World supply continues to rise with the International Tea Committee estimating the 2016 global production to be 5.462 billion kilogrammes (bnkg) compared with 5.281 billion the year before. The year-on-year (YoY) increase of around 3 percent is significant when one considers that 2016 was an El-Nino year.
Global supply review
Of the projected 181 million gain in 2016 YoY 2015, 55 percent or 102 million kilogrammes (mnkg) have come from the estimated Chinese tea production increases from 2.248 to 2.350 bnkg. Similarly, India, the second largest producer in the world, grew its production from 1.208 billion in 2015 to 1.239 billion in 2016, despite the low production in South India.
Kenya recovered from a bad 2015 of 399 mnkg to reach a record 473 mnkg in 2016. Sri Lanka came out as the biggest loser in that year with production dropping 11 percent from 328 mnkg in 2015 to 292 mnkg in 2016, a loss of 36 mnkg.
In 2017, a review of available data from the major producer exporting countries shows Sri Lanka up 18 mnkg by November on its low base year.
Total India crop for the same period is up five mnkg; while South India gained 19 mnkg on its low 2016 figure, North India was down 14 mnkg. Kenyan production was at a low 392.3 mnkg compared with 427.9 mnkg during the period January-November 2016. The shortfall was 35.5 mnkg.
Uganda crop to October is at 37 mnkg, down seven mnkg YoY 2016. It is difficult to project China tea production but could rise to 2.4 billion in 2017.
Total global green tea production has risen from 1.736 billion in 2015 to 1.788 billion in 2016; 86 percent amounting to 1.550 came from China.
China black and other tea production sharply up
China has aggressively driven its production of black and other tea over green tea in recent years. In 2010, China produced a total of 1.475 bnkg, which grew to 2.350 billion by 2016 (+59 percent). Of this total, green tea production stood at 1.046 billion in 2010, which increased 48 percent to 1.550 in 2016.
The black/other tea category has grown 86 percent from 429 mnkg in 2010 to estimated 800 mnkg by 2016. It seems however that most of this production has been consumed locally as the published export figures do not reflect a significant increase of this category. China’s booming economy has produced affluent consumers eager to purchase China’s best teas.
Sri Lanka tea production 2017
The available data of tea production for the period January-November 2017 shows it at 283.38 mnkg, up 18 mnkg, 7 percent, on last year’s low figure of 265.39 mnkg. Over the three previous years however, the 11-month total was 305, 313 and 309 mnkg, respectively.
The low country 11-month figure of 181.50 mnkg is naturally up on last year’s low quantity of 167.04 mnkg but trails 187 mnkg in 2015 – 194 mnkg in 2014 and 189 mnkg in 2013.
High grown production for the period is 59 mnkg; sharply lower than the 2015 quantity of 70 mnkg and 73 mnkg the year before. Mediums have followed a similar trend and are at 42 mnkg, down from 47.7 and 46.1 in 2015 and 2014.
Looking at the mixed weather and factors such as agricultural practices, fertilizer application and restricted labour, we are not optimistic the 4Q17 will see high production.
We believe the national total for 2017 will therefore be around 309 mnkg. The projected total for low growns would be around 197 mnkg, high growns 65 mnkg and mediums 47 mnkg.
World production projections 2017
India is heading for a record annual crop of around 1.26 billion, against 1.23 billion in 2016. Similarly, China, based on the historic trend, could move up to a record 2.4 billion in 2017, compared with 2.35 billion the year before.
Kenya following early losses should end 2017 at a quantity of around 438 mnkg, down 35 mnkg on 2016 final total of 473 mnkg. The other significant African producer exporter, Malawi, should be steady at around 43 mnkg with Tanzania 33 mnkg and Rwanda 25 mnkg. Uganda however following the Kenyan cropping pattern is trailing 2016 and will be around 47 mnkg in 2017, against 55.7 mnkg in 2016.
From a Sri Lankan perspective, the supply of orthodox black tea by the major producer exporting countries initially declined in 2016 YoY 2015. Production and exports from Vietnam and North India met some of the shortfall quantitatively but not qualitatively.
Supply of CTC black tea in 2017 followed a similar pattern with Kenya having a very poor 1Q.
