Markets

Better time brewing for tea companies

M. R. Subramani Chennai | Updated on February 24, 2011 Published on February 24, 2011

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The year 2009 turned out to be a watershed for the tea industry.

Prices that had stagnated over years began rising after Kenya faced one of its worst drought in years. It helped tea companies fare well and their bottom lines improved.

Investors, too, gained in line with the companies' performance.

Last year, tea prices managed to hold their levels despite pressure in the form pest attack on crops. However, tea firms suffered on slight fall in returns and drop in production. Their financials were under strain to wage revision for labour, thus affecting their overall results. This had an impact on the stocks, too

But with drought revisiting Kenya again this year, tea prices could cheer up planters and, in turn, stocks of the companies in the sector. The African continent is experiencing a dry spell since October despite the talk of continuation of the La Nina effect that brings in copious amount of rain.

This means, Kenya tea production could drop and that, in turn, could lead to shortage of the beverage in the global market.

Already, reports say that Kenya has faced one of its driest month in January. As a result, tea production dropped 4.5 per cent to 35.9 million kg. (mkg).

Last year's sales at auctions in Africa have not been that high compared with 2009. This means there are problems with carryover stocks. If drought were to affect, then stocks in the pipeline could be under strain putting pressure on prices. Indian companies will stand to gain from this.

However, the current unrest in African nations such as Libya, Syria and Egypt has kept prices under leash. The political turmoil in these nations has led to drop in demand on fears that shipments may be hampered. This is evident from auctions sales in January dropping three per cent to 22 mkg.

However, this week prices at African auctions improved. The average price increased to $2.85 (Rs 130) a kg from $2.79 (Rs 127) a week ago.

In the domestic market, last year's drop in production is set to shrink the carryover stocks. While exports have been pegged at 193 mkg, the same as in 2009, domestic consumption is reported to have increased, though figures are not available yet.

The fact is the shortfall may not cause much of a rise in tea prices now since stocks in the pipeline could help prove handy. But after April, there could be pressure on prices and quality tea.

A report by ICRA also talks of prices sustaining in the medium term due to demand-supply gap. It also foresees better prices for North India tea.

Also, with the Tea Board targeting 200 mkg exports, domestic supply could come under further pressure. However, one problem confronting the tea industry is the agitation for Gorkhaland that could hinder transportation of Darjeeling teas.

On the other hand, the Kenyan drought could mean that overseas buyers could scour the South Indian market for CTC teas as in 2009.

The other factor that could have a say in tea prices here is Sri Lanka that has had a record production last year. But the island nation has gone through a dry period in January. Rain resulting in floods this month, however, seem to have bypassed the tea gardens.

An indication of better times brewing for the sector and stocks is the outlook projected by McLeod Russel, which has said that there was a global shortfall of 140 mkg at the beginning of the year and a strong consumption growth is being witnessed.

In India, stagnant production, shortfall in quality belt of Assam and lower carryover are leading to a firm prices trend.

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Published on February 24, 2011
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