We expect another year of very firm tea prices: McLeod Russel

Aditya Khaitan, MD, McLeod Russel, in an interview with ET Now predicts another year of very firm tea prices.

The tea deficit widened to 130 million kgs compared to 110 million kgs that was estimated earlier. What’s your own estimate of the shortfall in production globally and particularly in India?

Globally the world market has reacted in terms of shortage because of the draught that hit Kenya as well as Sri Lanka and India is because of the consumption story. So if you look at the three countries in totality, we are looking at around about 130 million shortage in the inventory pipeline.

I do not see any of these three countries in the near future being able to produce this shortage and meet the consumption growth at the same time.

In India, we are growing at around 3.5% in the consumption pattern, so India needs approximately 35 million kgs every year to feed its consumption growth. You have other countries like Pakistan, Egypt, Middle East and the other countries also growing at a much more slower rate but it is adding to the consumption growth pattern.

So going forward, I see that demand-supply mismatch will remain for the next few years and prices will remain strong for the next few years to come.

Particularly in India, the major tea producing states like Assam and West Bengal are clearly not likely to produce tea until early April. Keeping that in mind, what is your estimate of the shortage that India is likely to face?

We started last year with a shortage of around 20 million. This year, I do not see the production meeting last year’s target, so we will end up with at least a shortage of 10 million. Add to that the 35 million requirement for the consumption growth, you are looking at close to 45 million shortage in the pipeline.

So we will start this year in the month of March-April with about 65 million shortage. Obviously this will work out to the pipeline inventory levels of all the major packers in a very, very low level and they will be hand-to-mouth .

Also, new season tea buyers tend to buy because it is fresher, it is better quality and hence the price reaction will be much, much stronger than what we saw roundabout March-April of last year.

What’s your estimate on tea prices in the coming months?

I would like to clarify that when you talk of prices being all-time high, you must also see from the base from which the prices have started rising. In India, we were running at around Rs. 99-100 for the top level teas in 1999-2000.

From there, the price of tea dropped to Rs 72, in fact lower, and we came down to levels which are below cost of production. So we are now only playing catch-up to meeting the requirement of what is the inflationary levels of tea that should be.

If you just take inflation as a barometer from 1999 to 2010, then we are well below the inflation level also. So you can say the prices are moving up but according to me, we are only playing catch-up. We are still Rs 25-40 lower than what it should have been at this time of the year.

Any estimate for the year 2010 in terms of an outlook
for price?

It is a very, very difficult question to answer because it is basically related to weather also, so going forward, it all depends upon how the season starts in the month of March and April. If we get the rains that we want roundabout February-March to start the season going.

If the weather comes in, I feel the market will still open much stronger and then may be by July, it might start tapering off when the main bulk of tea start coming in. But if we open the year with a drought, then being a commodity, prices can go to any levels.

What are your current realisations per bag then and what does a Rs 10 hike per bag mean in terms of margins for you?

We have been able to increase our volumes over the last few years. For us, we are presently in McLeod Russell producing close to 80 million and a Rs 10 rise will obviously transform to 80 crores to the bottom line.

We have also made two acquisitions overseas with Vietnam last year and recently we have acquired 15 million kgs in Uganda. So obviously the price increase that will take place will substantially add to the growth in the bottom-line.

Our equity is strong. Our debt is coming down every year, so basically going forward, a Rs 10 increase would tantamount to close to 80 to 90 crores to the bottom-line of McLeod Russell.

Do believe that even if the crop is normal next year, we could continue to face supply shortage?

As I said to you that even if India produces 20 million extra this year in its production, it will still be falling behind the demand of 35 million. So therefore, going forward we have come to a situation where according to me the market, the whole that has been created of close to 130 million, will take a long time for any of the three countries to be able to match up.

So do you believe then that you actually expect to see a full year of firming tea prices ahead of us?

Well, we hope so. As per what I can see on paper, yes, we expect another year of very firm tea prices.

You recently acquired Uganda Tea Company for about 118 crores. What’s happening there and are you also looking at raising any funds, any other acquisitions in the non-organic space?

We do not need to raise any funds. We have managed to make the acquisitions out of internal accruals. As I mentioned, our debt equity is quite strong. We have enough cash accruals to meet the requirement and yes, acquisitions are an ongoing process. We will certainly keep on looking at strategic opportunities and if they make sense, we will certainly look at it much more seriously.

So what about acquisitions in Africa. Is that a space you are looking at?

We have a team that is looking around keeping an eye on what’s happening in the various countries in Africa and if any opportunities are around and if they are willing to be sold, yes, we would certainly show interest.

Tea: India should strive to regain pre-eminence

If the tea plantation industry is to survive and sustain itself, the production margins must improve substantially.

