Tea exporters compelled to cut capex amidst depressed margins, rising operational costs

By Nishel Fernando

 Faced with depressed margins and rising operational costs due to competition and the high-interest rate regime, Sri Lanka’s tea exporters are forced to cut capital expenditure on infrastructure development and investments in machinery and equipment.

Although the increase in auction prices of tea benefited the producer segment, the exporters were unable to increase prices accordingly, due to rising competition and importers’ inability to adjust prices at the retail level.
Tea auction prices saw a boost from March 8 this year with the sudden floating of the Sri Lankan rupee. Though rupee devaluation was about 75 percent, tea prices went up by almost 150 percent due to low output.
“For a week’s transaction, value of the Colombo Auction is about Rs.9 billion and it amounts to Rs.450 billion per annum typically. However, this has increased almost three times the previous amount to purchase the same quantity of tea at the Colombo Auction,” said Ceylon Tea Traders Association (CTTA), Outgoing Chairman Jayantha Karunaratne, addressing the 128th AGM of the Association held in Colombo recently.

He added that the sharp increase in bank lending rates is a major cost factor to the industry. 

“Most of the companies need to borrow working capital and that had added up as additional cost for operations,” added Karunaratne.

 Against this backdrop, exporters are compelled to restrict capital expenditure on infrastructure development and on investment in machinery and equipment in facing future challenges to the industry.

“We are aware that keeping interest rates high will control inflation, but we request regulators to look at the negative impact affecting the development of the business,”  Karunaratne  said.

On a positive note, the outgoing chief was optimistic on exceeding US$1.3 billion in tea export revenue this year. This is despite the 20 percent reduction in tea output seen during the first eight months of this year.

 Karunaratne played an instrumental role in transforming the tea auction to an online e-platform in just ten days with the on-set of the Covid pandemic during his three-year stint. The digitisation and maintenance of the auction have been funded by producers and buyers of Ceylon Tea, which is budgeted for around Rs.450 million for the first five years.