Prices of orthodox varieties of tea are likely to see a firmer trend in comparison to last year, while those of crush, tear, curl (CTC) tea are expected to be softer, says ratings agency ICRA.
In the first five months of the current financial year (April-August), prices of the orthodox variety have risen 15 per cent on the back of higher demand, primarily from Iran. Prices of the CTC variety, however, continued to be under pressure — those produced in bought leaf factories (BLF) fell by 10 per cent, while those produced in tea estates remained flat.
As a result, overall prices in North India remained soft in the first half of FY20. As for prices at South Indian auction centres, they were firm till the beginning of July, but have continuously fallen since.
“However, on a cumulative basis, SI prices increased by around 4 per cent in the first five months of FY20, again driven primarily by better orthodox prices,” said Kaushik Das, vice-president at ICRA.
Overall, prices of both varieties would see a seasonal decline going into the fourth (Q4) and final quarter of the current financial year, says ICRA. The drop happens because the quality of what is produced declines towards the end of the season. If production till October is substantially higher year-on-year, the decline is sharper. The average decline from the highest prices, seen over a financial year, is around 35 per cent.
The highest prices are usually seen in June and July; the lowest in February and March.
According to the ICRA report, the divergent trend in prices between orthodox and CTC varieties is due to the difference in the underlying supply-demand scenario of both.
Record production in CY18 has continued to keep international CTC prices depressed this year. Increased availability of Kenyan tea (primarily a CTC producer) in the global market, which is relatively cheaper than Indian CTC, impacted CTC export volume from India. In addition, domestic CTC prices, particularly in the north, remained soft on account of an 8 per cent increase in North Indian production this year.
On the other hand, orthodox tea prices have firmed up considerably. Export to Iran has grown 125 per cent in the first seven months of the current year. While a favourable payment mechanism with Iran supported the offtake, Sri Lanka, the other major orthodox tea exporter, faced issues on shipment of sanctions-hit Iran. This, in turn, has led to a softening of Lankan prices, with Indian orthodox tea trading at a premium, contrary to historical trends.
Notwithstanding the considerable uptick in prices of orthodox teas, overall prices for NI bulk tea players are expected to see only a marginal increase, the report said. Thus, while higher production would lead to better absorption of cost, the overall soft price trend is likely to limit the improvement in financial performance.
Tea sold in ‘loose form’ (non-packet/non-tea bag) is called bulk tea. Estates and BLFs make and sell tea primarily in this form. These are then purchased by packet tea companies (Tata Global, Hindustan Unilever, etc), which then pack this into packets/tea bags. Some of the tea produced by estates are also sold by local retailers to end-consumers in the bulk/loose form.
ICRA says the credit profile of NI bulk tea players has been severely impacted over recent years, owing to a significant increase in cost of production, without commensurate increase in prices.
“Better orthodox tea prices would have a limited impact on the overall financial performance of bulk tea players based out of North India, given that the orthodox variety accounts for only around 10 per cent of total production. However, organised bulk tea players who have a high proportion of orthodox teas in their overall production would stand to benefit substantially with such price trends sustaining,” Das said.
Adding: "In this scenario, any further increase in wage rates would lead to a further deterioration in operating margins and debt-coverage indicators of NI bulk tea players, making their credit profile weaker.”