Tea Estates in North India Brace for Margin Squeeze in 2023-24

Tea estates in North India, particularly in West Bengal and Assam, are likely to face challenges in 2023-24 due to rising input costs and declining realization, according to a report released on Wednesday. The report, published by ratings agency Icra, predicts a significant impact on the Operating Profit Margin (OPM) of bulk tea players in these regions.

Double Whammy of Cost Increase and Lower Realization

The report highlights two key factors contributing to the margin pressure: an increase in the cost of production and a drop in realization. Wage rate hikes in West Bengal and Assam have led to higher production costs, while low export demand and sluggish rural consumption have resulted in lower realization prices.

Impact on Auction Prices

The impact of these factors is evident in the all-India Auction Prices of Orthodox (ODX) tea. During the January-October period of 2023, ODX tea prices witnessed a decline of Rs 51 per kg on a year-on-year basis. South India ODX tea prices also experienced a price drop, although to a lesser extent of Rs 7 per kg during the same period, primarily due to reduced export demand, particularly from Iran.

Export Decline Hits Prices

A sharp decline in exports to key markets such as Iran, Russia, and the UAE has significantly affected tea prices at auction centers in India. Direct exports to Iran, a major ODX market, have decreased by 80% during the January-September period, leading to a decline of more than Rs 50 per kg in ODX tea prices.

Outlook Revision and Global Production Trends

In light of these challenges, Icra has revised the sector outlook for the tea industry from stable to negative. The report also notes that tea production in Kenya is expected to increase in 2023, with an already recorded 7% year-on-year growth in the first eight months. While production in Sri Lanka has increased during the January-October period, it is still projected to remain below pre-pandemic levels of 2019.

The tea industry in North India faces significant challenges in 2023-24 due to rising input costs and declining realization. The impact is reflected in lower auction prices and a negative outlook for the sector. Global production trends in Kenya and Sri Lanka further add to the competitive landscape. Tea producers and stakeholders will need to navigate these challenges effectively to ensure the long-term sustainability of the industry.