Bulk tea industry sees rise in consumption, price despite Covid-19: Report

Despite the COVID-19 pandemic that has created a demand-supply mismatch, the bulk tea industry has witnessed a sharp increase in both consumption as well as prices, according to a report.

The bulk tea companies, particularly of northern India are expected to report their best financial performance witnessed in recent history, mainly on the back of a positive price-cost effect, ratings agency ICRA said in the report.

"As per our estimates, domestic production in CY2020 is expected to be lower by 12 per cent on a year-on-year (basis), assuming that no further material change in production takes place during...September to December," ICRA Vice-President and Sector Head (Corporate Sector Ratings) Kaushik Dassaid.

He added that the production may fall 13 per cent in northern India and only one per cent in southern India.

He also said that given the production loss, the cost of production for producers in the northern region is expected to increase in the range of Rs 25-30 per kg, that too without assuming any increase in labour wages from the current levels.

In the first seven months of the calendar year 2020, domestic tea production has been adversely impacted with an estimated decline of around 22 per cent on a y-o-y basis, the report said. It added that the production in the northern states may fall 26 per cent and southern states by 3 per cent.

Restrictions on garden activities in the initial periods of the lockdown to contain the pandemic had impacted tea production in the northern India during March, April and May, it added.

Thereafter, inclement weather conditions and flooding in Assam resulted in a crop loss in June and July 2020. Some impact of the adverse weather conditions on production is estimated to have been felt in August 2020 as well.

Tea being a fixed cost-intensive industry, a decline in the crop is expected to substantially increase the cost of production in the range of Rs 25-30 per kg for the bulk tea industry in the northern region during 2020.

While costs are estimated to increase in the range of 13-15 per cent, domestic tea prices have already witnessed a sharp increase. The average auction has risen by 58 per cent in the northern region and 25 per cent in the southern region on a y-o-y basis during April-August, driven by a supply-demand mismatch.

While there were initial apprehensions that the lockdown would have an adverse impact on the overall consumption levels, channel checks indicate that increase in 'at-home consumption' has more than offset the decline in 'out-of-home consumption'.

Prices of ODX tea from northern India are up by Rs 50 per kg, or 20 per cent against a year ago. For south Indian teas, while the current prices for CTC (crush, tear, curl) teas are up by more than 80 per cent on a y-o-y basis, average prices for the April-August period have increased by 26 per cent or Rs 26 per kg.

While the current prices are very high by historical standards, some moderation is expected in the latter half of the year.

"We expect prices of north India CTC teas to be higher by Rs 65 per kg and NI ODX prices by Rs 50 per kg on an average during FY21," Das added.

He added that as a result, financial performance of bulk tea players in the northern regions may witness a material improvement in FY21, making it one of the best in recent years. "While this would provide some respite to the beleaguered industry, which has been plagued by a consistent increase in costs and stagnating tea prices since FY2014, sustainability of the same going forward remains to be seen.