China: a bubble in the tea market?

China: a bubble in the tea market?

May 30, 2013 11:05am by Julie Zhu

Commodity markets may have lost their lustre as many investors have gone elsewhere. But there’s often a chance of a profit for those who know where to look.

Pu’er, a strong, earthy tea produced in China’s Yunnan province has seen its price rise by as much as 80 per cent over the past six months – even as prices for other Chinese teas have remained stable. Pu’er traders have seen it before – in a speculative bubble that burst six years ago. This time the run-up in prices has been more modest – so far.

In Kunming, capital of Yunnan province, Old Banzhang, a type of the finest Pu’er, last year went for Rmb5,000 a kilo in the form of tea leaves pressed into cakes. Now it commands almost Rmb9,000 a kilo, according to China Securities Journal, citing a local tea shop manager.

Zhou Chonglin, a Kunming-based tea expert and co-author of “War of Tea”, believes the price surge of Pu’er could have been predicted. He told beyondbrics that Pu’er investors, who left the market in 2007, started to come back late last year, in response to the increasing demand from the public for the tea, which is widely believed to have medicinal value.According to Zhou and some industry insiders, investors seem to be relatively rational and smarter this time – focusing on raw materials, notably from famous tea gardens and selected premium brands, rather than the whole market as in 2007.

“The investment size is smaller this time, as the production from those good-quality [locations] is limited,” Zhou said. With such precise investment targets, he believes the market is less likely to get out of control again.

In the terms of the Pu’er brand, Dayi, the biggest and most popular one, is widely reported to be the market darling this time. According to Yang Yan, sales manager of the Guangdong-based Diancha Tea Company, Dayi’s price has doubled in the province, China’s biggest Pu’er sales centre, from Rmb20,000 per piece (28 tea cakes) in late February to over Rmb40,000 in May.

“Its price growth is kind like in 2007, but not that crazy,” said Yang, who has been in the Pu’er industry for one decade.

Both Yang and Zhou agree that Dayi’s price has been pushed by investors, mainly because of its brand popularity. Less prestigious brands have seen prices rise by around 50 per cent. Dayi Guangdong did not respond to calls from beyondbrics.

Zhou said a severe drought in Yunnan was contributing to the price rises. “The drought is a common problem in main tea production areas across the world. As it cut tea production, the price, notably of Pu’er and black tea, of course went up.”

Yunnan is home to China’s biggest tea farms and the main production region of Pu’er, with an output value of Rmb 23.3 bn in 2012. The production of Pu’er last year, 81,300 tonnes, constituted almost one third of all teas produced in Yunnan (266,800 tonnes).

According to a recent report by the China Tea Marketing Association, due to poor weather, the tea production of Yunan this spring has reduced by 10 per cent compared to the same period in previous years, with nearly 100,000 hectares of tea gardens being affected.

In addition, incurring costs, in particular of manual labour, are reported to be another reason for the high price. Feng Zhizhong, who owns a garden in Menghai, a leading tea-growing county, found it “super difficult” to hire qualified tea farmers despite a pay raise.

“Last year, Rmb 2,000 per month is totally enough (to hire a tea farmer). But this year, over Rmb 3,000 is still not attractive,” he said. This compares well with the rates paid to factory workers in southern China’s coastal cities.

Feng admits the job “wasn’t that easy” – climbing up ancient, wild tea trees to pick leaves and working long hours in tea processing. He eventually asked family relatives for help with his garden.

Apart from these, the Pu’er expert Zhou pointed out the “business hype” by tea sellers had further driven up the price. “Pu’er has all the elements suitable for the concept hype. A natural product from the remote Yunan province, good for [health] regimens and free of pesticides. And it tastes even better with age.”

Not surprisingly, Yang Yan, the Diancha Tea sales manager agrees: “Just think about the Chinese food of today, always contaminated with heavy metals. It’s not surprising Pu’er is at an all-time high in China.”