Market glut pulls down tea prices at Mombasa auction

Kenyan tea producers will have to contend with diminishing returns as prices at the Mombasa auction have dropped consistently since May.

The market is preparing for a glut occasioned by favourable weather as the cold season ends.

As a pointer to what is coming, the average price of best Kenyan tea declined in last week’s auction due to expectation there will be increased supply in the near future.

Prices dropped nearly 28 per cent at the auction to $2.12 per kilo from $2.96 in May.

“We expect higher volumes as the warm weather opens up supply while demand reduces,” said a trader in Mombasa said.

The cold season from June to August inhibits development of tea leaves, cutting output, but boosting demand and raising prices.

Kenya, which exports mainly to the British market, is known for the black tea produced through the cut, tear and curl (CTC) method best for tea bags.

Last year prices reached a record high of $3.18 per kilogramme from an annual average of $2.38 in 2008, after dry weather in Kenya and Sri Lanka — some of the leading exporters — cut output.

This raised concerns that tea producers could over-react by planting more this year, leading to oversupply.

The British market saw prices rise from £1.97 to £2.20 last year following shortage in Kenya.

While there has been a shortage in India, the second largest tea producer in the world after China, in the recent months following a pest attack that affected 70 per cent of plantations, this drop may not stir prices since the country has a vast domestic market.

“We’re likely to see a high point of production and low point of prices for this year,” said Dr Kipkirui Langat, the East Africa Tea Association chief executive.

Tea production for the first three months of this year reached 111.7 million kilogrammes, which is the highest output in five years.

Last year, there was a dip due to drought.

The improved performance for the first quarter of 2010 was largely attributed to wet weather conditions in the first two months.

Tea earned Kenya Sh69 billion last year compared to Sh62 billion in 2008 in the face of low exports due to drought.

The Tea Board of Kenya managing director, Sicily Kariuki, said in highlights that production for the first quarter was comparable to a similar period in 2007, which was one of the best in Kenya’s history.

Weakening of the Kenyan shilling against the US dollar, which dropped from Sh76 in 2009 to Sh81 in 2009, is, however, likely to reinforce earnings this year.

The weatherman expects the country to receive little rainfall in the last quarter of the year, which is expected to hurt production and improve profits.

World recession

Tea prices remained relatively static last year at the height of recession that affected some of the top importers when disposable income fell, hurting purchasing power.

Local listed firms such as Kakuzi and Williamson Tea have had a good run on the Nairobi Stock Market, emerging the best performers in the last 12 months.

The industry has been in the spotlight in the last few months over debates about a Bill that seeks to liberalise the sub-sector by, among other things, giving small-scale farmers room to sell to factories of choice.

Players have also raised the alarm over relying on one method of production, saying it was a way of playing into the hands of other major producers who were investing in other technologies.

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