Tea Market Update. General Overview FALLING OIL PRICES, RUBLE CRISIS AND UNCERTAINTY IN MIDDLE-EAST REGION ADVERSELY IMPACT ON CEYLON TEA.

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1 Tea Market Update V o l u m e 1 1 N o 1 J a n u a r y M a r c h FALLING OIL PRICES, RUBLE CRISIS AND UNCERTAINTY IN MIDDLE-EAST REGION ADVERSELY IMPACT ON CEYLON TEA Tea Production 2 Tea Marketing 3 Tea Exports 4 Global Tea Scene 6 Trade Fair Participation 7 Research Update 8 Editor-Sampath Perera Tea Promotion Division sampath@pureceylontea.com Web-site Sri Lanka Tea production reached its peak in Cost of Production in recent years due to wage hikes and other essential overheads in plantations as well as factories attributed to quality concerned in every stage. Hence the country produce Orthodox tea, in which followed traditional unique practices to have unmatched quality tea production to compete with other producing countries. Ceylon tea exports heavily depends on oil rich Gulf / Middle East and Russia / CIS countries for its exports. The two regions absorb approximately 70 per cent of Sri Lanka tea exports. The falling oil prices, liquidity problem, restriction on outward remittance and depreciation of the currencies in some countries in the two regions reduced the purchasing power of all import items specially tea, attributed to the average prices at Colombo Tea Auction compared to other auctions. Further it burden during last quarter in year 2014 was witnessed a sharp decline in tea prices due to over production and political and economic uncertainties in globally. Economy General Overview During the first quarter of 2015, the trade deficit narrowed marginally compared to the corresponding period of 2014 due to the increase in export earnings at a higher percentage than the Increase in import expenditure. The narrowing of the trade deficit, higher inflows to the services account with increased tourist earnings and inflows of workers Remittances strengthened the current account while inflows to the financial account continued to moderate. On cumulative basis, expenditure on imports during first three months of 2015 increased marginally by 0.9 per cent, year-on-year, to US dollars 4,792 million mainly led Despite the fact that Sri Lankan Tea Industry for the year 2014 concluding on a healthy note in comparison to the year 2013 due to first nine months performance. Good demand for the average types of teas can be observed in the first quarter of 2015 due to decline in purchasing power in some of our biggest export destinations, namely Turkey, Iran, Iraq,Russia and Ukraine Etc. However, the analysts noted that the weak imports trends of orthodox teas of our traditional markets of North African countries like Egypt, Tunisia, Libya and European countries effect further of our market price decreases during the quarter. CTC tea producing countries suffered heavily in low prices at the world tea market scenario due to increased production from virgin lands in Eastern African nations. Hence, most of the developing countries eyeing their basic consumer goods import from wherever cheaper origins to faced the prevailing economic contractions in global market conditions. Continue in page.5 by consumer goods imports followed by investment goods imports. During the period of January - March 2015, the main import origins were India, China, Japan, UAE and Singapore accounting for about 61 percent of total imports. Tea Industry Sri Lankan tea industry s first quarter was not as resilient as the same period in 2014 due to global politics and subsequent economic downturns. The total national average of teas sold for the first quarter of 2015 was Rs in comparison to Rs for the same period last year show that Auction averages were further affected. continue in page.5

2 P A G E 2 + Tea Production The island's tea production during this quarter has increased compare to last year's first quarter attributed to favorable weather condition and crop harvested from new fields at low grown region. Table 1 - Tea Production during the first quarter 2015/2014 (Units :Mkg) Jan-Mar (MKg.) Change Category Qty % Elevation High Medium Low Total Processing Method Orthodox CTC Green Tea Total Table 1 above reflects that the elevation wise break down and processing method wise classification of the first quarter tea production in 2015 as against Tea crop in all elevations grew significantly during January March in Both high and low elevation tea production contributed to growth in a bigger way whilst the contribution made by the plantation in the medium elevation was comparatively lower. Processing method wise production figures for the quarter revealed that CTC tea manufacture decreased substantially, whereas Orthodox tea manufacture increased a considerable volume of 5.57 Mkg or by 8% compared to last year same period. Chart 1 Cumulative and Monthly tea production in first quarter 2015/2014 in 2015 is slightly down compared to 2014 and other two