Losing “Ceylon” for a few pennies more? Nay!
The report on the blending of teas in Sri Lanka has left committee members with a lack of consensus on the issue as a result of which no new policy has been formulated for the blending, packaging and re-export of orthodox teas from a country unique to Ceylon Tea.
“It was clear from the outset of the committee’s deliberations that there are both risks and opportunities associated with a further liberalisation of the existing policy, making it difficult to arrive at a consensus,” the report by a high-level committee to the Cabinet Committee on Economic Management on the ‘Policy on the Import of Tea for Blending, Packaging and Re-export’ stated at the outset.
Sri Lanka holds onto an enviable advantage in the production of its orthodox teas which has been able to withstand competing teas of Kenyan and Indian origin with a quality unique to its location and processing methods.
As a result the report states that Ceylon Tea branded orthodox teas fetch high prices in the global market and Sri Lanka is also the manufacturer of the largest amount of such teas.
In order to help Sri Lankan exporters to compete effectively in the global market, the import of CTC teas for blending and re-export has been permitted for the past several years. In 2015, for example, 2.3 million kg of CTCs were imported, to be re-exported after blending with 3.6 million kg of Ceylon tea. These teas are then labelled “A blend of Ceylon and other-origin teas, packed in Sri Lanka”.
The report points out that despite the freedom to import CTC teas for blending purposes, such blended teas account for only six million kg annually (approximately 2 per cent of exports) and do not attract a significantly higher FOB value.
On the other hand, Sri Lanka’s value-added tea industry (that comprises 36 per cent of exports), which is the envy of the other major tea exporting countries, is strongly reliant on the global reputation of the Ceylon origin.
A few exporters who emphasise the Ceylon origin have created brands that are able regularly to achieve FOB averages in excess of Rs.1,500 /kg for quantities in excess of 5 million kg/year, indicating both substantial value addition and the potential of value addition for the industry at large. The average FOB value of value-added tea, however, was only Rs. 700 /kg, the report states.
During the deliberations on formulating a policy for the blending of orthodox teas in Sri Lanka, the committee looked at both aspects of the debate for and against as this has created a division between manufacturers and exporters.
The committee was established following numerous requests made to the Minister of Plantation Industries and the Sri Lanka Tea Board by the Tea Exporters’ Association, and specific requests by buyers Ahmad and Tetley to allow the import of orthodox teas from other origins to be blended with Sri Lankan orthodox teas within the Board of Investment (BOI) zone thereby not allowing it to enter the local market.
But the committee has stated in its report that this was not a feasible option because of the very large investments needed amounting to around Rs.1-to-5 billion.
“These multinationals would therefore have a significant unfair advantage over their local competitors, in addition to which their use of the wording ‘Teas of multiple origins packed in Sri Lanka’ would allow them to derive false value from a Ceylon origin while diluting its value to local exporters,” the report said.
Blending – a money spinner
Blending of orthodox teas has sent multinationals like Lipton, Ahmad, Twinnings and Tetley to earn substantial profits in other offshore plants.
Further it is believed that with the steady increase in the labour costs, unmatchable with markets like Kenya and India has led to a drop in the quality standards and due to which exporters want the government to allow for the import of teas to offset the situation.
The report states that exporters want the government to ensure “free trade” by removing barriers to exports and without any interference from the manufacturers. Exporters argue that they should not be “shackled because of the parochial interests” of the manufacturers.
A growth of the blending industry could help offset the country’s increasing cost of production, the report states in its case for blending.
One of the possibilities of improving efficiency through blending would be by exerting pressure on the local tea industry to be more competitive by importing cheaper orthodox teas of “comparable quality to Ceylon Teas,” the report stated.
Holding the exporters “captive” to purchasing solely Ceylon Tea and not teas of other origins would ensure that Sri Lanka would stand to lose when these companies move offshore as a result of which both capital and capacity would be shifted out of the country.
Further claims by manufacturers that the Ceylon Tea holds special focus is believed to be changing today as the committee has noted that people today buy products not because of where it comes from but how much value the brand contains.
Losing status
The danger of losing the Ceylon Tea premium label is feared in the global market should the consumer consider the blended teas packed in Sri Lanka as the “Ceylon” tag.
