51 per kg for January to August 2022 on a YoY basis.

In Sri Lanka, monthly prices at auction centres firmed up in the current year vis-à-vis the previous year due to declining tea production on the back of the current economic crisis. The cumulative Sri Lankan auction price during the first seven months of CY22 improved by nearly 16 per cent to $3.69 a kg on a YoY basis. Sri Lankan production for the period January to July 2022 was down by around 18 per cent to 152 mkg on a YoY basis. Going forward too, production is likely to remain lower and the same would continue to keep the prices at an elevated level, it said.

“Notwithstanding the impact of higher wage rates, the financial performance of quality producers is likely to witness an improvement in FY23 on a YoY basis. An increase in prices of quality CTC and ODX teas would enable the producers to absorb the higher cost of production due to the wage rate revision,” Sujoy Saha, Vice President and Sector Head, Corporate Sector Ratings, ICRA said in the report.

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