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An exclusive interview with the Tea Board Chairman
Sri Lanka Tea Board Chairman Jayampathy Molligoda[/caption]
This week, The Sunday Morning Business caught up with Sri Lanka Tea Board Chairman Jayampathy Molligoda in an exclusive interview which gave insights into the direction the tea industry is geared towards, coupled with strategies that are in place to address loopholes in the industry while regaining the lost market share in the international arena.
Following are excerpts of the interview.
Ceylon tea vs. Kenyan tea
The Sri Lanka Tea Board, by way of Ceylon tea, has proposed the unique selling proposition through its authenticity and sustainability credentials by commanding a premium price in the world market. Kenyan tea edges over Ceylon tea based on its low cost of production, and Sri Lanka will not be crossing the Kenyan path since Sri Lanka has a high cost of production, according to Molligoda.
“Ceylon tea’s conventional black orthodox tea, labelled with its purity and sustainability credentials, has a market share of 40-45 % in the international market. As such, the Tea Board has taken initiatives to compete with differentiated terms of unique selling propositions by branding Ceylon black tea’s quality to be dominant over other competitive tea brands around the world,” he added.
Sri Lanka’s global promotional campaign has built a reputation for Ceylon tea as a high-quality tea consisting of wellness factors and chemical compounds which are considered as immunity boosters, and this has been backed with scientific proof, SLTB noted.
Additionally, the data analysis revealed that the Kenyan tea production has increased to 500 million kg, by 16.2%, from 430 million kg last year. Adversely impacting Sri Lanka’s world tea market share has been significantly decreased continuously, whereas the share of Kenyan tea is being increased with a higher growth rate, annually.
Increasing exports to Pakistan
The Pakistan tea market at present is dominated by Kenya due to the popularity of its CTC (cut, tear, and curl) teas. Sri Lanka produces only 10% of CTC tea out of its total tea production, which is not sufficient to cater to the huge Pakistan market.
Molligoda stated that Pakistan is in favour of the cost leadership strategy available by other competitors and Sri Lanka would struggle to compete under those grounds. Thereby, the Tea Board has planned to cater to Pakistan’s high-end market.
Although Sri Lanka produces a large quantity of orthodox tea, prices are very high compared with other orthodox tea exporters, mainly due to the increased cost of production. Sri Lanka exports most of its tea in value-added forms while other countries export in bulk. Value-added forms of tea from other countries are offered at lower prices. This has resulted in Sri Lanka’s failure in the Pakistan market, he further noted.
“If we compete with Kenyan tea catering to Pakistan on a cost-based approach, it will result in diluting the overall global image of Ceylon tea, since it dominates the highest price at the auction contributing to a value addition,” he said.
Molligoda further pointed out that Pakistan contributes to a major portion of the global tea consumption by importing 195 million kilos of tea and that market demand in the country is tilting in preference towards Kenyan tea since it is priced much lower in comparison to Ceylon tea.
However, the tea industry of Pakistan is now at a mature stage. Large players have established their brands in the market and enjoy huge profit margins. They are now looking towards product differentiation and multi-segmentation because consumers are now more taste conscious and look out for variety in the tea market.
Measures taken to increase replanting of tea
Sri Lanka has been struggling with development activities relating to replanting and tea factory modernisation since significant progress was not witnessed, regardless of the availability of subsidies.
Molligoda added that the declining production and restricted capacity of stakeholders to infuse adequate counterpart funds for capital development results in delays in the replanting process which affects the sustainability of the industry and in order to get rid of this debacle more incentives are required to be offered and to mark an improvement in production.
However, over two-thirds of production now derives from smallholders, but the lack of financial incentives or mechanisms to promote replanting is of crucial concern.
Molligoda further pointed out that before accelerating tea planting nursery plants are an important element for new planting or replanting, since without the nursery plants, the subsidy cannot be utilised.
Additionally, there is a need for nitrogen when the tea is harvested – about 3.5 kg to 5 kg of nitrogen – and also balanced nutrient (npa) nitrogen phosphorus and potassium in order to
produce more organic fertilisers and biofertilisers.
“However, in the short run, we project there could be a deficit in the nitrogen. Therefore, I urge the private sector and government to collaborate together and ensure the availability of nitrogen nutrient in the soil. The tea planting and replanting subsidies are set to increase from Rs. 400,000 to Rs. 500,000 and Rs. 500,000 to Rs. 630,000 per hectare, respectively, to enhance the crops available for export. As such, this initiative would be beneficial for the tea industry, since the funds for replanting are insufficient, and it takes about four years for a replanted hectare to generate income,” he added.
