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« on: June 15, 2010, 10:23:30 AM »

Trends in global tea consumption
by Manisha Fernando
15 July 2010

Tea was discovered about 5,000 years ago by Shan Nong a Chinese Emperor in 2737 BC. It is said that when boiling his drinking water a few tea leaves had fallen by chance giving off a rich, alluring aroma and taste.

The Emperor discovered it to be a refreshing drink and ordered for tea bushes to be planted in the palace gardens. This was the commencement of the custom of brewing fresh tea leaves in hot water, which quickly spread across China.

It was only about 500 years ago that the West was introduced to this great taste, and since then tea has become a commodity with a high demand across the world.

Tea cultivation in Sri Lanka began in 1857 initially as an experiment in small scale, which later turned in to a massive export product especially after a fungus wiped out almost all the coffee plantations in 1869.

By 1900’s tea was being cultivated in Java, Sumatra, Indonesia, Kenya and other parts of Africa, and today even the US has begun cultivating it in parts of North Carolina.

Market dynamics in the global tea industry
Over 72 percent of the global tea production comes from China, India, Kenya and Sri Lanka (Chart 1). Despite adversities and strong competition from substitutes, the world tea production increased from 3.4 million MT in 2006 to 3.6 million MT in 2007 and to about 3.8 million MT in both 2008 and 2009. About 45 percent of the global tea production is for retail markets.

Though Sri Lanka had the accolade as the top global exporter prior to 2007, it lost its top notch to Kenya for various debatable reasons! Even with the severe droughts and labour unrests that affected Kenya more than Sri Lanka (comparatively), the first nine months of 2009 did not help us regain the top notch despite drastic reduction in global tea production.

The only benefit during last year was the up-turn in global tea prices as a result of increased demand and a shortfall of supply.

One reason that perhaps de-motivated most tea producers in Sri Lanka was the fact that supply had always exceeded demand during 2004 to 2007 periods, and many in the industry thought this trend would continue with tea prices bound to fall further.

Such assumption as always, are more mythical and propagated due to lack of business planning and negative attitudes of the masses. Even during this period sufficient information was available for researchers and strategists to suggest that demand was bound to increase, exceeding supply in the forthcoming two year period of 2008-2009.

For a well prepared business, this was the calling to get their act together! But rather than plan for the impending ‘boom’, most of the major tea producers talked about the impending ‘doom’, pursued differentiated marketing strategies focusing on niche markets, whilst some even went to extent of cutting down on investments required for the up-keep of estates letting their negativities get the better of them!

As facts proved, the scenario changed in 2008 with demand outgrowing the supply and affecting tea prices worldwide, mostly due to three major factors namely, the low production and low export volumes from Kenya and Sri Lanka, and increased demand from Middle Eastern countries, Russia and East Europe.

In addition it was accelerated by environmental factors such as droughts. It is estimated that the shortfall in global tea supplies will rise to nearly 140-150 million kilograms this year from about 120 million kg in 2009 - and the tea drinkers will have to pay more for their beloved brew or shift to substitutes - good news for Sri Lankan exporters and bad news for tea drinkers!

The financial recession in many economies changed the market dynamics as well. According to reports from Bloomberg, the global tea shortage which began in 2008 is said to increase by 10 percent in 2010. In view of the impending shortage, African tea prices rose to a record at auctions while Indian prices have gained an average 25% for 2009.

The Indian tea industry is said to have an annual turnover of USD 2 billion, and by end of 2009 the Tea Board of India states that it has 1,692 registered tea manufacturers, 2,200 tea exporters, 5,848 tea buyers and nine official tea auction centers. With production falling, the Indian government even now considers tea vital enough to directly control the industry.

In Kenya, the production has also fallen to about 20 percent in 2009 and prevailing drought conditions as well as labour issues are expected to badly affect the Kenyan market further. Indonesia which is emerging as a strong competitor for Sri Lanka is expected to achieve an annual growth of 1.1 percent, from 130.6 million MT in 2000 to 147 MT in 2010.

Black tea production in China is expected to continue to decline to 54,000 tonnes as the balance of production shifts to other teas with stronger market prospects.

In Sri Lanka, the world’s fourth-biggest producer, production declined 32% in the 6 months to June 09’ to 130.5 million kilograms. Tea production in Sri Lanka is projected to reach 329 million MT by 2010, with an annual average growth rate of 0.7%, according to the data from the Sri Lanka Tea Board.

