SL plantations industry profitability to be boosted – report
View(s):Tea, rubber and palm oil, supplemented by coconut, cinnamon and other spices are the main crop interests of Sri Lanka’s listed Regional Plantation (RPCs). The industry continues to be at the mercy of unpredictable weather patterns and labour issues that have collectively dented profitability in the industry.
According to a Bartleet Relegare Research report, the current financial year has been spared of wage negotiations and expectations are for industry profitability to be boosted by a buoyant tea sector. This was indeed the case during the first half of 2014. “However, persistent rainfall has resulted in a drop in output and profitability during the latest quarter.
The rubber industry continues its decline due to bleak global market conditions and unfavourable weather locally.”
The report said that in this backdrop, it is imperative that plantations’counters considered for investment be diversified both in terms of crop mix and also in terms of elevation when it comes to exposure to tea.
Low grown tea accounts for a bulk of the country’s tea production and is known to be distinctly stronger in both flavour and colour. Demand for low grown tea stems from Russia and other CIS countries. High grown on the other hand are known for superior quality, unique taste and aroma and favored by European customers. Mid growns tend to be browner and sweeter than high growns and preferred in Australia, Japan, North America and the UK.
The report said that tea production in 2013 grew by 3.6 per cent to reach an all time high of 340.3 million kg. “Medium grown tea recorded the highest year on year (YoY) growth of 6.8 per cent 54 million kg, while low grown tea production increased by 3.1 per cent to 207.9 million kg and high grown production increased 2.6 per cent YoY to 74.6 million kg.
During the period January – September 2014 Sri Lanka’s cumulative tea production increased by 7.2 million (mn) kg to 255.7 mn kg. High grown and low grown tea recorded YoY growths of 9.1 per cent to 59.8 mn kg and 4.4 per cent to 157.9 mn kg respectively. Mid grown tea recorded a drop of 10.4 per cent YoY to 35.5 mn kg.
The report said that tea prices across all elevations fell from their peaks of last year due to an increase in supply at the auctions and instability in major export destinations such as Syria, Iraq, and Russia. “However, prices have shown a glimpse of recovery during October.”
Sri Lanka recorded its highest ever export revenue from tea last year, the report added, saying that exports were worth Rs. 199.4 billion while volumes dropped marginally by 0.8 per cent to 319.6 million kg.
During the 9-month period January – September 2014, Sri Lanka’s tea exports grew 2.9 per cent to 241.3 million kg. Bulk tea exports have shown a decline while tea in bags and tea in packets have shown a growth. In value terms tea to-date exports have grown 12 per cent to Rs. 158.7 billion.
Russia remains Sri Lanka’s largest buyer, followed by Turkey and Iran.
The most labour intensive of all plantation crops, the tea industry has been plagued with issues ranging from powerful unionised labour to rainfall (either abundance or a complete lack of it). This has rendered the industry extremely volatile and unpredictable in terms of earnings, according to the report according to the report.
“Ceylon Tea is considered to be among the highest quality teas in the world and has managed to consistently command a premium price compared to its global competitors. At US$3.60 per kg Sri Lankan Tea fetches almost twice that of its competitors in India and Kenya.”
However this phenomenon is negated by the fact that Sri Lanka has the highest unit cost of production among all major producers, the report said.
Daily wages of a Sri Lankan pluckier stands at US$5.30, considerably higher than that of Kenya $2.60 and India $2.10 Sri Lanka’s unit labour cost alone is higher than the total unit production cost of most of its competitors.
Sri Lanka’s daily output per plucker is 18 kg day which is significantly lower than the Kenyan output of 48 kg/day and the Indian output of 27 kg/day. “Productivity among male pluckers in Sri Lanka is especially low compared to global peers and also compres to only around 60 per cent – 70 per cent of female pluckers. This is in contrast to the situation in Kenya where male pluckers daily output is significantly higher than female pluckers.”
According to the Planters Association of Sri Lanka, an increase in the daily plucking average by a mere 2 kg/day would bring down the country’s cost of production by 6.5 per cent. This improvement, if achieved, would go a long way in easing the unsustainable costs incurred by RPC’s at present.
Plantation workers wages are revised upwards (usually by 20 per cent) bi annually. As the last revision occurred last year “we expect the current year’s earnings to receive a boost through stability in costs”, the report said.
The local rubber industry has continued to decline in line with the current global stagnation of the global market for the commodity the report said, highlighting that the weak demand conditions in China and the E.U coupled with excess supply.
“Adverse weather conditions have hampered tapping during most of the year, bringing down output as many small holders have resorted to discontinue tapping further. The slight price recovery witnessed recently has been a result of this reduction in supply.”