India’s tea production is estimated to have reached 1,328 mn kg and expected to rise to 1,339 mn kg in 2019, driven by higher yields in Assam and West Bengal. However, the share of exports is estimated to continue at 18-20% in volume terms. Thus, healthy supplies due to higher production and limited scope for growth in domestic consumption and exports will cap any rise in prices for Indian players. Tea auction prices are likely to be range bound with a marginal improvement at Rs 147 per kg given the price sensitive market, according to CRISIL Research.
CRISIL Research expects prices at tea auctions across the country to close calender 2018 at Rs 145-146 per kg on an average, 3-4% higher on year, compared with a compound annual growth rate (CAGR) fo 1.4% logged over calendar 2012-2017.Tea is sold in India through auction centres. The buyers are either private stockists who sell loose tea or large players who further process it and sell as branded packaged tea.
With 50% share of the domestic market, loose tea caters to price-sensitive consumers and is available at Rs 150160 per kg. This limits the ability of private stockists to pay higher procurement price.
Branded tea commands a high price differential of Rs 140-150 per kg over loose tea, and any further widening of this gap run the risk of downtrading by consumers.
Tea production in India logged 3.2% CAGR over 2012-2017. However, consumption ran up only at 1.7% CAGR.
The domestic market is saturated, with penetration as high as 99% among the tea-drinking population (above 10 years). This has limited the growth potential and has increased the players’ dependence on exports to maintain the overall demand-supply balance in the domestic market and thereby prices.
Export realisations of Indian tea producers dropped at ~2% CAGR over 2012-2017. In 2018, growth in realisations is expected to have remained muted, though 2019 could see a marginal increase of 1-2%.
International tea prices are driven by the Kenyan and Sri Lankan prices, which are largely dependent on the production trends in these countries. With a revival in Kenyan production and healthy output in India and Sri Lanka, global tea production is expected to be higher in 2018 compared with 2017, leading to a correction in international prices. That said, the rupee’s depreciation against the dollar is expected to provide some relief to Indian tea producers.
In 2017, India accounted for 23% of the global production. However, its share of exports was only 13% due to stiff competition from Kenya and Sri Lanka, and high domestic consumption. Interestingly, those two countries accounted for only 13% of global tea production, but cornered 39% exports share during the year.
Kenya and Sri Lanka also enjoy much higher realisation compared with India, given better-quality tea. In other words, lower quality restricts Indian tea’s export growth potential.