Tea prices likely to remain firm in 2017: ICRA

Tea prices are expected to remain firm following higher demand, especially due to the expected supply side issues in both Sri Lanka and Kenya, ICRA said in a report here.
"Initial weather forecasts indicate lower rainfall in Kenya during the first quarter of 2017, which is likely to impact production from the region.
"Since Kenya is the largest exporter of black tea, its production levels have a significant bearing on the availability of tea in the global market," ICRA Vice President and Sector Head, Corporate Sector Ratings, Kaushik Das said.
Moreover, he said, Sri Lankan production, which is primarily of the orthodox kind, is likely to continue to remain under pressure, leading to increased export demand for Indian orthodox tea.

"Such supply-side issues are likely to have a favourable impact on both international and domestic tea realisations," he added.
ICRA said, in spite of India's large domestic consumption base, exports play a vital role in maintaining the overall demand-supply balance in the domestic market.

"Buying patterns will also be a key determinant of domestic price levels in the current year as well," Das added.
Further, ICRA said, despite the buoyancy in prices though, continuing cost pressures, with the increase in wage rates, are likely to keep the margins and debt coverage indicators of bulk tea producers under check.
"In 2016-17, wage rates are scheduled to increase by an additional 8-9 per cent across the tea-growing regions in north India, resulting in continuing pressures on the profit margins of bulk tea companies, despite the increase in domestic average auction realisations," ICRA report said.

With tea being a fixed cost-intensive industry, labour wages have accounted for a significant portion of the total cost of production in past years, it said.
Over the last two years, the cost of production of bulk tea players in north India has increased by nearly 23 per cent on account of increased labour costs.
Similarly, in both Assam and the Dooars there was a steep rise in wage rates, which rose by around 25 per cent during 2014-16.