The Nation GAIN

Wednesday, May 2, 2012

Tea hub aims global market leadership

By Dilina Kulathunga

Sri Lanka would have the capacity to increase its annual global market share in tea exports from the current 15% share to at least 20% through the adoption of the tea hub concept, which has been a debated topic in recent times, says a top industry official. According to Rohan Fernando, a member of the Tea Exporters Association of SL (TEA), the tea hub concept which allows importation of tea from other tea producing countries and blend, pack and re-export from Sri Lanka is likely to position the country as a dominant player in the world map and will have no deterrent impact on the long-term sustainability of the tea industry.

“The reality that we all have to realize is that Sri Lanka is only exporting about 300 million kilograms of tea out of the total world exports of 1.8 billion kilograms but using a tea hub concept, we would be able to substantially improve revenues from tea exports,” Fernando said refuting allegations leveled against the concept that Sri Lanka would open way for ‘cheap tea’ to dominate the market.

When the issue was recently taken up for discussion with the Minister of Plantation Industries, Mahinda Samarasinghe, some exporters voiced concern that allowing a tea hub would allow ‘cheap tea’ to be blended with Pure Ceylon Tea which affects the premium quality synonymous with Sri Lanka.

“There is nothing called ‘cheap tea’, either there is good tea or bad tea. We have a clear strategy to position the ‘Pure Ceylon Tea’ to a niche as a premium product which is more expensive but unique in taste while the ‘blended multi-origin tea’ will be positioned separately with a clear distinction,” Fernando said denying that this is an effort to sell cheap tea to the world.

He says that tea blending and packaging is not a new phenomenon and if the tea hub concept is not allowed in Sri Lanka, local exporters may think of even expanding their present blending facilities in other countries.

“Sri Lanka might run the risk of becoming isolated or somebody else would come and set up similar facilities unless we become proactive. After all, how many kilograms of Pure Ceylon Tea are we exporting under our own brands?” he asked pointing out that only around 12% out of our total tea exports consist of our own brands.

Meanwhile, a director of MJF Group and an established tea exporter under Dilmah brand, Malik J Fernando said: “we are totally against this proposal on the grounds that, this proposal is intended to facilitate packing of multi-origin foreign brands and ‘trading’ local brands and not to develop the premium, Sri Lankan brands”.

“It is my well-considered opinion that the quality of Ceylon tea and its image as the world’s finest tea will be irreparably tarnished if free importation of black tea is permitted. At the present time, CTC manufactured tea, green tea and speciality teas not grown here can be imported, subject to certain regulations,” he said concluding that with the current exchange rate policy of the government resulting from the balance of payments problem, the request by TEA makes even less sense.

“All exporters, including packaged tea exporters, are getting windfall rupee profits as a result of the progressive devaluation of the rupee,” he further pointed out.

Chicken surplus to dent margins

By Azhar Razak

The Chairman & Chief Executive Officer of Three Acre Farms PLC (TAF), the largest poultry player in Sri Lanka says that margins of poultry firms in the island will be affected in the coming years as the poultry industry is anticipated to be over capacity in the coming years due to the rapid expansion of key players in the market.

“With growing market trends and the Sri Lankan economy predicted to reach over 8% growth in 2012, it can easily be said that the poultry industry’s contribution to the economy will increase multiple-fold in the coming years. We expect that the consumption of Chicken Meat will increase to about 8Kg per capita by 2016, which is highly favourable for the poultry industry in general and TAF in particular,” TAF Chairman and CEO, Cheng Chih Kwong, Primus said in the Annual Report released last week.

Reviewing operations for the year 2011, he noted that with the intervention by the government to import layer hatching eggs to increase supply of day old chicks (DOC) during the 4th quarter of 2010, the industry entered into a cycle of excess supply of DOC in 1st quarter of 2011 and that subsequently the market showed a shortage of demand for poultry products in the 2nd and 3rd quarter of 2011, when major players were forced to scale down their operations to reduce losses.

“Consequently when the market normalized around the final quarter of the year, the local production was insufficient to meet the demands for day old chicks. These fluctuations in demand pattern greatly contributed to increased operational costs within the Company and the poultry industry as a whole,” Primus analysed.

Meanwhile, Primus who also heads TAF’s parent company, Ceylon Grain Elevators (CGE) said that CGE had achieved its highest ever feed sales volume in 2011 despite facing numerous challenges.

