- Comparatively low yields
Globally, tea-producing countries
have been recording variable yields. We note that yields usually depend on a
range of factors, including weather conditions, labour productivity, the fertility and topography of
the land, the quality of seedlings, and technology. It is evident that
SriLankan yields have been lower than those of competing countries . Whereas
Kenya enjoys average yields of over 2,000 kg/ha and India records close to
1,800 kg/ha, Srilanka’s yield has remained low at around 1,400 kg/ha. As indicated
by Chart 6, yields in SriLanka have been declining in the last few years. On a
related note, it is clear that the yields of smallholdings are higher than
those of regional plantation companies.
There are several reasons for the low-yield scenario; factors that have influence labour productivity include chronic absenteeism and lack of workforce continuity.
Aspirations for a higher standard of living, coupled with low levels of social
recognition for plantation workers, have encouraged younger generations from such
families to seek employment elsewhere.
On a separate note, low incidences of replanting and in-filling have also crimped
yields in Srilanka. Replanting involves uprooting old bushes, rehabilitating soil,
planting and maintenance until maturity. According to the SriLanka Tea Board
(“SLTB”), a replanting rate of nearly 3% is essential to obtain a sustainable
improvement in yields. Currently, replanting stands at only 0.5%; the rate has been
relatively low due to the hefty capital outlay associated with the exercise. That said,
the Ministry of Plantation Industries recently announced its intention of making it
mandatory to achieve a certain level of replanting and infilling; the government has
also indicated that provisions of concessionary loans will be considered to finance
the replanting schemes. These developments are viewed positively. Meanwhile, it is
evident that over 50% of the tea plantations in Srilanka are over 100 years old,
thereby rendering the land less productive; the economic age of a tea bush is on
average estimated at 100 years. The use of low-yielding seeds and inadequate
fertilizing have also contributed to sub-par yields.
- High cost of production
On average, the cost of production (“COP”) for Sri Lanka’s tea sector approximates USD 2.33/kg - among the highest in the world. This has affected the country’s competitive position in the global arena. The primary determinants of COP in the tea sector include labour productivity. In this regard, it is clear that the wage bills of most estates are inflated, mainly in view of the low productivity levels of their labour force. For instance, wages make up approximately 60% of the COP in Sri Lanka while they only come up to 40%-50% in India and Kenya.
The wages of the country’s plantation industry are determined every 2 years,
through a collective agreement between the sector’s trade unions and the Employers fe
deration Council (or EFC), which represents the plantation companies. Given the
power wielded by the trade unions, minimum wage rates have increased significantly over the last decade, exerting a heavy impact on total COP. The minimum wage for plantation workers has been elevated from just LKR60 in 1992 to the present LKR405. Moreover, energy costs have also risen at a CAGR of approximately 11% over the last decade, accounting for almost 13% of the tea sector’s total COP.- Declining competitiveness
Despite the superior quality of its tea, Sri Lanka’s competitiveness in the global arena has been slipping in the last few years; this has been largely due to heightened competitive pressures and the country’s continued focus on bulk tea. Once the largest tea exporter, Srilanka has now relinquished its position to Kenya and is closely followed by China. Kenyan tea production has expanded robustly, driven by the expansion of its cultivated land (from 120,400 ha in 2000 to 157,700 ha in 2008) and better production skills. However, it should be noted that Kenya primarily competes against Srilankan high-grown varieties; competition in the low-grown segment stems from India and Vietnam.
Changing global demand patterns have threatened Sri Lanka’s competitive position because of its continued focus on orthodox tea, which is manufactured via the traditional method of gradually rolling the leaves into smaller particles. In this regard, the country has failed to exploit opportunities such as rising demand for value-added tea. For instance, as European markets have been turning to tea bags, Srilanka has gradually lost its footing in Europe to CTC producers such as Kenya. This is primarily due to the financial constraints of most plantation companies, as production of value-added tea would require substantial capital outlay. Similarly, Srilanka’s high COP has also affected its competitive position. In this regard, Egypt and Pakistan – traditional importers of Srilankan tea - have already switched to cheaper exporters such as Vietnam.
- Inability to engage in multi-origin blending
In recent times, there has been much controversy over Sri Lanka’s import
restrictions on tea. The current regulations only allow imports of specialist tea such
as green tea; these restrictions have prevented the country from developing as an
international tea hub due to its inability to undertake multi-origin blending. Tea
exporters are now lobbying for the relaxation of these import restrictions, as multiorigin
blending and the re-exporting of such value-added tea would be significant
generators of foreign exchange. On the other hand, certain industry experts argue
that permitting free imports of tea would reduce demand for Ceylon tea, thereby
threatening the livelihood of the parties involved. These experts argue that the focus
should be on promoting Ceylon tea as a brand in its own right, rather than relying
on major international tea brands. In this regard, we believe that it is crucial to
formulate a cohesive strategy that will allow a certain level of liberalization vis-a-vis
imports, rather than permitting the import of all types of tea, in order to minimize its
impact on the domestic industry. We note that major brands have already exited the
country in search of additional value; the potential in this sphere has been exploited
by countries such as Dubai, Russia and the Ukraine.
- Changing consumption patterns
As mentioned earlier, Sri Lanka has remained focused on orthodox tea, which
accounted for almost 95% of its tea production in 2010; the remainder comprised
CTC tea, which is used to fill tea bags. Moreover, Sri Lanka has principally been an
exporter of bulk tea . However, there has been a gradual shift in
patterns, with several countries switching to the use of more
convenient forms of the beverage, such as tea bags. For instance, demand from the
UK has changed from bulk tea to tea bags, thereby enabling Kenya (which mainly
produces CTC tea that is suitable for bagging) to capitalise on this. As such, shifts in
consumption patterns may become a threat to Sri Lanka if the country continues to
focus on bulk tea.
- Supply-side factors
As highlighted before, the COP for Sri Lankan tea is rather high while yields are
lower than those of its competitors. This is chiefly due to inadequate investment in
field development, such as re-planting and in-filling efforts, as well as lower levels of
labour productivity. Overall, regional plantation companies and smallholders are
challenged by financial constraints as they do not have access to viable funding
options. Given the intensifying competition in the global arena, the inability to
reduce costs and improve yields may cause Slrianka to lose out to its more costefficient
competitors.
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