Accordingly, Sri Lanka is projecting to produce 360 million kg of tea by 2025, and to support the initiative, the Cabinet approved the proposal tabled by Minister of Plantations Dr. Ramesh Pathirana to increase the subsidy for new planting and replanting, from the existing amount of Rs. 400,000 to Rs. 500,000 per hectare.
In 2020, the Government allocated Rs. 300,000 per hectare for new planting and Rs. 350,000 per hectare for replanting. This would be applicable not only for the estates coming under the regional plantation companies (RPCs), but also for tea smallholders, since 73% of the tea that is produced is accounted for by the tea smallholders, and only 27% is contributed by the RPCs.
Financial struggles of RPCs
According to the Planters’ Association, complaints have been drawn that the yields are dropping for regional companies, which has stemmed from a decline in the labour productivity and land productivity.
Sri Lanka has the highest COP (productivity and cost of production) among major tea producing countries. This has affected the country’s competition in the global arena. The cost of production per kilogramme of made tea has rapidly increased during the last decade. Increase in labour cost and higher prices of inputs had especially affected the production cost, since COP are interrelated and increasing cost of production continues to be a worrying phenomenon in the plantations sector. Labour productivity in tea has a greater relationship with COP, as the tea production system needs a larger quantity of labour, according to Molligoda.
Expansion into further international markets
In an attempt to reposition the Ceylon tea brand and regain the lost markets, the Sri Lanka Tea Board has planned to implement the global tea campaign, of which the total promotional budget for the three events would be around Rs. 600 million. Out of this, around Rs. 350 million will be allocated for 12 markets this year, beginning from Russia, Ukraine, and China, Molligoda added.
According to the information provided further on this, the campaign is aimed at creating awareness of the Ceylon tea brand in international markets and adapting to better strategies to penetrate markets effectively.
Russia was the largest export destination for Ceylon tea in 2016 and had imported 11.92% of total tea exports, followed by Turkey, which surpassed Russia’s position in 2016 and maintained the position at the first place among the main Sri Lankan tea export destinations by importing 13.09% of total Ceylon tea exports. Tea consumption continues to be dominated by Asian countries, particularly India and China, estimated to be 55% and more of global demand.
However, Sri Lanka’s tea export revenue stagnated between $ 1 billion and $ 1.63 billion from 2007 to 2018, with a peak of $ 1.63 billion recorded in 2014. In 2018, Sri Lanka exported tea worth $ 1.43 billion, down from $ 1.53 billion in 2017.
Revenue from tea exports recorded in the period from January-December 2020 is Rs. 230.1 billion in comparison to the previous best of Rs. 240.6 billion in 2019, a decline of Rs. 10.4 billion. Moreover, exports for the period from January-December 2020 totalled 265.5 million kg in comparison 292.6 million kg from January-December 2019, showing a decline of 27.0 million kg, Molligoda stated.
Meanwhile, to utilise the tea consumption in Middle Eastern countries and the Gulf region, which absorb over 54% of tea exported from Sri Lanka, the Tea Board introduced the Ceylon Tea Pavilion for the Gulf countries in 2021, along with leading tea exporters from Sri Lanka.
However, European countries facing an economic downturn could impact tea prices in a significant manner. It is noteworthy that value-added tea exports now account for almost 38% of the total export volume.
Tea for oil barter deal with Iran
Cabinet approval has been granted for the Sri Lanka-Iran barter deal and has got formal approval from Iranian Cabinet. Accordingly, Sri Lanka has formally appointed and streamlined the system and looks forward to signing the agreement at the end of this month.
A “tea for oil” barter deal was proposed mid-last year to settle Ceylon Petroleum Corporation (CPC)’s outstanding payments to Iran. The terms of the aforementioned barter agreement involve large sums of payments due to the Iranian Government from CPC for fuel exported to Sri Lanka several years ago. Hence, Sri Lanka, in an initiative to settle the debt, will export tea to Iran since it was unable to settle the aforementioned debt with liquid cash, previously due to sanctions placed on Iran by the US.
The barter trade agreement is a path adapted to revive the tea export market share in Iran, which was overtaken by India in 2019. Iran imports 90% of its national requirement of tea from India and Sri Lanka, so that this barter system would increase the association’s exposure and help expand its market share.