Tea Industry On Tenterhooks About Ukraine Conflict

Russia is among the top buyers of Indian tea, accounting for about 18 per cent of the industry’s total exports.

One of the jokes about Indo-Soviet relations was that the bestselling exports were Raj Kapoor’s films and tea.

The latter lost much of its favour in the region with the dissolution of the USSR in 1991 and the abolition of the central buying mechanism.

Yet 30 years on, as Russia wages war on Ukraine, the tea industry is on tenterhooks.

Russia is among the top two buyers of Indian tea — the other being Iran — accounting for about 18 per cent of the industry’s total exports and the entire Commonwealth of Independent States (CIS) at close to a quarter.

It’s a pale shadow of what the Soviet Union used to buy — about 50 per cent in the 1980s — but any dent in these markets is bound to cause ripples in the domestic market.

Tea exporters are already feeling the heat of the war — with shipping lines putting a pause on booking and costs soaring.

“Steamer lines have given instructions that they are not going to accept any more cargo from Russia and Ukraine. And we have no clue about the containers in transit. We have even heard that they may come back, which would be disastrous,” said Dipak Shah, chairman, South India Tea Exporters Association.

“It’s a lot of hassle bringing back teas once exported even if it’s your own tea,” he explained.

Unlike North India — which halts production from mid-December to mid-February — this is the quality season for South Indian tea.

Substantial exports take place from the region during this time; for North India, bulk of the shipments are between May and October (South India accounts for about 18 per cent of total tea production).

Anshuman Kanoria, chairman, Indian Tea Exporters Association, said there were exporters who kept shipping throughout the year. He also pointed to skyrocketing costs.

There were also concerns around the fall of the ruble, the Russian currency, and its impact on exports.

“It is unlikely that Russia will be willing to pay much more in rubleS,” said Kanoria.

Exports to Russia are based on dollar or rupee payments.

However, Shah said some members of the association were facing problems in the aftermath of the crisis even with rupee letters of credit as bankers were not accepting documents for goods already shipped and LCs in hand.

“Exporters are in the lurch,” he said.

Sanctions and its impact are not new to the tea industry.

Exporters to Iran have been facing delays in payment with the rupee-rial trade drying up.

Iran was a major supplier of oil to India.

When sanctions were imposed by the US in 2012, bilateral banking trade transactions under a rupee payment mechanism were routed through UCO Bank.

But the rupee funds started drying up after India stopped importing oil from Iran following the last set of sanctions in 2019 by the Donald Trump administration. That has led to lingering payment problems directly with Iran.

“As long as the rupee-rial trade was there, we exported to Iran. Now that it has dried, we have not sought other routes,” said Azam Monem, director, McLeod Russel India.

While exports by tea producers reduced after the problem, merchant exporters stepped in to plug the gap, as they worked out new routes to send tea to Iran — mostly via Dubai.

The Indian government is now reportedly exploring the option of fortifying the rupee-ruble trade to tide over the impact of sanctions on Russia following the war on Ukraine.

That has rekindled hopes for an increased offtake from Russia.

“If a proper mechanism is established by the government, we can get back some of the market,” said Himanshu Shah, chairman, M K Shah Exports.

In the Soviet days, the rupee-ruble trade and State buying mechanism had translated into huge benefits for the industry.

“Huge transactions were happening because none of us had dollars or foreign currency,” recalled Shah.

Exports to the USSR was about 100 million kg out of a total 200 million kg exports from India.

But the disintegration dealt a blow to exports.

It’s not just the scrapping of the central buying mechanism that brought down exports to Russia though.

Changing consumer preferences in favour of tea bags and lower production of orthodox tea in India that has a wider demand in the global market added to it.

Russia is a mix of orthodox and CTC market — in CTC, or processed via the crush, tear, curl method, India faces competition from cost-competitive Kenya and in orthodox, from Sri Lanka.

This may be an opportunity to get back some of the market, said Shah.

“Russia being starved of foreign currency, their reliance on markets like Kenya as well as Sri Lanka may reduce because they will find it difficult to get dollars,” he pointed out.

Unlike Kenya and Sri Lanka, which are export-driven, the Indian tea industry largely caters to the domestic market.

Yet, exports are vital to keep the domestic demand-supply in balance.

Tea industry officials explain that if exports are impacted then more tea will be available in the domestic market and that will lead to an oversupply situation, causing prices to crash, a situation that will pile the pressure on a troubled industry.

Tea prices for most years have been depressed. Stagnation in tea prices and increase in costs led to a decline in operating profitability of bulk tea players particularly from FY2015, according to an ICRA-Assocham report.

That impacted the health of the industry.

The report pointed out that there were only seven upgrades and 26 instances of a downgrade in ratings from FY2013 to FY2020.

But lower production in CY2020 due to the pandemic led to a 34 per cent rise in prices, boosting the bottom line of many companies.

Most in the industry believe it was an aberration.

This year is looking good so far on the price front.

“With two successive years of lower production, the new season for North India is likely to start on a strong note,” said Kaushik Das, vice-president, ICRA.

North India accounts for about 82 per cent of total tea production.

Whether the Russia-Ukraine war puts brakes on the optimism — with reduced exports and soaring oil prices adding to input cost — is anybody’s guess right now.

The industry can only hope that Russia makes tea, not war.

Feature Presentation: Aslam Hunani/Rediff.com

Source: Read Full Article