“The Company continued to expand its farming capacity with the addition of 4 new modern environmental controlled (EC) broiler houses, and will continue to increase our farm capacity in the future,” Primus mentioned in his message in CGE Annual Report which was also released last week.

About 70% of the contribution to livestock sub-sector in Sri Lanka comes from chicken meat and eggs. Chicken meat and eggs remain the cheapest source of animal protein. While the country’s economy progresses, the domestic per capita income also increased, and improving Sri Lankan purchasing power. Currently the annual chicken meat consumption in Sri Lanka is approximately 5.7Kg and 54 eggs per person.

Do not change track, advises Pathfinder

Top policy advocacy institute, the Pathfinder Foundation (PF) last week warned that it will be important the present stabilization policies adopted by the Central Bank of Sri Lanka in recent times are allowed to run their course and that failure to do so will increase the depth and duration of the economic downturn. In a comment issued by the body, it stated that although both the exchange and interest rates came under some pressure last week, despite the courageous reforms introduced by the Authorities in early February 2012, it is important, however, to learn from the policy mistakes of the recent past and to resist imminent pressure to manipulate these two key economic prices.

“It is important that the Authorities abide by the policy commitments that they have made in the recent past. These policy measures should be supplemented by a new package of reforms that increases the competitiveness of the economy and strengthens its growth framework,” PF said in their recent comment titled ‘no more backtracking’.

They noted that the policy stance adopted during August 2011 – February 2012 clearly demonstrated that attempts to resist market pressures are extremely costly with the attempt to defend the misaligned policies resulted in $3.6 billion being spent on propping up the Rupee and a hemorrhaging of a quarter of the country’s foreign reserves, much of it borrowed from abroad on commercial terms.

“The following lessons should be drawn from the recent policy mistakes. A very high price has to be paid in terms of the deterioration in the external finances; the foregoing of growth and employment; and the increase in the burden on the people, if economic policies seek to defy market forces. No one can hold down interest rates and support the value of the Rupee at the same time when there are imbalances in the economy. The less the exchange rate is allowed to adjust towards its market-determined value, the higher the interest rates will have to be allowed to move and vice versa. The failure to respond to global trends in a timely manner (e.g. an increase in the oil price) inevitably results in more painful action further down the line,” they commented.

Meanwhile, PF said that although the Central Bank has raised the Repurchase and Reverse Repurchase Rates by 50 and 125 basis points (bps) respectively the continuation of the rise of market-determined interest rates suggests that these actions are trailing well behind the markets.

“The simultaneous pressure on the exchange and interest rates indicates that the adjustment necessary to stabilize the economy (i.e. address the sharp deterioration in the external position) is not complete as yet,” the statement further pointed out.

Low unemployment threatens stability

The Central Bank has warned that further tightening of labor market conditions may pose challenges to economic and price stability as well as social stability since increased economic activity has absorbed a majority of the labor force resulting in a continued low rate of unemployment. According to Central Bank Annual Report 2011, Sri Lanka’s unemployment rate has been below 5 per cent in each quarter since the second half of 2010, and greater foreign employment opportunities, in spite of adverse global economic conditions, continue to tighten labour market conditions further.

“This could give rise to a wage-price spiral where wage pressures may lead to upward pressure on prices as well, although the continued low consumer price inflation, which has remained at a single digit level during the past three years, remain a dampening factor. Hence, to sustain the growth momentum of the economy it is essential to support improvements in labor productivity and increase capital intensity,” the Annual Report suggested.

It further noted that the labor force participation rate, which was 48.2 per cent in 2011, still has room for improvement and ease pressure in the labor market through absorbing population currently not in the labor force into the market.

“Therefore, it is essential that physical infrastructure and social infrastructure facilities including good quality public transportation, urban housing, and childcare facilities continue to be developed to promote labor productivity and increased labor force participation. Recent advances in Sri Lanka’s information and communication technology could also provide alternative flexible work arrangements for some types of work, which may also help in reducing labor costs while attracting those not in the labor force into the labor market,” the Annual Report further highlighted.(AR)

Exchange loss concerns Overseas Realty

The Chairman of Sri Lanka's premier property developing firm, Overseas Realty (Ceylon) PLC (OSEA) says that the firm will have to carefully monitor and manage foreign exchange risk as it suffered by an exchange loss in 2011 as a result of the depreciation of the rupee.