months registered healthy increase in production. However, cumulative manufacturing in first quarter of 2015 still maintained its top level. Table 2 - District wise tea production comparison as at March 2015/2014 (Kg) ADMIN. DIS- TRICT Growth Growth % COLOMBO HAMBANTOTA MATALE KEGALLE KALUTARA KANDY BADULLA MATARA GALLE RATNAPURA NUWARA ELIYA Total When comparing the tea production in various districts, it showed at above table 2. Rathnapura district ranked the first place with increased production to 17.8 million Kgs compared to last year figure of 15.2 million Kgs. Nuwara Eliya district registered the second highest tea production list with slight increase in production ad against last year same period. The quarter, Matale district tea production improved significantly to 0.8 Mkgs from 0.4 recorded in last year same period. This remarkable crop growth registered due to improved rainfall and cultural practices backed by government subsidy initiatives and fair prices. Chart 1 illustrates the quantity produced in the first three months in both 2015 and 2014 as well as the accumulation. The chart depicted that January crop figure Green Tea production volume remained same as last year and Bio tea production decreased significantly to Kgs from kg registered in Following Instant tea production remained same with slight increase compared to last year same period. PUBLICATION OF TEA PROMOTION DIVISION SRI LANKA TEA BOARD

3 Tea market update Volume 11. No. 1 P A G E 3 Tea Marketing The price decline witnessed during last quarter in 2014 extend in first quarter 2015 also attributed to weak demand from our key markets. The average price decline in first quarter 2015, registered at below the Cost Production level of Rs.422/Kg reported in Hence, most of the plantations companies faced cash trap situation and small holder sector received lower rate for green leaf supply. Table 3 Teas Sold and prices fetched in first quarter 2015/2014 Unit: Qty-Mkg,Rs/Kg Elevation Jan to Mar Jan to Mar Qty (MKg) (SL Rs) (US$) Qty (MKg) (SL Rs) The quarter tea sales were marginally higher in volume as against previous year same period, but the prices in 2015 were below those in 2014 in all three elevations. Average price fetched at low grown areas reported worst with the clear indication of low demand from CIS and Middle East markets Where leafy grades mostly demanded traditionally. Table 4: Teas sold and prices fetched by distribution channels (Qty:Mkg, Rs./Kg) (US$) High Medium Low Total Different channels Qty (MKg.) First Quarter (Rs./Kg.) Qty (MKg.) (Rs./ Kg.) Public Auction Private Sales Direct Sales Total Above table 4. depicted that direct sales gained a relatively higher average price as against public auctions and private sales, but involved only a small quantity. Whilst only private sales average price fetched at healthy level but quantity decreased as against last year same period. The volume of public auction has increased to Mkgs from Mkgs during the period under review but average price decreased by 17% to /kg from Rs /Kg. Table 5: Sub district Auction average price Sub District 2015/2014( Rs./Kg) Table 6: Grade wise quantity sold and price comparison during the first quarter 2015 Grades January to March change per kg Sold Qty (Kgs) Change % Nuwara Eliya Westerns (8 areas) Mediums (9 areas) Uda Pussellawa (2 areas) Uvas (8 areas) Low Growns (10 areas) Average price Avg. ORTH-FBOPF1/FBOPF 10,165, ORTH-FOP/OP1/OP 7,152, ORTH-BOPF 6,976, ORTH-FBOP1/FBOP 6,332, ORTH-FP/PEK 5,898, ORTH-BP/BM 5,021, ORTH-OPA 4,735, ORTH-BOP1A 4,113, ORTH-BOP 3,963, ORTH-PEK1 3,548, ORTH-PF/FNS/FNS1 3,166, CTC-PF1 2,445, ORTH-BOP1 2,000, ORTH-DUST1 934, CTC-BP1/BPS 819, CTC-PD 665, OTHERS 11,927, Total 79,865, Table 6 above shows that, the highest quantity of 10.17Mkgs offered to Colombo Tea Auction by Orthodox FBOPF1/FBOPF grade teas and fetched average price level of Rs / Kg during the first quarter. The volume of 3.94Mkgs was sold in CTC grades and average price registered at Rs per kilogram.. PUBLICATION OF TEA PROMOTION DIVISION SRI LANKA TEA BOARD

4 P A G E 4 P A G E 4 Sri Lanka exported million kilograms of tea during the first quarter 2015 at an average unit FOB price of Rs whereas million kilograms were exported last year at Rs per kilogram. This shows a marginal decrease in quantity exported in the first quarter Table 7 - Export Statistics for each month during first quarter 2015/2014 Units : Qty-MKg, FOB-Rs/Kg Category Change Qty FOB Qty FOB Qty FOB January February Tea Exports Table 9 -Top ten destinations of Pure Ceylon tea from Jan March 2015/2014 Units: Qty - MKg Country Total Exports % Change 2015 Qty % Turkey Russia Iran Iraq UAE Syria March Total Libya Kuwait According to the above table 7, difference of FOB price decrease end up at Rs.56.85/ kg in March difference starting from Rs /kg during January. As a result, earnings from tea exports decline further to Rs. 44 billion from Rs 50 billion earned during same period in last year. For