India eyes larger export share as Sri Lankan tea faces challenges

With Sri Lankan tea producers facing a three-pronged challenge, Indian firms are hoping to get a larger share of markets where the former is strong.

Between January and June this year, export prices of the orthodox tea variant from the island country averaged $3.83 a kilo, while prices for the Indian export of the same variant were $2.87 a kg. However, the cost of production of orthodox teas in Sri Lanka is nearly $5 a kg; compared with just $2.6 a kg in India. This makes Lankan production unviable. Indian producers also get tax incentives for export.

"Wages in Sri Lanka have gone up substantially, which has been stressing their cost of production. We have decided to target the Ceylonese tea (it is sold abroad under this name) export market for a larger share," Atul Asthana, managing director at Camellia-owned Goodricke Group, told Business Standard.

The largest and prime export markets for orthodox teas from both countries happen to be the same. Russia and the other countries in the Commonwealth of Independent States continue to be the largest buyers of both Indian and Ceylonese orthodox teas, followed by Iran. Japan, America, Egypt and other countries feature thereafter.

During January-May this year, Indian exports to Russia stood at nearly 18.7 million kg compared with Lanka's 14.2 mn kg. Iran imported 10.34 mn kg from India and 8.5 mn kg from Sri Lanka.

Indian companies want to regain their earlier hold on Iraq. After years of political instability and security issues on account of the rise of Islamic State fighters, exporters from India vacated the market altogether. In this time, Ceylonese tea made a breakthrough there and Iraq is now the largest buyer for Sri Lanka, with annual purchase of about 35 mn kg.

The Union Commerce Ministry is now set to lead a delegation there of the Indian Tea Association (ITA). Azam Monem, chairman at ITA, says, "If we could recapture even a part of this lost market, it will boost Indian export immensely. Iraq consumes orthodox teas, which usually get much higher export prices when compared to the CTC (crush, tear, curl) variant."

Officials at Indian firms add that Ceylonese tea now faces "reputation issues". Russia imposed a temporary ban on it last December after an insect was discovered in a consignment. Japan returned some shipments from Lanka last year on breach of their rules on residue levels. Lankan producers have termed these "economically catastrophic" if not addressed.

Japan is another prime orthodox and green tea consumer. It imported 3.6 mn kg of Indian orthodox tea last year; import of Ceylonese tea was 7.9 mn kg. Unit prices in Japan were among the highest for both India and Lanka, often breaching $6 a kg.

The third problem for Sri Lankan export is the coming US sanctions on Iran. After a bilateral agreement, Indian tea exporters are able to bill in rupees to Iranian importers. However, the trade between Iran and Sri Lanka is conducted in dollars.

If Lankan supplies to Iran fall, India will be the direct beneficiary.

According to the website of the Tea Exporters Association of Sri Lanka, a payment mechanism would be needed to see more export to Iran in 2018.

The annual production of orthodox tea in Sri Lanka accounts for a little over 300 mn kg; India's is around 100 mn kg. Most of the orthodox tea is exported.