Tea brands scramble for quality leaf, jack up prices

A supply squeeze of quality tea this year has sparked a scramble with leading Indian tea brands aggressively buying the leaf at higher prices that portends trimmed margins and possible price hikes.

The buying spree is likely to continue in the world's second biggest producer for a few weeks as the brands want to hoard supplies in time to meet winter demand.

"Big buyers like Tata Global Beverages, Hindustan Unilever, Godfrey Phillips India have been quite active of late," said a senior official at J Thomas and Co Pvt Ltd, the leading broking house in India.

A pest attack of helopeltis in June-July slashed the crop in the northeastern state of Assam, India's top producer.

Tea Board and Indian Tea Association see India's production dropping by about 14 million kilograms to 965 million kilograms in 2010.

"During monsoon months we get good quality tea, but this year production is getting affected. These companies always want to buy good quality tea to maintain brand quality," Sanjay Manyal, analyst with ICICI Direct, said.

"They are buying at higher prices, so their margins will be lower in coming quarters or they will pass on the rise in prices to consumers," Manyal said.

But higher tea prices will boost earning of the leaf producers like Jay Shree Tea & Industries McLeod Russel and Harrisons Malayalam.

Average prices of CTC and Darjeeling teas are over 20 percent higher than last year at this month's auctions in Kolkata, data with Calcutta Tea Traders' Association showed.

"The big buyers have jumped in and are buying whatever quality they can get. This is driving prices further up," said Aditya Khaitan, managing director of McLeod Russel, India's largest producer and exporter.

The effect is more prominent for the Darjeeling tea, which is also exported to countries like UK, Germany, Netherlands, United States and France, said a Tea Board official.

India exports CTC mainly to Egypt, Pakistan and the UK, and the premium orthodox variety of tea to Iraq, Iran and Russia.

"The average price of Darjeeling tea is hovering between 75-125 euros per kg, which is well above last year's average price of 45-90 euros per kg," said an official from Chamong Tee Exports, the largest producer of Darjeeling tea.

Even overseas markets like Kenya, Sri Lanka and Bangladesh have been firming up on robust demand, though they were harvesting higher crop this year.

"Tea Board data shows lower production in June and July. We think output was lower in August also and tea production is unlikely to rise on year in any month in the second half of 2010," said S Patra, joint secretary, Indian Tea Association.

Tea production has been stagnant for last two years, while domestic demand is rising by more than 3% annually, supporting prices and tea makers, said Manyal, who maintains buy rating on  Jay Shree Tea & McLeod Russel.