PremiumKOLKATA : At Sunil Garg’s tea warehousing and blending facility on Kolkata’s southern fringes, workers line the insides of cardboard cartons with silver foil, fill each with 10 kg of Assam orthodox tea, and keep them aside for a shipment to Dubai.
But here’s the catch: Garg’s buyer will resell the consignment to an Iranian importer.
As if in confirmation of the final destination, the legend on the cartons reads: ‘Pahlevan Brand’– pahlevan being Persian for “champion".
The circuitous transit via Dubai is necessary because of US sanctions on Iran. Garg, whose company Asian Tea & Exports was, according to Tea Board of India data, India’s fourth biggest tea exporter in 2021, is legally exporting his teas to Dubai, and is not responsible for its end consumer.
Dubai has long been one of Iran’s main links to the outside world as a re-exporting hub, but trade between the two slowed down in 2018, though it did not entirely halt, when the then US President Donald Trump reimposed sanctions on Teheran.
Indian exporters have been forced to take the Dubai route since then.
The longer route inflates freight cost for Iranian importers, but they are quite willing to bear the additional charges. “Iranians love Assam orthodox," says Garg, whose four tea plantations include two in Assam.
Orthodox teas are loose leaf teas produced in the traditional method, as opposed to the advanced ‘crush-tear-curl’ technique employed for CTC teas – black teas that derive their name from the manufacturing process.
Sri Lanka produces and exports predominantly orthodox teas, which ensures it the third spot in global exports in revenues, with India—which also exports orthodox teas—at fourth place. China’s green tea despatches ensure it the top slot, while Kenya’s CTC sales keep it at the second.
Due to various reasons, India earns lower revenues than Sri Lanka from overseas tea markets despite being the second largest producer globally, manufacturing 1,330 million kg across categories in 2021. China topped the list with production of 3,120 million kg.
India’s exports of 195.5 million kg during the year fetched about ₹5,247 crore, according to Tea Board of India data, slightly ahead of the ₹5,235 crore it earned in 2020, but way below Sri Lanka’s 2021 earnings of $1.32 billion ( ₹10,016 crore) on smaller exports of 288 million kg.
And therein lies the story of how Sri Lanka is beating India in the tea business. It also raises a question: As Sri Lanka reels from an economic crisis, can Indians step in and corner its market share?
The price point
Iranians love the orthodox variety, and buy it from both India and Sri Lanka, though in larger quantities from the former; in 2021, it was about 10 million kg more.
Jaydeep Shah of Mumbai-based planter-exporter MK Shah Exports explains why. “Iranian consumers are connoisseurs of tea and have a very high standard as far as tea is concerned," he says. “Naturally, they prefer the malty Assam orthodox cups over other origins." (‘Malty’ in tea industry jargon refers to a full-bodied taste with a very strong mouth-feel, a characteristic of teas from Assam).
Iran and Russia together accounted for about 30% of India’s exports in 2021, but the current Ukraine crisis has upset despatches to Russia. The impact on demand can be assessed once stability returns, the government has said.
But despite high demand for Indian teas, Indian exporters lose out to Lankans in both markets when it comes revenue.
Iran is the second largest importer of Indian teas after Russia. In 2019, it bought nearly 55 million kg, though that shrunk to 26.18 million kg in 2021, the smallest consignment in recent times. Tea Board data shows Iranians pay more for the Sri Lankan variety even though they buy less of it.
For instance, in 2020–the year till when the per-kg earnings data is available–they paid $4.53 per kg to Lankan exporters, compared to $2.32 per kg to the Indians. The gap was wider in 2018–$5 per kg.
The same is true for Russian purchases, as it is in other major markets for India. In 2020, Russia lifted 34 million kg from India, compared to 27.21 million kg of Sri Lankan tea. (The Commonwealth of Independent States, as a bloc, imported 44.57 million kg). But Sri Lankan exporters earned $4.53 per kg as against the $2.32 earned by Indian sellers.
To the credit of Indians, this was a better show than in 2018, when the Russians paid $5.09 per kg to the Sri Lankan exporters, and $2.29 per kg to the Indians.
The reason for this, perhaps, can be found in a report that rating agency ICRA released in April. Russia sources mainly plain to medium categories from India, and the premium varieties from Sri Lanka, the report says. Indian teas lose out in other key markets as well, apart from Iran and Russia. Importers from countries such as the UK, Germany and even China pay higher rates for Sri Lankan teas.
Amit Dutta, associate director, agri, food and nutrition practice at business consulting firm Frost & Sullivan, pins it down to flavour. “The major reason is that the Sri Lankan varieties have better taste profiles," he says.
Exporter Shah sees it another way. The “biggest advantage" that Sri Lanka has over India, in his view, is that the quality of their teas is consistent throughout the year, while Assam teas have a seasonal cycle, which forces buyers to hold a larger inventory over the year. “That is why Sri Lankan teas are extremely standardized, which cannot always be said of Indian orthodox," he says.
The opportunity for India
But Sri Lanka’s leads may be shrinking, say analysts and industry stakeholders, citing its ongoing economic crisis and the Ukraine situation.
For instance, ICRA in its report says the “likelihood of lower availability of teas from the island nation" could see Indian producers replacing Sri Lanka “as suppliers of quality orthodox teas". It also says the Sri Lankan government’s decision last year to shore up foreign exchange reserves had impacted yield, and also raised costs. Given this backdrop, it feels Indian exporters could enlarge their footprint in the Iran market, as well as in Russia and the UAE. Mumbai exporter Shah adds two more: Iraq and Turkey.
