The Hindu Business Line : Tea: The overflowing cup of woes

TEA is best had, not written about. Or so the saying goes. But its cup has been so full of woes, that there is hardly any cheer left. A surfeit of supplies and sliding prices have left the tea industry at the bottom of the cup, in dregs. To exacerbate the situation, the industry essentially operates at a commodity level — volume driven and with low margins.

Worldwide, tea production has declined, by about 4 per cent to 652.8 million kg between January and June 2002 against the levels in the same period last year. Global consumption too has shrunk about 3.5 per cent to 529 million kg during this period. This is a worrying trend indeed.

Spiralling costs, low prices

The cost of producing tea in India is high, taking a toll on margins. Since the industry is agrarian, labour is an important component of the cost structure. Prices have languished on the back of demand-supply mismatch. Teas put up for auction in the South have traditionally fetched lower prices than those in the North. But this year the fall has been sharper in the north (down 30.17 per cent in January-May 2002 against the corresponding previous period) while in the south, prices slipped 12.46 per cent.

Curtailing production levels may be one way of lending support to prices. In fact, the truant monsoon is being viewed as a blessing in disguise for the industry. The all-India production in the January-June 2002 period dropped about 4.5 per cent to 285 million kg over the same period last year. However, prices have not perked up in tandem. Rather, the all-India average selling price dropped about 20 per cent (at Rs 51.52 a kg) against the levels in the same period in 2001. Understandable, as there is usually a lag before prices begin to correct. But, in the end, even if prices recover on the back of production cuts, the industry will lose out as the net value of tea produced will fall.

Exports down to a trickle

For a country that prides itself on being the largest producer of tea, it comes as a surprise that exports are much lower than that of other countries. Exports between January-June 2002 were a mere 74 million kg (down 3 per cent over the same period in 2001). Exports by Kenya and Sri Lanka, on the other hand, were much higher at about 120 million kg each. In particular, India has lost share in the British and Russian markets (the latter tumbled over 8 percent in 2001 as quality and prices turned buyers away).

Another problem is that India is a CTC consumption country while the world prefers the orthodox variety. Small plantation growers are more comfortable producing the CTC types, as domestic consumption is certain even if price realisations are lower. Growers are simply not competitive on the export front and Sri Lanka, Kenya, Malawi, and Indonesia are able to beat them in the orthodox segment.

Cannibalisation in beverages

There is also a feeling that soft-drink majors and other beverage companies have drawn away tea-drinkers. The youth, for example, are seen as grabbing a bottle of soda rather than a cup of tea. However, the industry is largely to blame for this. It remained complacent even as colas and sodas took over the market, and even traditional beverages like coffee were promoted into a fashionable drink.

Dogged by problems

* The higher age of tea plants in India vis-à-vis those in the new tea-producing countries has affected the quality and yield.

* The quality of tea produced in India for the export market is lower than those offered by other countries.

* The Darjeeling variety has not been patented and protected enough that markets abroad are often flooded with quantities far exceeding the actual production.

Government support

Realising the gravity of the situation, the Government has begun to be supportive of the tea industry. India is the largest producer of tea (at 854 million kg in 2001) after China. But much of this is consumed domestically (660 million kg in 2001). Only a small proportion is exported (about 180 million kg in 2001). Given the size and the employment potential, the government's moves are not surprising.

To make prices more competitive and to pep up domestic sales, the 2002 Budget cut the excise duty from Rs 2 a kg to Re 1. The industry is expected to gain about Rs 86 crore by this. Further, to guard the home turf from cheaper imports, the import duty was raised from 70 per cent to 100 per cent; imports have come down marginally from last year. Curiously however, the drop has been more in value terms (36 per cent, or Rs 11.4 crore, in January-April 2002 over the same period last year) than in volumes (13 per cent or 5,93,000 kg). This suggests that high-value teas, like orthodox varieties, are being imported less.

The Government also decided to fully open the tea industry to foreign investment. The FDI limit has been raised from 26 per cent to 100 per cent. However, this is hardly any incentive for foreigners to pump money into an ailing industry beset with high costs and low realisations.

The way ahead

The image of tea has to be given a facelift and actively promoted, and the general consensus among the industry is to do it by projecting it as a health drink (polyphenols and other amino acids in tea have cholesterol-reducing and anti-cancer properties). This may lead to higher consumption of tea.

For the established players vending tea at the retail level, the more pressing need is to focus on blending, packaging, and labelling, and branding the tea products both in the domestic and export markets. For, their worry is primarily of smaller manufacturers flooding the market with low-priced packet teas. In particular, bought tea leaf factories are able to do this successfully as they are able to procure the same quality at lower prices in auctions as opposed to companies that grow tea themselves.

Companies such as Tata Tea have tackled this by introducing economy-end umbrella variants like Agni and Agni Sholay that compete with, among other brands, A1, Tiger, Ruby and Girnar Jumbo.

Cost rationalisation is another key area for plantations and integrated companies. Tata Tea has already started on this by offering a separation scheme to its non-plantation employees.

Production cutbacks appear inevitable to stabilise prices though this will mean lower realisations in the short-run. A tilt in favour of orthodox tea rather than CTC may also help pursue exports.

In terms of packaging, too, tea from plantations can be stocked in standardised pallets allowing easier handling and transportation.

All this may come as a soothing cup for tea companies facing difficult times.

In falling markets, as now, companies are bound to lose share to low-cost producers. Integrated companies (that produce and brand tea) are even more at risk.

And, worse, other tea-producing nations like Sri Lanka, Kenya, and Malawi are watering down India's image as a dominant and quality exporter. Not a pretty picture indeed.

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