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Bright future predicted for Sri Lankan tea firms

The tea industry in Sri Lanka, the world's second biggest exporter of the crop, is looking forward to good times again as prices soar on a global commodities boom.

Mounting productions costs and growing demand are combining to reverse a three-decade trend toward lower prices, industry officials said, and that means drinkers will likely have to pay more for their brew.

Dilhan Fernando, director of Dilmah Tea, which sells more than US$500 million in tea in over 90 countries, expects strong prices to halt the long slide in tea prices and boost earnings for producers.

"We have never had it so good. The climate has changed and we are seeing consumers willing to pay more for their teas," he said.

Sri Lanka earned a record US1.03 billion last year selling the commodity overseas and expects to earn more this year.

"Tea will be a bull market in 2008," said Kaison Chang, of the UN Food and Agriculture Organization (FAO).

"The fundamentals have changed and consumers are likely to see price rises," Chang said.

Tea, which is not indigenous to the island but was introduced by a Scotsman named James Taylor who planted it in 1849, is Sri Lanka's number one export commodity.

"A pack of 100 tea bags now retails at US$5, about 15 percent more than last year," said Fernando.

"In some markets our fancy teas are selling 40 percent more than a year ago, which is good because tea prices in packed form usually move up by between 2 to 3 percent a year," Fernando said.

Sri Lanka's high quality aromatic teas, sold as "Pure Ceylon Tea" are made with tender leafs and buds of the plant botanically known as Camellia Sinenis. Ceylon is the former name of Sri Lanka.

Russia and former Soviet republics are the largest markets for Sri Lankan tea and account for nearly a fifth of the total tea exports, followed by the Middle East and North Africa.

Brokers said growing disposable incomes in oil exporting countries, where tea is part of the basic food basket for many families, would also lift local demand this year.

"These markets are likely to enjoy relative economic stability as oil prices would remain strong in a year that economists forecast recession," said Anil Cooke, senior vice president of Asia Siyaka Commodities.

"Liberalization of tea markets such as Iran, Libya and Iraq will add to demand," Cooke said.

In December, with concerns mounting already over a possible shortfall in supplies and Chinese consumption surpassing India for the first time, political violence in Kenya's tea-rich Rift Valley region triggered a price spike.

African tea prices have climbed more than 8 percent to about US$2.50 per kilo in Kenya last month, the highest in more than two years.

Colombo, which conducts the world's biggest weekly tea auction, sold tea for about US$3.15 per kilo, brokers said.

"Auction prices are not falling. That combined with higher transport, packaging and labor costs, will push up prices of Ceylon tea in packaged form," said Niraj de Mel of Van Rees, a Dutch bulk tea buyer.

With global levels of production and consumption converging at about 3.6 million tonnes a year, the FAO said any hint of bad weather, further political violence in a leading supplier or a bigger thirst for tea will lift prices.

And the rise in the for a cup of tea comes as the prices of other traditional brews such as cocoa and coffee have also risen.
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