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Tea Capital of the World: A Visit to Sri Lanka
The Tea & Coffee Trade Journal / March 2009

By Larry Luxner

COLOMBO, Sri Lanka — At the entrance to the Ceylon Chamber of Commerce building in downtown Colombo, a guard waves a handheld metal detector over all visitors, while a uniformed woman wearing a "Lady Security Officer" badge inspects bags and laptop cases as a precaution against Tamil Tiger terrorist attacks.

No wonder. In this building are the Sri Lankan headquarters of multinationals like IBM, Nestle, Unilever and Xerox. It's also home to a half a dozen foreign embassies and government trade offices.

But once inside, concern over suicide bombings and ethnic unrest give way to old-world charm. In a large auditorum on the second floor, the Colombo Tea Auction — a twice-weekly ritual — is well underway. Seated on bamboo chairs and hunched over long curving mahogany tables are some 75 young men, clad in blue shirts and ties. This is strictly a man's world; one lone female secretary takes notes.

"The Colombo Tea Auction has been going on for over 125 years," says Deepal Chandrasekera, a consultant for Imperial Teas Ltd. "We are the oldest and largest tea auction center in the world."

Here, laptops, blackberries and cellphones are nowhere in sight. Instead, young men take handwritten notes, sometimes consulting a calculator. The auctioneer at the mike speaks rapid-fire Sinhalese, with only the prices quoted in English. The only clue a non-Sinhalese speaking visitor has as to what's going on is a small marquee at the podium reading "Tea Auction" with a list of the eight commodity brokers participating on any given day.

The tea auction takes place every Tuesday and Wednesday. Of Sri Lanka's 430-odd registered tea exporters, 100 are considered active. And of these 100, at any given time 70 to 80 of them participate in the auction.

Last year, according to the Sri Lanka Tea Board, the country produced 320 million kg of tea, of which 305 million kg (rougly 95%) was exported. Sri Lanka accounts for 10% of world tea production and 20% of exports. The United States represents about 1.5% of Sri Lanka's exports.

Even so, Sri Lanka is not the world's largest tea producer; it doesn't even come close to China or India. But because those countries have huge internal markets, much of the tea they produce is consumed domestically. As a result, Sri Lanka continually vies with Kenya for the title of "world's largest tea exporter."

In 2007, Sri Lankan tea shipments overseas brought the island nation $1 billion in foreign exchange — marking the first time any tea-producing country had achieved that goal. Kenya, by comparison, earned $650 million, because even though Kenya shipped more volume, Sri Lanka exports more tea in pre-packaged form, adding to its export value.

In 2008, Sri Lanka earned $1.25 billion from tea, but would have reached the $1.4 billion mark if not for the economic crisis depressing markets around the world.'

"Up until September, the market was pretty buoyant. Crude oil prices were high, and we were selling at prices which we never dreamed of. We were getting even more than what we deserved for our tea," admitted Lalith Hettiarachchi, chairman of the Sri Lanka Tea Board. "We were more than half a dollar per kilo more expensive than even the second-most expensive auction center, Calcutta."

At its peak, Sri Lankan tea was fetching $3.20 to $3.40 per kg; its nearest competitor was India ($2.75 to $2.80 per kg) followed by Kenya (around $2.25 per kg).

But then, as world financial markets turned sour, the price of oil took a sudden plunge — from a high of $147 per barrel in July to below $60 by year's end.

"That's good for us as a country, because we are so dependent on imported oil, but it put pressure on our buyers, and they started asking for cheaper tea and extended credit," Hettiarachchi said during a lengthy interview at Sri Lanka Tea Board headquarters in Colombo. He noted that the Middle East and the 15 former Soviet republics (including Russia) buy 70% of Sri Lanka's tea exports.

"Georgia used to be a huge tea producer, about 100 million kilos a year," he said. "But with the disintegration of the Soviet Union, government support was removed, and those tea plantations got desroyed. So they started importing tea. During the Soviet times, we used to export small quantites of top-quality tea to Russia to be used only by the Central Committee people."

In 2007, the last year for which comprehensive statistics are available, Sri Lanka exported 311.7 million kg of tea. Of this total, 57.78% was in the form of of bulk tea, while another 23.77% was in packets, 7.08% in bags, 0.47% in the form of instant tea, 1.11% green tea and 4.74% other. The remaining 5.05% consisted of imported or re-exported tea.

Sri Lanka's top 10 tea importers by volume in 2007 were Russia (56.7 million kg); United Arab Emirates (43.9m kg); Iran (32.1m kg); Syria (27.6m kg); Turkey (14.8m kg), Japan (10.3m kg) Libya (9.4m kg), Ukraine (9.0m kg), Iraq (9.0m kg) and Saudi Arabia (8.5m kg). Other important customers for Sri Lankan tea are Finland, Chile, Germany, Tunisia, Jordan, Hong Kong and the Netherlands.

In 2007, the world's top tea exporters by volume were Kenya (345.9 million kg); Sri Lanka (294.2m kg); China (289.4m kg); India (156.7m kg) and Vietnam (115.0m kg).

"Right now, we are facing the effects of the world financial crunch and credit squeeze," said Chandrasekera. "Our largest single buyer is Russia, and the largest tea-buying region is Russia plus the CIS. Russia had to cut its purchases because of their devaluation, which makes our prices higher as far as they're concerned. Secondly, we had very good prices partly because of the Gulf markets. They had a lot of money from oil and could easily absorb our best-quality teas at the best prices. Now that's over. They're not buying as much at those prices. Instead, they're going for medium-priced teas."

Even so, it's hard to overestimate the importance of tea to Sri Lanka — both from a historical and an economic point of view.

