Tea traders hope for imminent recovery

November 20, 2013 9:10 am

Tea traders hope for imminent recovery

By Javier Blas in Nairobi

When Williamson Tea Kenya, one of the biggest growers of the leaf in Africa, released its quarterly results earlier this month, it had a blunt warning: the price drop to a five-year low had created a “commercially unsustainable” market. The agribusiness group was not exaggerating:black tea prices have tumbled more than 40 per cent since January as top importers Pakistan and Egypt cut purchases just as output surged on the back of favourable weather in late 2012 and early 2013.The price plunge was one of the fastest and deepest in the recent history of the industry. But after the price free fall and dire warnings, tea traders now believe the market has reached a tentative trough, with prices likely to rise early next year.

“We have reached the bottom and we are definitely going up,” says Peter Kimanga, director at Kenya-based Global Tea & Commodities, a leading trading house.

“Earlier this year we had a lot of crop that coincided with a time when people were cutting stocks. And now we have less crop and people wanting to rebuild stocks.”

The anticipated price turnround would benefit Kenya, the world’s tea exporter, and other large producers, including Sri Lanka, India, China, Vietnam and Uganda. The commodity is also important for tea packers, including Unilever, which sells the popular Lipton brand; integrated tea companies with operations from plantations to packaging such as Finlays of the UK, and trading houses like US-based Cargill.

The wholesale cost of Kenyan medium-quality tea, known as Best Pekoe Fanning 1, fell last month to $2.25 a kilogramme, the lowest since December 2008 and down nearly 46 per cent from an all-time high of $4.14 set in October 2012. Since then, prices have already started to recover, with medium-quality tea fetching $2.61 per kg.

Unlike other crops such as coffee, cocoa and cotton, tea does not trade in a futures exchange and the business is based on physical deals at regular auctions. The weekly auction at the port city of Mombasa, Kenya, sets global benchmark prices.

Van Rees, the Netherland-based tea traders, said: “In terms of outlook, there is clearly some bullish sentiment about Mombasa.” But the tea trading house, a top buyer in Kenya, cautioned it was “slightly doubtful” about the strength of the recovery.

The most bullish traders believe tea prices could rise another 30-40 per cent in the first half of next year to roughly $3.40-3.50 per kg. But others in the industry are more cautious. Kamal Baheti, chief financial officer of McLeod Russel, the India-based plantation group that is the world’s largest tea grower, told local media this month he expected “stable prices” next year.

The incipient price recovery, regardless of its final strength, is firmly anchored in both supply and demand factors, traders and wholesale buyers say.

On the consumption side, top importers Pakistan and Egypt – the world’s fourth and fifth largest buyers of the commodity – are returning to the market as security in both nations improves following unrest earlier this year. Egypt briefly withdrew from the market this year when the country’s powerful military deposed President Mohamed Morsi and triggered a violent crackdown on the Muslim Brotherhood.

Traders said that buyers in Cairo and in Karachi, the Pakistani port-city that serves as the country’s commercial centre, were stocking the commodity again after running down their inventories for much of the year. Van Rees said in a report to clients that Mombasa was attracting “continued improved demand” in recent weeks.

Tea Brokers East Africa, a Mombasa-based firm heavily involved in the weekly auctions, said in a note to clients that this week the market saw “strong widespread demand”, noting in particular buying from Pakistan.

On the supply side, traders believe the big production surplus that hit the market earlier this year is starting to fade away, albeit slowly. In January, top exporters Kenya, Sri Lanka and India harvested 15 per cent more than in the same month of the previous year. In September, the year-on-year increase was about five per cent.

While the combination of positive supply and demand factors is set to lift black tea prices, traders caution that values are unlikely to rise to the strong levels seen in 2009-10. Even so, the recovery will be a relief for companies like Williamson Tea, which last month warned the price drop was a “matter for national concern” in Kenya.