Sri Lanka production outlook 2018
The country will have to contend with unsettled weather, inability to source cost-effective weedicides, disruption to regular agricultural practices and high cost of fertilizer. Wage negotiations for regional plantation company (RPC) estates are expected in 3Q. There could potentially be disruption to work particularly in the higher elevations based on historic patterns of union activity.
If weather holds, Sri Lanka could reach 320 mnkg in 2018. Low growns 200 mnkg, high growns 70 mnkg and mediums 50 mnkg could be achieved if market prices for Ceylon Tea remain buoyant until the 3Q.
Global supply projections 2018
In Sri Lanka, with elections due in February and cooler dry conditions experienced on the western side early in the year, we expect production to be restricted during 1Q. Much depends on the settling of key issues discussed previously if 2Q and 3Q are to be high cropping periods. We project a total of 320 mnkg.
Of the other major Asian producer exporters, Vietnam could get back to 170+ mnkg and Indonesia will record nominal growth to about 130 mnkg. Globally India and China are likely to hold steady on 2017 numbers as both countries cannot sustain the growth momentum shown in the three previous years.
Kenya is capable of bouncing back with potential to reach 470 million. Uganda would benefit from the same weather conditions and increase production potentially to 60 mnkg. Other Africans will hold steady.
Supply
Despite 2016’s final global production figures showing supply improvement, there was a marked shortfall in the supply of orthodox and CTC black tea from many countries.
Crop intake declined in the southern hemisphere from around mid-year and continued into 1Q17. Supply chain had little stock. In Sri Lanka, supply remained tight throughout the year.
Sri Lanka is heading for a low cropping 1Q in 2018 following a weak 4Q in 2017. Cold dry weather is expected on the western slopes and in the low country, which means supply will remain tight until after the Sinhala New Year. Tea production will increase in 2Q. North India and some other Asian countries will be in winter during 1Q.
Quantities traded/exports
World exports of tea remained flat at 1.797 bnkg in 2016 compared with 1.793 bnkg in 2015. The highest figure for world exports of tea was 1.897 bnkg in 2013. In that year 37.2 percent of world production was exported and this has declined to 32.7 percent in 2016 reflecting higher domestic retention in producer countries.
Of the major tea producer exporters in Asia – India, Sri Lanka and Indonesia – have recorded lower quantities in 2016 YoY 2015, whilst China shows a little change. Vietnam is the only producer to record significant gains. African exports have grown on the back of a sharp rise by Kenya.
Overall green tea shipments dominated by China were marginally lower in 2016.
We project Sri Lanka tea export quantities in 2017 to show little change YoY 2016. India and Vietnam are likely to record gains. Africa is heading for a big drop with projected Kenyan exports in 2017 expected to decline more than 50 mnkg YoY 2016.
2018 supply/export outlook looks to be very tight in 1Q. The pipeline seems to have fed immediate demand with no carry over from the previous year.
Demand
The major export auction centres, Colombo, Mombasa and Kolkata, all recorded significant gains in 2017 YoY 2016. Price changes at the Colombo auction were more pronounced even as the rupee depreciated against the dollar.
The US dollar was around Rs.145 in June 2016 and appreciated to Rs.153 by the same time 2017. The currency generally held these levels thereafter. At the Colombo tea auction, prices reached record levels that peaked in October for all three elevations and stayed buoyant until December.
Many of Sri Lanka’s key markets are oil income driven. Projections for crude oil prices in 2018 are relatively high as they were in 2017. We have seen a strengthening of currencies in these markets, as their economies recover.
Iran, a major buyer of Sri Lankan orthodox black teas, has domestic and international issues that could have a negative impact on purchase of Ceylon Tea.
On the other hand, India is gaining a larger share of the market through increased exports of its own and other origin teas through its ‘financial package’ with Iran.
This could have a long-term impact for Ceylon’s and Pure Ceylon Tea packs.
In Sri Lanka, tourism is on the up and many urban Sri Lankan consumers are being offered BOPF standards by the brands. This is a positive sign.
Outlook 2018
We expect the market at the Colombo tea auctions for orthodox long leaf teas to maintain the December closing rates until around March 2018.
The market would soften in 2Q subject to supply and could strengthen thereafter.
Prices for liquoring high growns are projected to be strong through 1Q18. It is not certain however how the market would behave over the Japan MRL issue. We are confident this matter will be resolved early but there could be a negative impact on price in the immediate short term. Overall we project market levels in 3Q and 4Q to exceed comparable prices of 2016.