this decrease, sharp decline in March Exports (5.8Mkgs) and FOB (Rs ) lowering are mainly affected. Expectations of peak periods in coming months, the prices will be further decline at second quarter. Table 8 Tea Exports comparison during first quarter Units: Qty-MT, FOB Rs/Kg, Value Rs. Millions Category ** RTD Tea in Litres The quarter value added tea exports, decreased significantly by 18Mkgs or 40% as against last year same period. The unit FOB price of Green Tea increased by Rs /kg reaching Rs from Rs recorded in the first quarter of Whilst tea bags, tea packets, Instant tea and re exports average prices dropped significantly compared to last year same period. Decrease of tea packets prices affected in bigger way to registered lower earnings in this quarter from Tea exports. PUBLICATION OF TEA PROMOTION DIVISION SRI LANKA TEA BOARD Azerbaijan Japan Total Turkey comes to the leading position of main destinations list of Ceylon tea, but the volume imported during first quarter dropped from 9.88 to 9.12 million kilograms in comparison to same period of Similarly Russia which is the second largest importer of Ceylon tea purchased only 8.29Mkgs compared to 11.02Mkgs during the first quarter reflecting a drop Change % Change Qty FOB Value Qty FOB Value Qty FOB Value Qty FOB Bulk 44, ,496 28, ,190 16, , Packets 20, ,461 37, ,735-16, , Tea Bags 4,912 1,095 5,376 6,204 1,107 6,870-1, , Instant Tea 466 1, , Green Tea 535 1, , Sub Total 71, ,485 72, ,254-1, , Re-Exports 2, ,909 2, , Total 73, ,394 75, ,585-2, , RTD** 3, , , of almost 25%. Iraq was able to retain the third place during the first quarter of 2015 by importing 6.99 Mkgs an increase of 48% in volume terms as against last year. UAE increased tea imports from Sri Lanka to 6.77Mkgs (84.38%) as against last year. India improved Ceylon tea imports and FOB unit value at healthy level at above first 12 countries list except Japan during the period.

5 FALLING OIL...from page 1. Russia, Ukraine and other markets like Syria, Iraq and Iran suffered heavily for their basic food items imports due to internal conflicts,western sanctions for bank transactions, decline in oil prices resulted peak level of inflation. Hence purchasing power declined drastically and it affected quality tea imports also. Therefore, it is imperative at this juncture that Sri Lanka must looks for new markets in order to export teas rather than being solely dependent on Russia and Middle Eastern counties which are already in a crisis. The importation of other origin teas to Sri Lanka for re-exports as a hub should be re-examined in order to capture markets with lower import values. The rising cost of production on the plantations and small holder tea factories could hinder the growth of the tea producing sector. Insufficient practices in GMP and lack of re -planting could affect the plantations sector on the longterm. The substantial decline in price of crude oil globally as well as the lower interest rates which is prevailing now would be a temporary relief to the plantation sector debt cost and energy cost. General Overview.from page 1. The tea exports account for about 14% of the total exports and about 62% contributes for the total agriculture exports in the country. Sri Lanka tea exports for the first quarter of 2015 amounted to Mkg, a decline of 2.02 Mkg from the same period last year. The rupee recorded a modest depreciation around 2 percent against the US dollar during the period. Reflecting the cross currency movements, the rupee also depreciated against the pound sterling by 0.7 per cent and the Indian rupee by 1.2 per cent during this period while appreciating against the euro by 9 per cent, the Japanese Yen by 1.4 per cent, Canadian dollar by 5.1 percent and the Australian dollar by 4.5 per cent.. P A G E 5 Tea Industry Outlook for 2015 Colombo Tea Auction was performing better than all other auction centers in Opposing to the previous pattern of price decline for Low Growns in first quarter, therefore we expect the market to hold during this period with some strengthening of categories as delayed orders come in. The strength of the market for Low Growns is that the extensive mix of grades and standards are often shipped to a mix of markets. Seasonal dry weather and holidays during end of first quarter and early second quarter could restrict supply and help maintain prices during the period. Increased supply thereafter and slower demand during summer months could cause a dip in the market till early third quarter; when the market strengthens when winter demand picks up. Over all, given the volatile conditions in key importing markets, we expect short term price fluctuation to be a factor throughout the year. For High Growns the late origination of the season would keep prices of average westerns at comparatively lower levels in January. With improved quality thereafter the market should improve for better liquoring teas and could continue for teas offered for sale in to