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| Sunday, 24 August 2003 |
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| News Business Features Editorial
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Rs 1.3b loss to tea industry from Iraq war by Elmo Leonard The war in Iraq affected Sri Lankan tea exports to the tune of Rs 1.3 billion during the first four months of this year, outgoing president of the Private Tea Factory Owners Association (PTFOA) Dr Sarath Samaraweera said. This loss was borne by growers and factory owners. All bought leaf factories faced severe operational cash deficits and witnessed serious erosion of profits, he said at the PTFOA's 12th Annual General Meeting.The low grown tea sector suffered the most as Middle Eastern buyers mostly purchase low growns. The PTFOA has 246 members, who comprise the cream of the tea processing sector and account for 95 per cent of private tea factories in Galle, Matara and Ratnapura and over 80 per cent of the active private owners' tea factories in the island. In 2002, Sri Lanka produced 310 million kg of tea, of which the PTFOA membership processed 60 per cent or 186 million kg. These teas fetched an average price of Rs 163 per kilogram for low elevation teas. In terms of green leaf, the PTFOA procured 865 million kg from transactions with smallholder growers during the past year, estimated at Rs 20.6 billion. Despite such figures, private tea factory owners face immense competition from within, resulting in lowering of standards. "Such competition is not necessary for so vital an industry and we need to ensure that the situation does not worsen in the future," Dr Samaraweera said. When the Iraq war was imminent, the Minister of Plantation Industries had gazetted a working capital loan scheme to assist tea factories, he recalled. While the lack of working capital is the biggest constraint to the bought tea processing sector, the Government offered the working capital loan with a 50 per cent subsidy on interest. However, this does not help factories which desperately need financial assistance as most of them would not even qualify for credit due to lack of security required by banks. Further, this loan scheme anticipates recovery in two years, which is far too short, while the repayment terms are unrealistic, Dr Samaraweera said. While requests for deferment of payments to banks and State institutions failed to receive attention, the Deputy Minister of Plantations had made an effort to get redress from the Ceylon Electricity Board, which too had failed, he remarked. The PTFOA decided in February to withhold Rs 2 per kilogram from the rate of tea processing from the earlier month, which prevented the closure of many factories, he said.Although the market for low grown elevation teas had dipped seriously from February to April, the market for leafy and tippy teas had grown strongly and peaked three weeks ago. While the low elevation average was Rs 163.19 per kilogram (US$ 1.70), the national average stood at US$ 1.55. In comparison, the average for Indian and Kenyan teas were US$ 1.14 and US$ 1.49 respectively, indicating that in dollar terms, Colombo Auction prices, and in particular, low elevation prices, were good. That would be why Kenya, India, Vietnam and even local high and medium elevation factories were planning to produce or were already producing teas similar to Sri Lanka's low elevation teas. The bad news, according to Dr Samaraweera, is that while prices of these low grown teas are high compared to other exporting countries, the downward pressure on prices is imminent. The problem for Sri Lanka is that while these prices are high, the producers are not content with profits. Growers in low elevations are not happy unless they fetch a price above Rs 25 per leaf. The Sri Lankan tea industry is plagued by high costs in all aspects and the country has no hope at the low price end of the global supply. In the short term, for the sake of the industry's survival, local manufacturers have no option, but to pursue the path of quality and high price. "In the longer term, even that may not be sufficient," Dr Samaraweera said. The country is likely to experience rising prices of electricity, within this year or the next, he said. The cost of electricity in the island is already the highest in the region. When peace dawns, the demand for power would increase.The real problem for the Lankan tea industry is the lack of fuel wood for driers. Over 70 per cent of tea is processed using firewood as the source of fuel. In low elevation areas, fuel wood usage is probably over 90 per cent. In view of availability and low cost, firewood was and still is the preferred fuel for tea factories. But there is a short supply for rubber wood from mid-2002, resulting from the demand for rubber wood at higher prices from other industries and improving prices of rubber. While other tea producing countries like Kenya are self-supporting in fuel wood needs, Sri Lanka's measures of growing trees for fuel wood are grossly inadequate. In low grown districts, hardly any attempts have been made to grow trees for energy, he said. The reason for lack of investment in fuel wood growing is that these trees take seven to 10 years to mature, strangling the already tight cash flow situation. The Ministry of Plantations Industries has focused on this issue and a report has been prepared. Dr Samaraweera called on the tea industry to support the move to grow fuel wood, initiated by the Ministry. There now seems to be no option, but to convert furnaces and boilers from firewood use to liquid fuels, which would require capital and increase factory operational costs by at least four rupees per kilo. For some factories, it would be a large slice of their profit margin and beyond affordability, Dr Samaraweera concluded. |
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