Tea, rubber and Sri Lanka’s economy

by FS

(March 06, Colombo, Sri Lanka Guardian) The volatile situation in West Asia (Middle East) precipitated by the collapse of Hosni Mubarak, the ageing ruler of Eqypt, is causing ripples in Colombo given the region’s importance to Sri Lanka’s economy.

While the labour markets have not been adversely affected except for a repatriation of a group of Sri Lankan workers from Libya and Eqypt, the tea markets have been shaken by the crisis in West Asia which began in Eqypt, spread to Bahrain and Tunisia and Libya.

Sri Lanka’s main tea buyers are the CIS and West Asia with Iran being the largest buyer in the region while Syria is a close second. Dubai in the UAE is the tea hub where teas to the CIS and other buying countries are channelled through.

Thus any unrest in West Asia has a definite impact on the Colombo markets. Apart from the ‘wait-and-see’ posture on rumblings in the Arab world, the tea sector also has a lot to worry about back at home vis-à-vis high intensity rains which ruin the bush, erratic weather conditions and its impact on the quality season which is right about now.

Tea traders said seasonal quality teas have been affected by the uncertain weather while another problematic issue in coming months is facing up to wage demands from workers with negotiations on a new collective agreement in the plantations due to begin this month, probably after the elections.

“It’s a volatile period for the plantations,” noted one broker. Sri Lanka’s plantation sector has gone through these ups and downs over the years but is the great survivor, able to take the occasional dip and recover after that.

On the positive side, rising oil prices and a possible increase in social spending in the troubled region to dampen the anger of the youth, the unemployed and rising food prices could lift tea prices and benefit Sri Lanka.

For many in the industry, while the markets are yet to be affected other than the Mombasa auction in Kenya seeing demand fall and some unsold quantities, it’s a situation that needs to be monitored for the next three to four months at least. West Asia is a crucial link to western economies in terms of the dependance on crude oil.

On one hand, rising crude prices has led to a regeneration of the bio-fuel industry with food prices rising because commodities are also being diverted to this industry apart from the usual consumption patterns. Furthermore the demand from India and China for more food and other essentials based on rising growth and income levels is affecting the supply side.

All this needs to be factored into the tea markets because of its close affinity to West Asian consumers who consume the bulk of the tea produced across the world. However rubber is coming to the rescue of Sri Lanka’s and other economies as the thirst for more vehicles grow in China, India and the rest of the world. According to some estimates, the current 800 million vehicles in the world is seen growing to 1.2 billion in 2012 and 1.5 billion by 2015, almost double current levels.

With that the demand for rubber and rubber tyres (to service the motor vehicle industry) is growing so fast that according to unconfirmed reports, rubber tapping is taking place two or three times a day in some producing countries. Sri Lankan rubber prices have risen sharply from an average $1 per kg in 2005 for RSS3, the main rubber grade used in tyre manufacture, to $5 per kg at the February 2011 auctions in Colombo with record prices for all grades last month. Brokers say these record prices have not reached these levels for the past 75 years.

Thus while tea will see some dips this year based on the volatility in West Asia, erratic weather across producing countries and crucial wage negotiations between workers and management which could impact on the cost of production; rubber would provide economic planners a welcome fall back option in terms of revenue for the state and keeping the foreign exchange coffers filled up.

On foreign employment and migrant workers vis-à-vis the crisis in the troubled region, job agents here believe that the crisis won’t spill over to key labour generating countries like the UAE, Qatar or Saudi Arabia. For the moment the outflow of Sri Lanka migrant workers hasn’t eased and the foreign employment industry expects another 200,000 to 250,000 to find jobs overseas this year.

Nevertheless government planners and other industrial sectors concerned with issues not only in West Asia but the rest of the world need to closely monitor these developments given the Arab world’s powerful influence on western economies which in term has a strong impact on export-dependent countries like Sri Lanka.