"Garments bring in about $3 billion a year, three times the revenue tea brings," said Chandrasekera. "But the net foreign exchange from garments is about 20%. With bulk tea, 99% is net foreign exchange. For value-added in packets, it's about 98% foreign exchange, and for tea bags, it's about 95%. So regarding foreign exchange, we are far more important than the garment industry."

And when it comes to job, no other industry even comes close.

Tea plantations give direct work to 600,000 people; another 400,000 Sri Lankans are employed by the tea industry indirectly.

For the last two years, Hettiarachchi has run the Sri Lanka Tea Board, which was established in 1976 to regulate, promote and develop the island's tea industry.

"We have inspectors in seven regions controlling the 14 districts where tea is grown," he said. "Their role is to see that tea is produced according to the guidelines, aimed at producing the purest kind of tea Sri Lanka can export."

Hettiarachchi said that at present, Sri Lanka has 220,000 hectares of tea under cultivation in five of the country's nine provinces. By law, this amount cannot expand because of a moratorium on tea planting. Some 55% of Sri Lanka's tea land is controlled by 22 private-sector companies and two government entities.

One of Sri Lanka's biggest advantages when it comes to tea is that 93% of its production is orthodox, as opposed to the mass-production CTC (cut, tear and curl) which is much cheaper. CTC accounts for 90% of India's production and 99% of Kenya's production.

"It makes a huge difference in prices. With CTC, there are only six main grades. With orthodox, we offer 34 grades," he said. "Our strength is in orthodox tea. This lets us give our international buyers different types of teas which the CTC producers cannot offer."

Interestingly, the British market — which in the 1950s and 1960s was Sri Lanka's most important — is today a drop in the teapot, not even making the top-20 list today.

Forbes & Walker Tea Brokers Ltd. has been in business since 1881. Owned 70% by Dilmah, it's by far the largest broker in Sri Lanka's high-grown tea sector.

"We become the marketing arm of the producer, and the go-between between the buyer and the seller," explained Yshan Fernando, managing director of Forbes & Walker. "Today, the method of sale is that tea must go through the auction system so it brings an element of transparency. We provide warehousing facilities, financing where needed, and technical know-how on manufacturing, in addition to the marketing and auctioning of teas."

Fernando oversees a staff of 175, including 25 marketing specialists. He said that at any given time, his company has two weeks' worth of tea in the pipeline.

"Once a tea is manufactured and invoiced, that invoice is dispatched to Colombo. The broker takes a sample and catalogues it in sequence. After the tea is catalogued, the broker examines the samples and gives a brief report to the producer, indicating suitability," he explained.

"Having done that, we take these samples and distribute them to approximately 250 prospective buyers, so you're getting the demand concentrated in one point. That way, no tea gets less than what it deserves." Within seven days of sale, he said, the producer gets his money, although that's not guaranteed.

"History has demonstrated that this system has worked for over a century," said Fernando. "There is no debt collecting in this business. That's one of our tremendous advantages."

Roughly 60% of the cost of producing Sri Lanka's tea is in labor; energy costs, fertilizers and other inputs account for the remaining 40%. Out of the 60% in labor costs, "social expenses" like health, education, worker lodging, water and food subsidies account for 15% to 20%.

"We have regulated wages, the minimum wage and number of working days is fixed, and the government is very strict about age," said Chandrasekera, whose company, Imperial, had $42 million in 2008 sales and ranked as Sri Lanka's sixth-largest tea exporter. "They won't employ anyone under 18 here. If you go to garment factories, you'll find that foreign buyers will cancel their orders if they see child labor."

He said that in Sri Lanka, plantation workers get free accommodation and incentive payments, and are generally "much better off" than their Indian or African counterparts.

"In Kenya, for instance, tea pluckers bring in much more leaf than ours — three times as much, because our pluckers work fewer hours and not as hard as their counterparts in other countries," he said. Generally, tea pluckers start at 6 a.m. and finish by noon, plucking only the top two leaves and a bud. Workers comb through the fields with baskets, returning to the same tea bushes every seven days to pluck new leaves.

Chandrasekera said there are four approved channels to buy tea in Sri Lanka. About 75% of the tea by volume is purchased through the Colombo Tea Auction, followed by private sales. The third channel is to buy from plantations through the Sri Lanka Tea Board, and the fourth is through forward contracts (futures), though that option has not been used for the past four or five years.

Since 1996, Akbar Brothers has ranked as Sri Lanka's largest tea exporter in all three categories: bulk, bags and loose-tea packaging.

Van Rees Ceylon Ltd., a subsidiary of Dutch trading outfit Van Rees B.V., has been present here for 50 years. The company's managing director, Niraj de Mel, said 95% of its exports are in bulk form.

"We're totally the opposite of Dilmah," said De Mel, who started as a tea broker with Forbes & Walker and served as chairman of the Sri Lanka Tea Board from June 2004 to November 2005.

"From our point of view, Dilmah is the way to go from a national point of view, but at the same time, Sri Lanka's global presence as a standalone product is minimal. Whatever presence Dilmah has is the result of 20 years of hard work. But global brands must also be supplied with the raw materials they need. That is where I believe we come in."

All the tea executives interviewed for this article agree that Sri Lanka's tea industry has largely been spared the ravages of the country's long-running violence sparked by Tamil discontent with the central government in Colombo.

"Tea is affected inasmuch as the fighting impacts the growth of the economy — the fact youํre spending a disporporiate amount of country on the war," said Malik Fernando, director of Dilmah. "But it's a war that has to be fought."

Adds Chandrasekera: "The future looks good, whenever we come out of this mess. As exporters, people are concentrating on increasing their value-added share. That's where the future lies — not in bulk trading, but in value addition, brand marketing and private-label packaging."

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