Reports coming out of Sri Lanka suggest processing of tea leaves post-plucking is getting delayed because of scarcity of diesel for transportation and disruption in factory operations–caused by extensive power cuts. This, in turn, is causing deterioration of finished tea.
Production loss in Sri Lanka is likely to lead to a short supply situation in the orthodox tea market, says Shah, whose 13 tea estates in Assam produced 18 million kg in 2021, making his company the largest producer of orthodox teas in India. In his view, the lack of fertilisers and pesticides in Sri Lanka would likely lead to a “high mortality rate" of tea bushes of up to 5% over the long term, as against the normal mortality rate of around 1.5%, which he says would firm up prices beyond 2023.
In the short term, he thinks Sri Lanka growers could suffer a crop loss of at least 35-45 million kg in the current year. This would support prices of Assam orthodox, he says.
Frost & Sullivan analyst Dutta, however, expects South Indian orthodox teas to benefit. “But this is expected to be a short-term gain as most of the blenders and packers will prefer Sri Lankan orthodox tea over Indian orthodox tea," he says.
It is not as if only Indians are talking of the gains to be had from Sri Lanka’s crisis; the Lankans are too.
Brokerage house Ceylon Tea Brokers has a warning from its chairman Chrisantha Perera on its website: If the current trend of falling output was not checked, the country would lose share in “important markets".
Sales figures emanating from Sri Lanka and India seem to confirm his fears. Ceylon Tea’s data shows production was down 7% in January, while, as per India’s official data, Indian exports the same month to Iran doubled year-on-year to 2.7 million kg.
What sets Sri Lanka apart
Indian and Sri Lankan producers export orthodox teas for opposite reasons: India because it consumes most of the tea it produces, Sri Lanka because it touches very little of it.
Shah explains the India story: It is primarily a CTC market, making orthodox tea more or less an exclusively export product. Tea Board data shows Indians in 2021 drank 85% of the tea produced in the country– mostly CTC–keeping growers buoyant. For instance, Coimbatore-based tea merchant Nishant Barkhari says, “I’m a 100% CTC seller, I cater to the Indian market and don’t look at orthodox."
So attractive is the CTC market that many orthodox tea-growing gardens in Assam’s Doom Dooma region in Tinsukia district–perfect for growing tea due to its terroir, weather and growing conditions–have been converted to CTC estates, says Shah, who has eight gardens in the region.
Sri Lanka’s domestic consumption, on the other hand, is poor. This low consumption has forced its producers to rely on exporting what they grow, and as ICRA notes in its report, their “low-grown" yield now accounts for almost 65% of the global orthodox supply.
Data released by the Sri Lanka Tea Board shows that of the 300 million kg produced locally in 2021, the country exported 288 million kg–or 96% of its total output.
“The situation is such that if they don’t look for new markets, their teas won’t sell," says Sujit Patra, secretary of the Indian Tea Association (ITA), the oldest organisation of tea producers in the country.
This is reflected in its barter arrangements. In Turkey, Indians had to back off in face of a steep 145% duty, even as the Sri Lankans moved in, riding a barter pact between the governments. The Lankan government has now also announced it will barter tea to Iran to settle oil dues of $250 million.
“We are not diversified like Sri Lanka’s exporters, who are our main competitors, or even Kenyans. We are still dependent on a few markets," Patra says. (The Kenyans, he pointed out, seized the Pakistani market after the Kargil war, and walked into Egypt–once a thriving market for the Indians–after an intra-continent pact ensured zero tariff for them, and Egypt imposed a 30% duty on Indian teas).
Another market lost to aggressive Sri Lankan promotion is Iraq. India had a small presence there till 2020, but last year, exports fell to zero; in contrast, Sri Lanka exported 44 million kg in 2021.
Frost & Sullivan’s Dutta too argues India’s promotional activity is weak. “Sri Lanka has always been aggressive in branding its teas," he says. “It’s a major foreign exchange earner for them. That’s not the case for Indian companies."
And it is this lack of aggression that could dampen Indian hopes of taking over markets where the Sri Lankans have been strong for so long. Among the many stakeholders who share this view is Ajay Jalan, president of the Tea Association of India (TAI), a platform for smaller estates. Jalan owns three gardens in Assam; his produce competes in Europe with that from Sri Lanka. For instance, his ‘Mokalbari’ brand is sold in Harrods in the UK and Sinas in Germany. He is certain that Sri Lanka’s market share can’t be usurped that easily. “It’s going to be difficult," he says.
Instead, he feels, what is needed is government support. “We recently signed a wheat deal with Egypt, as supplies from Ukraine have dried up. Why not include tea in the package?"
ITA’s Patra agrees. “Sri Lanka’s market share won’t be captured overnight. We need a united drive." Individual companies or sellers can up their aggression, but that will not be enough to corner a market. That will need a concerted effort from all players, as well as a policy push from the government, much like the sustained support that nurtured India’s IT industry. It will involve roping in embassies in various countries to explore new markets such as Turkey, Poland, Syria, Libya, Chile and Australia.
“That way, our exports can go up by another 100 million kg in two to three years," says Patra.