The committee has found out that this position is underlined by the fact that brands such as Ahmad and Twinnings (in addition to many other brands) use ‘Ceylon’ in their labelling even for teas blended with those from other origins such as India, or perhaps with no Ceylon tea content at all.
Additionally, several unauthorised and misleading uses of the Ceylon origin (in forms such as ‘Ceylon Plus’, ‘Ceylon Gold’) and even the Lion Logo are commonplace, demonstrating the value placed on Ceylon as an origin of quality tea. It is therefore clear that the ‘Ceylon’ brand carries substantial value, and allowing its dilution with teas of other origins will only jeopardise the reputation won by the brand over the past 150 years, the report notes.
Another concern is that the orthodox teas imported for blending could enter the local market and be eventually re-exported as Ceylon Tea.
In this respect, the committee states that these types of malpractices could result in consumers ceasing to place a premium on Ceylon tea to the detriment of the industry.
Importers of Sri Lankan Teas purchase the majority of the bulk teas or value added to order who are said to “squeeze exporters to minimise their margins and maximise their credit.”
As a result the FOB price of value added tea is as low as Rs.700 per kg creating pressure to blend with other origins to reduce cost but wanting to retain the Ceylon branding is mainly a requirement from the importers.
Exporters on the other hand make higher margins and therefore the challenge of the industry is for exporters to strive to become genuine value-adders, appealing directly to their consumers, capitalizing on the advantage the Ceylon origin gives them.
Due to the country’s unique positioning, Sri Lanka’s proximity to the equator ensures a year round supply of tea without a “winter season” as in India and China. As a result the country is able to produce premium and consistent quality orthodox black tea with the ability to garner a premium over other origins.
It is this issue that would be detrimental to Sri Lanka if it should agree to a policy on blending of orthodox teas from other origins as it will devalue the “Pure Ceylon Tea” in the eyes of the consumer.
In response to the issue of being held captive against the import of orthodox teas of other origins; authorities note however, that despite permission given to import CTC teas for blending only one exporter is currently engaged in this operation.
In this context the committee maintained that the Ceylon origin needs to be safeguarded and allowing Indian and Vietnamese orthodox teas to enter Sri Lanka could mean endorsing these origins to enter the markets hard won by the country.
So due to a lack of consensus the Ceylon Tea tag will be safeguarded and orthodox teas set to retain their premium value in the global market from its largest manufacturer, Sri Lanka that will continue to adhere to the strict code of ethics on blending with only CTCs allowed to be imported. Orthodox teas will not, as a policy under the present government, be allowed to be blended with orthodox teas of other origins for re-export.
| Tea exporters cry blue murder | |
| Tea exporters have raised strong objections against the government decision not to approve blending of teas in Sri Lanka even exclusively within the Board of Investment (BOI) zone. The Tea Exporters Association on Thursday issued a statement to highlight the consequences of not liberalising tea imports to the country’s economy. It was noted that in the 14 years period from 1981 – 1995 where orthodox tea was allowed to be imported without restriction for value addition and re-exports, there was no adverse effect on local tea producers. The authorities should have considered allowing certain selected orthodox tea grades under the same scheme for value addition and re-export until a long term decision on liberalization of tea import is taken. A scheme can be designed to make sure that tea importation will not affect the demand for local tea, the release said. They noted that with tea production on the decline the growth of tea exports would be “restricted” by the limited availability of tea in Sri Lanka, exporters stated. Loss of export opportunities is costing the industry around 75 million kg per year amounting to around US$375 million annually but which could be covered in the supply side by liberalizing tea imports by increasing the quantity for export. With Sri Lanka losing its market share due to the decline in tea production and high price of Ceylon tea, most competitor nations like India, Kenya and Vietnam would capture it. In addition, the constraints in tea production have increased the cost of production as a result of which the prices at the Colombo auctions were much higher than other auctions. The Sri Lankan tea brands that exclusively market the Pure Ceylon Tea concept account for less than 10 per cent of the country’s annual tea export volume and their growth in terms of volume remains static, it was noted. The exporters pointed out that these brands are unable to drive the tea industry to achieve the expected growth due to comparatively low volumes. The world market share of single origin tea is insignificant and it is unlikely that this share would increase. |