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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » TEA assertion on revenue gains doesn’t add up

TEA assertion on revenue gains doesn’t add up

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Malika1990

Malika1990
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
TEA assertion on revenue gains doesn’t add up Tea
The denial by some members of the TEA that they are lobbying to import cheap tea is laughable. The sole purpose of the exercise, as stated in their own proposal, is to import teas cheaper than the Ceylon Tea they are forced to now use. The crux of their proposal to the Tea Council is: “The market leader brands are offering the consumer multi-origin blends which leaves Sri Lankan exporters at a severe price disadvantage.”

Some members of the Association want to import cheaper teas to address the “severe price disadvantage” they claim with Ceylon Tea. They would then be able to reduce their export prices in order to “compete”.

Prices for foreign tea are generally much less than for Ceylon Tea. All teas imported would be well below the cost of production in Sri Lanka, which is about $3.50. There is currently an import duty of 25% on such teas to protect Ceylon Tea and the TEA now wants it duty free. It doesn’t take much to imagine the impact on Ceylon Tea producers who are already ailing. When cheaper teas are used to reduce export prices, the average export price per kg would naturally reduce.

Current annual exports are approximately 320 million kg, thus at an average of $4.50/kg it works out to $1.5 billion approximately. The TEA projects increased exports, including imported tea, at 450 million kg (so presumably 130 million kg of tea will be imported) and earnings of $5 billion, which works out to an average of US$11.00 per kg.

This average export price of $11.00/kg is 2.5 times the current price of $4.50/kg. If they export at lower prices per their documented proposal, how on earth could the price go up 2.5 times? It should go in the other direction. Export prices per kg must surely fall and there goes that $5 billion pie in the sky.
It simply doesn’t add up…like much else in their arguments.

A likely future scenario based on TEA data:

Current exports 320 million kg Pure Ceylon Tea x $4.50kg = $1.5 billion approximately.
TEA projected exports mixing with foreign teas 450 million kg x say $4.00kg = $1.8 billion approx.
Less imported tea value 130 million kg at a maximum of $2.00 = $260 million.
Net exports = $1.54 billion approx. Quite a bit off the $5 billion target.
So from a macro perspective we are standing still.
The fall-out
Ceylon Tea producer prices will fall, in competing with foreign teas all imported below Sri Lankan cost of production.
As exporters buy more foreign teas, those prices will go up [global tea supply is tight] so more foreign teas will be needed in the blend to get blend cost to level required by buyers. Ceylon Tea content will keep dropping on an ongoing basis.
Devastating impact on Ceylon Tea producers, many will fail.
Image of Sri Lanka as a source of pure Ceylon Tea will be irretrievable damaged, impacting the ability to export at premium prices.
If, on the other hand, the TEA resolves to market the present crop of Ceylon Tea under Sri Lankan premium brands at prices that some Sri Lankan brands already achieve, we would more easily reach the $5 billion target and exporters can smile – all the way to the bank!
Tea smallholder Galle
http://sundaytimes.lk/index.php?option=com_content&view=article&id=19445:tea-assertion-on-revenue-gains-doesnt-add-up&catid=79:analysis&Itemid=565

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