Plantation industry in dire straits

23 March 2015 06:52 am - 0     - {{hitsCtrl.values.hits}}

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Oil palm to the rescue?

By Chandeepa Wettasinghe

Plantation companies that have not diversified to include oil palm are likely to face an overall negative outlook due to global and macroeconomic factors.
“Only oil palm planted estates will make a profit,” Watawala Plantations PLC CEO Dr. Dan Seevaratnam told Mirror Business recently.
He noted that the tea and rubber industries would run at a loss for the current financial year.
“The industry, people or the country will not benefit from rubber or tea,” 
he said.
However, only five of the 19 listed plantation companies have diversified to oil palm.
A recent research study done by NDB Securities (Pvt.) Ltd too mirrored Dr. Seevaratnam’s sentiments, saying that the outlook for rubber and tea largely remain negative, while oil palm would grow in the long term. NDB said that Ceylon tea’s main markets fell in the final quarter of 2014 with only the USA growing at 
5 percent.
According to the report, lower demand from Russia due to sanctions, the oil glut and political crises affecting the Middle East and deflation in the eurozone will continue to depress demand in the short term.
Market sources say that Russia was ousted as the number one export destination for Ceylon tea by Turkey last quarter, while many tea exporters are now targeting alternative markets in the Far East and other emerging markets. The International Monetary Fund (IMF) has predicted that tea prices will remain stagnant till the middle of this year, when demand is expected to pick up.
“Prices are expected to pick up in the long term as population growth and rising per capita income levels drive global tea consumption,” NDB too agreed. While saying Ceylon tea will continue to command a premium, the report cautioned that supply side problems, specially relating to heavy use and cost of labour, would have to be addressed urgently, if the industry is to remain sustainable in the long run.
The regional plantation companies have been mulling the introduction of mechanized harvesting as a solution. However, their tea bushes are over 50 years old and cannot hold up to the stresses and planting new bushes carries a return on equity of around 24 years, while their leases from the state are set to expire by 2045. Meanwhile, NDB said that the fall in crude prices has significantly lowered synthetic rubber prices, thereby lowering natural rubber prices as well, while increasing the proportion of synthetic rubber used for tyre production. “In addition, it should also be noted that China accounts for approximately 35 percent of natural rubber demand. As such, slowing economic growth in the country will not bode well for ‘non-tyre related demand,” it further added.
NDB said that the outlook for rubber will remain stagnant. The government is artificially holding up rubber prices to give relief. Further, supply conditions are also deteriorating with erratic weather reducing the number of tapping days. Dr. Seevaratnam said that areas suitable for rubber plantations three decades ago are not so now.
“We should shift rubber to a region where it’ll do well. Or if we can import rubber and allow diversification, because oil palm fetches Rs.300 per litre on the shelf,” he said.
He further said that the benefit for workers in oil palm is greater, with a worker earning in excess of Rs.70,000 a month. Tea estate workers, in comparison, earn around Rs.15,000, while rubber tappers earn less than Rs.10,000.
This is due to the reduced labour intensity of palm oil, requiring one person per 10 hectares, compared to two to three workers per one hectare of tea.
NDB said that oil palm will remain stagnant in the medium term with industrial uses declining due to cheaper crude.
However, it said that since Sri Lanka still imports around 60 percent of its palm oil, the major cooking oil in the world, population growth and increasing demand would allow for profitable import substitution in the long run.
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