Financial Times

Packing Ceylon tea in Russia?
The Ceylon tea industry might have to consider setting up packing plants in Russia to get around a sudden, sharp increase in import duty on value added tea shipments that threatens to erode Sri Lankan exporters' share of their biggest market, trade officials said.

The sharp hike in effective import duty on packeted teas and tea bags by Russia was partly the cause of lower prices at the Colombo auctions as buyers held off to take stock of the situation. Niraj de Mel, CEO of the Tea Association of Sri Lanka, said the effective increase in import duty could reduce direct exports of Ceylon tea finished products to Russia.

"A long term option would be for Sri Lankan packers to set up packing plants in Russia," said de Mel. "Exporters will need to come together and receive government support."

Brokers Asia Siyaka Commodities said the duty hike was targeted at value added imports from producer countries and was seen by trade sources as being "punitive." "The timing of this action would cause considerable losses to Sri Lankan exporters who have already commenced packing for shipment prior to the high consumption winter period. These rates have also equated exports from producer and non-producer countries."

The minimum value of packets jumped 67 percent to $3 per kilo from $1.80 and tea bags rose 43 percent to $5 from $3.50. Forbes and Walker Tea brokers said the higher minimum declared value of pre-packed teas imported into Russian Federation came into effect on October 29, 2003. Brokers John Keells reported there was less demand from the tea bag sector, especially Russia, at the auctions.

Low Growns met with much less demand and prices declined as much as Rs.10-20 a kilo for certain categories. "This could be attributed to less activity by certain Middle Eastern countries due to the on -going Ramadan Festival, border closures, and the new duty structure imposed on imports to Russia and the Ukraine."

The Russian authorities have defended the duty hike saying they want to encourage their packaging industry. Industry officials said a sudden drop in exports to Russia was unlikely in the short term but that the development went against efforts by the Ceylon tea industry to increase value added exports.

"Russia will still continue to be our no. 1 importer at least in the short term because of imports in bulk," one official said. "Russian packers will still need Ceylon tea. However, over the long term they'll maximise their profits by using less and less Ceylon tea and more of the cheap alternatives available such as from Vietnam and Bangladesh." Industry officials said the mission led by Plantations Industries Minister Lakshman Kiriella in September had failed to persuade Russian authorities to reverse the effective import duty hike as the visit was arranged too late.

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