April, subject to climatic conditions. In the absence of any disputes resulting from wage negotiations; increased supply in second quarter would have its impact on prices until the Eastern Quality season kicks in. If winter demand follows, the market will continue to improve going into fourth quarter. Maintaining quality would be critical and we believe that teas not meeting these standards would be heavily discounted more so than in previous years. Meanwhile, world production of tea has shown a steady rise since 2012 from 4.6 billion kilograms to 4.9 billion kilograms in 2013; driven primarily by China. Chinas total production which was at 1.3 billion kilograms in 2009 has leaped to 1.9 billion kilograms by 2013, an increase of 566 million kilograms (+42%). Of this total 68% or 1.3 billion kilograms comprise of Green Tea and 615 million kilograms or 32% are Black and Other Teas. Interest is that tea retained for consumption has increased 51% from 1.05 billion kilograms to 1.59 billion kilograms. From the point of view of Black Tea supply Kenya s continual expansion to reach 432 million kilograms in 2013 and India s reaching 1.2 billion kilograms are significant. India s domestic absorption however, is estimated at around 82%. Kenya s retention is not materially significant. PUBLICATION OF TEA PROMOTION DIVISION SRI LANKA TEA BOARD

6 P A G E 6 Tea Production P A G E 6 Global Tea Scene World's Black tea production hit a record low during first three months this year, following it registered lower crop in last year. Kenya s tea production decreased 27percent year-on-year to 81.6Mkgs from 112Mkgs during same quarter.in last year. Following other tea producing countries of East African region record lower crops due to drought condition started from last quarter Table 10 -Global tea production comparison in first quarter 2015/2014(MT.) PRODUCTION Month Growth (Kg) N E INDIA SOUTH INDIA BANGLADESH SRI LANKA KENYA MALAWI UGANDA * The above table 10. revealed that slight increase in Sri Lanka Tea production compensated the crop loss in slight margin at globally but not fully recovered in black tea segment. Concerning the low price signal in world tea market, other major tea producers would have better crop compared to last year same quarter. Table 11- Average prices in major auction centers as at March (Qty:MT) It is evident from the above table that Sri Lanka s tea always realized the premium prices compared to others which could be attributed to its high quality. Despite the fact that the effect of other origins low prices impact the decrease of Colombo auction averages and it resulted world average price to US$ 2.42/Kg from US$ 2.56/Kg in last quarter in Table 12. Country wise tea Exports Comparison ( ) Unit: MT Country Source: ITC Period of months Growth Change% Kenya China , Sri Lanka Taiwan Malawi Bangladesh Total , Major black tea exporter Kenya reported the highest volume compared to other countries but below the last year level of 125Mkgs for the quarter. As per the above table Auction Centers Change 2015 / 2014 Qty (MT) US$/Kg Qty (MT) US$/Kg Qty (MT) US$/Kg Kolkata 32, , Cochin 12, , Chittagong 12, , Mombasa 99, , Jakarta 5, , Colombo 78, , Guwahati 21, , Malawi 1, , World 264, , , World average tea price showed at decreased level due to supply pressure and instability of economies at major tea importing countries. 12., Green tea and Oolong tea (China and Taiwan Exports) exports improved to considerable amount and Orthodox tea segment made slight increase compared to last year same quarter. PUBLICATION OF TEA PROMOTION DIVISION SRI LANKA TEA BOARD

7 Tea market update Volume 11. N o. 1 Trade Fair Participation Prodexpo 2015 Russia (09th 13th Feb 2015) Sri Lanka Tea Board with the collaboration of Sri Lanka Embassy in Moscow participated at PRODEXPO 2015 with three private sector tea exporting companies organizing a Ceylon Tea pavilion at Expocenter in Moscow. PAGE 7 Foodex - Japan Exhibition From 3rd To 6th March 2015 Sri Lanka Tea Board participated at Foodex Japan 2015 with 06 Sri Lanka tea companies namely; 1. Basilur Tea Export Private Limited 2. Stassen Exports Private limited 3. J V Gokal Ceylon Private Limited 4. Hidellana Tea Factory 5. UvaHalpewatta Estates 6. Juria International Company Limited 1. Sindbad (Pvt) Ltd. 2. Natures (Pvt) Ltd. 3. Alpha Tea Exports (Pvt) Ltd International Food & Drink Exhibition International Food and Drink Exhibition (IFE ) was held at the Excel Exhibition Centre, London from 22nd 25th March The diversity and quality of products on India International Tea & Coffee Expo 2015 show cased by more than 1350 exhibitors. (26th February 1st March 2015) UK is one of the largest tea importers in the world and it is India International Tea & Coffee Expo 2015(Trade within our radar of 25 identified target markets for the only) holds their second edition during 26th February global campaign. Sri Lanka Tea Board got the opportunity 1st March 2015 at Science City Kolkata due to their to participate IFE, London 2015 along with three giants success in first edition. The exhibition featured in Ceylon Tea Exporting Mlesna Teas, Sindbad Teas and over125 exhibitors from all over the world. Sri Lanka Stassen Teas respectively. Tea Board participated at this fair at the first time in this year to explore market expansion possibilities. PUBLICATION OF TEA PROMOTION DIVISION SRI LANKA TEA BOARD

