India is a tea loving country. Consumption aside, it's also the largest producer of black tea accounting for about 42% of global black tea production. India is also one of the largest consumers of tea. With majority of it's produce being consumed domestically, India happens to be a major black tea exporter too. Accounting for 12-13% of world tea exports. But not all is as refreshing in the Indian tea industry as a good cup of morning tea.
Tea production is subject to major external factors like climate conditions, labor availability etc which makes it relatively more cyclical. These external factors create demand supply voids leading to shortages and oversupplies at times. Climate change is adversely affecting the global tea business, from potential droughts in Kenya to poor and undistributed rainfall in India, every player is adversely affected by climate change thus affecting their bottom line severely.
Indian producers face a variety of other challenges too. With high regulations & tight labor supply, Producers face rising production costs which they're unable to pass on to customers. Labor costs make up 65% of total costs on average. Other regulations such as cess of green leaves by the state govts and additional taxes by the central govt squeeze profitability as well. Labor regulations (especially for north eastern tea gardens) mandate certain contributions and bonuses on part of the employers.
Tea auction prices have stagnated since the past few years while costs have continued to rise.
India predominantly produces CTC tea (crush, tear, curl). CTC is one of the many ways of processing tea leaves to make tea. Other major types include the orthodox and green tea. 90.1% of Indian tea production is CTC, while orthodox tea accounts for only 8.4% and green tea the remaining 1.5%.
ITA ( Indian Tea Association) estimates more than 50% of global export demand to be for orthodox and green tea. Major tea markets like China, Turkey and Ireland too are experiencing greater demands for orthodox and green types. The global taste palette seems to be changing and it's not good news for India. While CTC type prices remained stagnant, orthodox and green tea prices have gone up significantly reflecting the healthy global demand.
Shifting from CTC to orthodox method is capital intensive, producers need to change factories and equipment to switch, which, in this already critical condition of tight liquidity and high debt of Indian producers, is quite a task. Moreover, the cost to produce orthodox tea is around 1.2 times greater than CTC. India has to rely on domestic consumption to beat the export pressure.
Though domestic tea consumption is increasing by around 2%, it's nowhere near to the annual cost growth.
Indian tea packagers are also facing quality and price issues. Since the Indian Tea Industry is historically overprotected, it has brought in complacency. Indian grown tea lack the desired quality and is pricier than imported tea. Import duties of over 100% in place for many years have taken a toll of both quality and quantity. Foreign producers, facing stiff competition among each other have, over the years developed efficient cost-effective methods and better quality tea which is 25-40% cheaper than Indian grown tea(net of transport costs). But high import duties are acting as barriers for Indian tea packagers to deliver better tea at lower prices. A cut in import duties will ensure healthy competition for quality and price. Though being already in a distressed situation, Indian producers are definitely not ready for an import duty cut, with around 1.2 million direct employees in the sector.
OUTLOOK
With big players like MCleod Russel India ltd. on verge of default and shutting operations, The Indian Tea Industry is in a cornered position. Restructuring of debt, Policy initiatives and global market will play an important role in the future of Indian Tea. Although a non painful way out of this slump seems improbable, Any developments in the space will be interesting and a potential opportunity.