The hike in wages rates in Bengal along with production returning to normality would impact the profitability of the tea industry.

The impact on bulk tea prices once production returns to normal in the new season would be a critical factor for profitability in the next financial year, rating agency Icra said in a report.

Bengal has recently announced a 15 per cent increase in wage rates, on an interim basis, which would increase the cost of production for bulk tea companies, it added.

Domestic prices have increased sharply in the current financial year. The North India auction average rose 46 per cent annually during April-December 2020 and South India 41 per cent, the report said.
Prices rose because production fell 10 per cent, while consumption remained firm, increasing profitability for the fiscal.

The trend for next fiscal will depend on whether the higher prices are sustained and the input costs, the rating agency stated.

Icra vice-president and sector head (corporate sector ratings) Kaushik Das said, “While it would be premature to comment on the exact level of tea prices, nonetheless, overall prices are likely to witness a negative bias, once the production returns to normal in the new season.”

Input costs is expected to go up because of the higher wages. “ Bengal has already announced an interim wage increase, Assam is also likely to follow along similar lines.”

Das also said the sustenance of healthy profitability would be critical to ensure the long-term financial health of the bulk tea industry.

Global trends

The report said the decline in production from India and Sri Lanka — a contraction of 11 per cent for both in 11 months of 2020 — is estimated to result in an overall decline in global production in 2020.

The fall in production in the two Asian countries will not be offset by a sharp rise in the Kenyan crop by 32 per cent during the nine months of 2020.

The report said the global supply of crush tear curl (CTC) teas largely remains the same, with the increase in Kenyan CTC crop compensating for the decline in Indian CTC production.

Global orthodox (ODX) production was hit following the decline in both India and Sri Lanka, it added.