India has lost its leading position in tea exports over the last 20 years due to failure in facing the competition from China, Sri Lanka and Kenya. Unless the margins of major companies in the industry improve, the country will be reduced to a small player in the international markets, according to the findings of a Commerce Ministry Committee on the competitiveness of the industry.

The panel findings gain a renewed significance in view of the statement made by Union Minister of State for Commerce and Industry Jyotiraditya Scindia recently that tea and spices were the two commodities that India could develop as brands in the international markets.

Since the scope for expansion of tea growing areas is limited, the committee, headed by former secretary S. N. Menon, recommends that India should raise its exportable surplus by increasing productivity, which will bring down the unit cost to some extent. India already has a handicap of being a high-cost producer.

Chiding the industry for having failed to respond to the global changes in consumer preferences in terms of product-mix (as the shift towards larger amounts of orthodox production has not been adequate), the panel admits that further cost reduction can take place through a host of measures within the control of managements but reduction of cost of certain items require the cooperation and action by unions, State and Central governments.

As the flag-bearer of Indian teas, Darjeeling should receive some special considerations. Due to its low productivity and high costs, which will continue to be endemic, some measures are needed to mitigate costs. This should include supply of steady and stable grid power and extension of transport subsidy, the panel report says. The average cost of production in the industry is Rs. 350 a kg, which can increase to Rs. 600 a kg during specific periods, the committee observes.
Problems of the South

The committee says that the acute shortage of labour, especially during the peak plucking season, is affecting the entire South and machine harvesting needs to be encouraged.

Tamil Nadu finds a special mention in the report, which says that the Government should speedily resolve the deadlock on the Gudalur Janmam Estates’ case for the tea industry’s benefit. There are also problems on application and interpretation of land and environment laws which should be settled. The State should set up an SEZ in Coimbatore with special facilities for tea, the committee says.
Social overhead costs

On the issue of social costs, the committee calls for a review of the 1951 Plantation Labour Act as it feels that many of the provisions have lost their relevance. Statutory social welfare measures as mandated in this Act add to the garden cost and reduce the competitiveness of the tea industry. It also recommends that as in Sri Lanka, the Union Government may consider the transfer of funds for programmes to be implemented in mitigating the burden of social overhead costs by extension of government schemes to the plantation sectors through a separate trust or an agency under the aegis of the Tea Board.

Indications that the government has already started thinking on these lines were evident during the recent visit of Mr. Scindia when he said that social cost was a major issue for the tea industry and the government was examining the possibility of as to how the Centre and the State could bear this cost.

According to the committee, if the tea plantation industry is to survive and sustain itself, the production margins must improve substantially.

Within the sector, margin improvement can take place by cost reduction. Productivity-linked wages on the lines of West Bengal and Tamil Nadu model will produce substantial cost reduction. There is a substantial difference between farm-gate price and the final retail price, all of which go to layers of intermediaries. A part of this difference must be made available to the producer.

Noting that the tea industry is characterised by high manpower intensity, the committee says that because of historical reasons, the industry has been burdened with social responsibilities to the workmen which should rightfully have been the territory of States. The industry has repeatedly pointed out that these provisions were initiated in early years when employment in remote areas was difficult because of inadequate facilities. However the Plantation Labour Act, 1951, which was enacted to make it incumbent on tea estate managements to provide certain facilities still exist, directly impacting the cost of tea production.

An inter-ministerial committee constituted by the UnionLabour Ministry has dealt with the subject in detail and has worked out the cost of social welfare provisions at around Rs. 5 a kg, excluding concessional rations in the North. The various components of labour welfare are medical, fuel, housing, education, drinking water, sanitation and conservancy. The committee finds that though there has been a substantial recovery in prices in 2009, continuing onto the current year, medium and long-term viability of tea production continues to remain uncertain. In a representation to the 13th Finance Commission, the Consultative Committee of Plantation Associations (CCPA) stated that the high cost production in India has been a critical factor impending India’s export competitiveness. It also sought reimbursement of the welfare expenditure. The report mentions several Central government schemes under the control of the Union Ministry of Rural Development, Panchayat and Urban Development and the Ministry of Social Justice and Welfare.

The schemes which are run by the government and which have the potential of being dovetailed into the tea sector schemes are: social security schemes, heath and hygiene schemes, employment generation and livelihood schemes like NREGs, education schemes such as the Sarva Shinksha Abhiyan.

However, although an indication of the government’s inclination to examine this issue was given by Mr. Scindia during his last visit to Kolkata, it is not easy to provide coverage and benefits from these schemes to the families of the workers living in the tea plantations. Among the issues which make the task difficult is the fact that ownership of land on which the workers stay is neither with them nor with the tea garden managements which only hold it as a lease. Sri Lanka has been able to extend government schemes through a trust through which funds are canalised. This could be examined by India too, the committee observes.

INDRANI DUTTA

From The Hindu