Summary
Tea is a very popular
drink whose demand is relatively insensitive to price. However,
being an agricultural commodity its supply is sensitive to weather
conditions. Tea plantation and production is highly Labor
intensive. Labor cost accounts for around 60% of the total cost of
production. Tea bushes begin to yield leaves after 5-7 years and
have a life span of about 150 years. This implies that return on
new investment is low and spread over along period. World
production is concentrated in a few countries like India, Thai,
China, Kenya, Sri Lanka and Indonesia mainly on account of climatic
conditions. Major import markets are in developed countries but
with increase in consumption in developing countries also there is
a gradual shift to developing countries becoming big import
markets.
As per a report by FAO
on tea market the tea production increased by 1.8% in 1999 while
the consumption increased by 2.05% during the same year. Total
world production in 1999 was at 3mn MT. India and China, the
largest producers and consumers of tea, account for about 50% of
world production. Kenya has emerged as a leading exporter of tea in
the world over past two years. While countries like Sri Lanka,
Indonesia, Malawi etc too have stepped up their production
countries like Pakistan etc have increased their imports.
Consumption in other developing markets too is
increasing.
India is the largest
producer and consumer of tea. In 1999 India produced 805mn Kgs of
tea and consumed 615mn Kgs. The tea industry however is going
through a bad patch owing to falling prices, lower exports and very
slow growth of consumption.
India's advantage has
diminished significantly on account of stringent labor laws and
lower productivity from older bushes. Imports are banned for
domestic consumption. The surplus is sold in the competitive
international market, which sets the benchmark for domestic prices.
The Indian tea producers (and also investors) had profitable times
through the late eighties till 1991, as the buyers in the erstwhile
USSR were able to pay abnormally high prices thanks to the
artificially overvalued rouble under the bilateral trade agreement.
The situation has changed since then with the collapse and break up
of the Soviet Union.
The long-term outlook
for the industry is fraught with uncertainties. Cost of production
in the competing countries like Kenya and Sri Lanka is lower due to
labor cost advantages, better productivity from younger tea bushes
and state support. Sans the rupee trade, Indian tea is not price
competitive except for some niche segments. Nevertheless, investors
will have short term trading opportunities when tea prices rise due
to bad weather in the major producing regions.
The sector should get
valued like any other commodity sector. With a domestic surplus
situation and the absence of global competitiveness, the sector
fortune is linked to a global price rise, which is highly
uncertain. Investment can be considered when the industry fortunes
take an upturn.