The tea consumers...
The average global per capita consumption of tea in 2007 was 0.3 kg and was driven by the growth in sales of black specialty tea bags, green tea and other types. The global tea market is expected to grow by almost 10% in value and over 13% in volume between 2005 and 2010 and current estimates indicate that the onset of the global recession is favourable for tea exporting nations due to increased global demand and per capita consumption.

According to a survey done by Org-Marg for the Tea Board of India, the per capita consumption of tea is put at 0.8 kg for India, below Pakistan (0.95 kg) Bangladesh and Sri Lanka (1.2 kg). Turkey is considered to be the highest tea consumer (2.7 kg) followed by Ireland (2.7 kg) and UK (2.1 kg). UK had the highest per capita consumption of 2.3 kg till end of 2006 but changed dramatically thereafter with their focus shifting to other substitutes.

The Russian market also has one of the highest per capita consumption rates of about 1.3 kg compared to the average global per capita consumption. Despite the heavy domestic demand in China and India, they lag behind most countries in per capita consumption (0.8 kg each) due to their higher population.

Market forecasts for the tea trade
According to acclaimed global watchdogs including several tea boards of major tea producers and the FAO database, the world black tea exports in 2010 are projected at 1.14 million tonnes.

A greater part of the increase would take place in tea growing nations of Africa where currently the rate of growth of production is higher than its domestic consumption. Most major tea exporting countries in Asia are expected to experience slight declines in exports in line with expected growth in income and population that would foster domestic consumption. For example, exports from India and Indonesia are expected to decrease by 2.4 percent while exports from Sri Lanka are expected to increase at an annual average growth rate of 0.4 percent.

According to several forecasts for 2010, world net imports of black tea would amount to about 1.15 million MT, reflecting an average annual increase of 0.6 percent. Net imports in the CIS countries would increase to about 315,200 tonnes, an annual average growth rate of 3 percent. Pakistan would increase its net imports by 2.9 percent per year to about 150,000 tonnes.

The United States is expected to increase net imports by 1.4 percent per annum to 94,300 tonnes, while Japan would increase its net imports to 22,000 tonnes, an annual average growth rate of 1.8 percent. However, net imports by the United Kingdom are expected to decrease further by 0.6 percent annually to 125,500 tonnes.

These major importers together would account for about 60% of global net tea imports.

Green tea exports are expected to exhibit a significant upward trend in keeping with production. Total exports are expected to increase by 2.8 percent annually and China would continue to be the world’s dominant green tea exporter.

Whilst Japan would consume most of its domestic production, Morocco, the world’s leading green tea importer, is expected to increase imports at an annual average growth rate of 4.5 percent.

Russia continues to be the largest importer of tea followed by UK, US, Pakistan and Japan. The Russian tea market has a growing demand for all tea varieties as well as for black tea, and Sri Lanka is placed as the major supplier for the Russian market.

In terms of retail value the Russian market was worth well over $3 billion with retail volumes (demand) in excess of 150 million kg. The year-on-year average growth rate of the Russian tea market is 12 percent in terms of retail value and 2 percent in terms of retail volume.

Due to growing demand, the retail prices for tea in Russia are relatively higher than other parts of the world making it a serendipity for the tea exporters.

Even despite the financial turmoil that affected most parts of the world, the tea consumption and demand in Russia and other CIS countries have shown an inelastic demand. The average retail price for tea in Russia was about $18 - 20 per kg compared to the average global retail price of about $10 - 13 per kg.

In most instances, firms fail not because of external factors, but mainly due to their internal defects of being unable to analyze their markets properly.

Many organizations and businesses have access to data, and for the ones that look hard enough for information required for analyzing their markets, it can be found perhaps with a little difficulty - giving them the competitive edge.

Yet in most cases, analytics freely available are hardly used. If export businesses are to thrive, it is imperative to look at both the global and domestics conditions, and in view of the summarized study on the global market dynamics, it is evident that Sri Lankan tea exporters (and producers), have a greater potential to make a lucrative business, with tea regaining its position as a top foreign earner.

It’s only a matter of getting the right attitude to win against all obstacles - that’s what makes a great cup of tea!

(The writer is a banker with experience in corporate and business strategy, strategic planning and market research. This study is part of a personal research on the potential for investments and business development in various industries of Sri Lanka. He has a Commonwealth Executive MBA from the Open University of Sri Lanka; is an Associate of the Institute of Bankers (AIB), Sri Lanka; and is a Member of the Association of Business Executives (ABE), UK. He also has Diplomas in Management and Human Resource Management.

He can be reached at ideasplus9@yahoo.com

Source: DailyNews.lk http://www.dailynews.lk/2010/06/15/bus24.asp
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