State push on SL tea prices “detrimental”, says Fitch Ratings

Government intervention at the Colombo tea auctions could be detrimental to the sector, ratings agency, Fitch has said.

It was pointed out that this measure, which is yet to be implemented, would make Sri Lankan tea less competitive in a global market that is over-supplied. The government in October this year had allocated Rs.1 billion to purchase tea at the Colombo auction drive prices to Rs.450 per kilo, it was stated.

The ratings firm explained that the listed tea companies were challenged due to the low prices for tea in the global market and the high wages demanded by the workers.

The depressed prices and high wages will continue to weaken the credit profiles of Sri Lanka’s listed tea plantation companies, those that derive more than 50 per cent of their revenue from tea, Fitch Ratings stated in the release.

The combined leverage, calculated as net debt/EBITDA, of all listed Sri Lankan tea plantation companies has risen to 9.9x at end-September 2015 from 2.4x in 2013 as low prices and cost increases have significantly impaired the profitability and cash flow generation of the companies, the release stated.

Fitch expects sector leverage to remain at high levels in the long term because of regular wage increases and low productivity compared with other leading tea exporting countries.

The average price in September at the Colombo tea auction fell to Rs.370 per kg, which was the lowest since February this year, the release said adding that it was due largely to lower demand from the country’s key customers including Turkey, Russia and the Middle East.

Labour costs amounting to 70 per cent of tea plantations companies’ production costs, rose to 25-30 per cent in the last few years, it was stated, adding that the tea companies have posted operating losses so far in 2015.

Wage increases made every two years has ended in a deadlock with trade unions demanding a 60 per cent increase while the companies are seeking a deferral till next year or a maximum increase of 10 per cent given the low selling prices and their struggle to break even, Fitch Ratings stated.

Current auction prices are hovering around Rs.400 per kg, which remain well below the average production cost of Rs. 450 per kg and any wage increase would undermine the profitability of the tea companies, the release said.