Tea prices hike to offset impact of wage increase in WB, Assam: ICRA

• An increase of tea prices due to global supply issues will likely offset the impact of higher wages.
• Prices of South India (grown in Kerala, Karnataka and Tamil Nadu) CTC tea remained lower.
• The economic crisis in Sri Lanka also contributes to the high price of ODX tea.

A rise in tea prices due to global supply issues is likely to offset the impact of higher wages in West Bengal and Assam, according to a report. The increase in wages in the current calendar year in North India (NI), Assam and West Bengal, is expected to be negated in the current fiscal year by healthy tea achievements, especially producers focused on producing quality tea, Icra said in a report. In FY22, weakening realization and wage increases led to a decline in players’ operating margin (OPM), it noted. “Despite the impact of higher wages, the financial performance of quality producers is likely to improve in FY23 year on year. An increase in the prices of quality crush-tear-curl (CTC) and orthodox (ODX) tea would allow producers to absorb the higher production costs resulting from the wage rate review,” Icra Vice President and Sector Head, Corporate Sector ratings, Sujoy Saha said.

The report stated that ODX tea prices remain at historically high levels due to a supply/demand mismatch in the international market due to production stoppages in Sri Lanka. Sri Lanka, the largest exporter of ODX tea in the world, witnessed production interruptions due to the current economic crisis. The production loss in Sri Lanka is likely to continue for some time to come, which would keep supply in the international market tight and thus support the prices of Indian ODX tea, the report said. NI CTC tea prices have also risen 5 percent year-on-year, mainly due to the sharp increase in auction prices in August 2022. The upward trend in NI CTC prices is supported by lower-than-expected production, particularly of quality teas, in the current season and the increasing demand for good quality teas, it noted. The price premium for top-quality CTC tea is likely to persist into the future, given its limited supply base, it added.

However, the prices of CTC tea from South India (grown in Kerala, Karnataka and Tamil Nadu) remained lower compared to the previous two fiscal periods due to continued production levels of purchased leaves in NI, a direct competitor to SI CTC tea. in terms of quality. “As ODX prices are expected to remain at significantly higher levels year on year, some quality producers have increased ODX production. Consequently, quality CTC production is likely to remain flat, which will also continue to support the prices of such tea. An analysis of tea prices indicates that the price differential of NI CTC tea produced by the top 50 plantations relative to the average auction prices rose to 137 per kg in the first 8 months CY2022, from Rs 122 per kg in CY2021,” Icra Vice President and Co-Group Head, Corporate Sector Ratings, Kaushik Das said, Cumulative production across India increased 16 percent to 320 million kg year-on-year through May 2022.

However, the loss of crops in June and July 2022, due to adverse weather conditions and flooding, led to a 2 percent drop in production across India to 614 million kg in the first seven months of CY2022 on an annual basis. Since 54 percent of annual production typically occurs in the last five months of a calendar year, Icra expects total production in CY2022 to remain flat from last year, although the same would remain dependent on harvest levels through October. after which production begins to decline. In CY2021, production across India rose 7 percent to 1,343 million kg year-on-year, recovering from the lows of the pandemic-hit CY2020 season. However, it still remained 3 percent lower compared to the record crop of CY2019, the Icra report said.

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