8 Research Update Tea's benefits extend to old bones Japan researchers Journal of Nature Medicine Researchers in Japan say black tea could help treat osteoporosis, a bone condition affecting older people, but admit you need to drink an awful lot of it. Scientists say the humble brew contains an antioxidant that can prevent the loss of bone commonly seen in old age that makes the elderly more vulnerable to fractures. The news is the latest claim for a drink that is a staple of countries around the world, and one over which neverending arguments rage about how to brew the perfect cup. Researchers led by Keizo Nishikawa of Osaka University found that theaflavin-3 (TF-3); the antioxidant works by inhibiting the function of an enzyme called DNA methyltransferase, which destroys bone tissue. The research, published in the online edition of the US journal Nature Medicine, found that mice suffering from osteoporosis that were given TF-3 showed recovering levels of bone volume, similar to those of healthy mice. But it might be a bit early to rush to put the kettle on the research found that a 60 kilogram (130-pound) adult would have to drink 60 cups of tea over three days to see a noticeable difference, Jiji Press reported. Osteoporosis particularly affects women in later life and is a growing problem in rapidly ageing societies such as Japan. NEWS in brief Russian Market Critical For Sri Lanka Tea In 2015 For Sri Lanka, behavior of the Russian market would be critical in 2015, notes a Sri Lanka Tea Market review 2014 and Outlook Weakening of the Ruble would place Sri Lankan Tea Exporters and Russian Importers under extreme pressure. Sri Lankan Exporters who have shipped on credit could have complications with receipt of full payment; whilst brand marketers of teas packed in Sri Lanka could see a sharp erosion of margins if tea prices do not reflect the changes. Sri Lanka is almost a unique supplier of High-end Orthodox Black Tea and is protected to a great extent from increased supply of CTC Teas. The market for Small Leaf High Growns however, is more vulnerable particularly at the lower end of quality. In 2013 Sri Lanka achieved a highest ever crop of 340 million kilograms and 2014 would be around the same level. P A G E 8 A caution would be the continuation of fertilizer subsidy and the absence of disruption due to wage negotiations with RPCs scheduled for end first quarter of Globally, in fourth quarter 2014 and first quarter 2015 climate change were initially projected in the Southern Hemisphere where most tea is produced. The relevant tracking centers have since reduced the probability significantly. Demand: More than 90% of Sri Lanka s tea exports are shipped to the Middle East, North Africa and Russia / CIS Countries. Many critical markets have significant domestic issues that will impact on prices at the Colombo Tea Auctions. The impact of crude oil prices on the price of tea has been studied by the FAO and confirms a linkage, which has been known by the trade for some time. On the demand side for Sri Lanka however, the impact is more significant. Markets such as, Russia, Iran, Saudi Arabia, Iraq, and Kuwait and to a lesser extend Libya and some of the Gulf countries are all major oil producers, consumers of Ceylon Tea. The impact on their currencies and other domestic factors resulting from sharp drop in national income could be significant if oil prices continue to weaken in the medium term. Additionally social unrest in Syria, Ukraine and Libya has already had its impact on tea prices at the Colombo auctions. Iran a major buyer of high quality Low Growns has seen a steadying of its currency and is likely to improve its purchasing power in 2015 as tensions with the west diminish. For Sri Lanka behavior of the Russian market would be critical in Weakening of the Ruble would place Sri Lankan Tea Exporters and Russian Importers under extreme pressure. Sri Lankan Exporters who have shipped on credit could have complications with receipt of full payment; whilst brand marketers of teas packed in Sri Lanka could see a sharp erosion of margins if tea prices do not reflect the changes. On a positive note with Russia s accession to the WTO in August 2014.Tariff on value added imports have declined. In September 2014, the applicable rate dropped from 17.5% to 15% and in the same month of 2015 the rate would be 12.5%. Trade and statistics inquiries: Sri Lanka Tea Board 574,Galle Rd, Colombo 03. All things being equal 2015 should see a similar volume produced. PUBLICATION OF TEA PROMOTION DIVISION SRI LANKA TEA BOARD