“Due to further depreciation of the SLR in the 1st quarter of 2012, foreign exchange risk will have to be carefully monitored and managed,” OSEA Chairman told shareholders at the release of the firm’s 2011 annual report last week.

He noted that group profit was affected by an exchange loss of Rs. 39.8 Mn consequent on the depreciation of the Sri Lanka Rupee (SLR) in 2011 compared with an exchange gain of Rs. 83.7 Mn in 2010.

“With the continued growth and development of the national economy, 2011 saw increased demand for the leasing of quality office space at the World Trade Center (WTC) Colombo as well as apartment sales at Havelock City,” Tao said.

The Group has registered a healthy growth in both revenue and profit with revenue of Rs. 2,491 Mn showing an increase of 47% and Profit before Tax excluding fair value gains on investment property of Rs. 609 Mn showing an increase of 35%. The Group’s Profit after Tax after fair value gains for 2011 was Rs. 2,707 Mn registering a growth of 196%.

“Revenue generated through leasing of space at the World Trade Centre (WTC) Colombo of Rs. 847 Mn saw significant growth of 21% over the previous year. Occupancy which was at 72% at the start of the year closed at 89% with committed occupancy being 95%,” the firm’s annual report mentioned.(AR)

Hikes needed to curb losses- CB

While the commitment of the government to improve the infrastructure base of the country is commendable, financially viable institutions, effective regulations, proper pricing and precise targeting are essential to maintain the sustainability of services provided, the 2011 Annual Report of the Central Bank stated. In this context, it noted that the recent fuel price adjustments followed by electricity tariff and transport fare adjustments were steps in the right direction.

“Such price revisions are essential to correct adverse macro-economic implications caused by the heavy losses incurred by the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) due to the sale of their products at prices below cost. At the same time, it is important for other State Owned Enterprises (SOEs) providing infrastructure such as Sri Lanka Railways, Sri Lanka Transport Board, Postal Service, SriLankan Airlines, National Water Supply and Drainage Board to ensure the financial viability by improving financial management and pricing,” the Annual Report stated reiterating that less dependence of these entities on the government budget and the banking system to finance their operating losses is important to avoid the likely macroeconomic implications.

Last week, The Nation had exclusively reported that seven of Sri Lanka’s largest State Owned Enterprises had incurred a combined loss of a staggering Rs.151.5 billion in 2011 with state run entities CPC, CEB and SriLankan Airlines suffering a total loss of Rs.138.6 billion.

Meanwhile, the Annual Report stated that in 2011, policy measures were initiated by the government to improve the performance of SOEs to increase their return on investment through the development of an economically feasible cost reflective pricing structure and thereby reducing the reliance on the Government budget.

“SOEs are also expected to explore innovative Public-Private Partnership (PPP) strategies and attract private investments to catalyse the development process,” the Annual Report further highlighted.

BoC to focus on SMEs, expand overseas

By Azhar Razak

Sri Lanka’s largest commercial bank, Bank of Ceylon (BoC) is planning on opening special SME units in each district in the island this year and would look to expand its network internationally including the planned expansion of Chennai and Malé Branches. According to the Bank’s 2011 Annual Report, BoC is exploring the possibilities of positioning its UK subsidiary in the Euro Zone countries, where a large number of Sri Lankan diaspora live, to mobilise deposits and inward remittances.

“Our plans to expand globally will divert our already increased banking business activities on to a whole new global platform and bring further foreign remittances to the country through a full-fledged world banking system,” the management said in their commentary.

The report noted that the Bank intends to expand its network to over 1,000 worldwide network correspondence banks and exchange houses to provide services to the Sri Lankan diaspora as well as to facilitate international trading parties.

“The Bank of Ceylon became the first commercial bank to establish an SME Advisory

Centre in Kurunegala last year and will continue to establish more centres that will assist in the SME expansion drive,” BoC Chairman, Dr Gamini Wickramasinghe said in his message in the Report released last week.

He said the Bank’s future strategic goals include achieving the broad based growth projections unveiled in the Government’s Budget for 2012 which focus on sustainable growth, earmarking exports, agriculture, construction, infrastructure development, tourism, education and improving upon the government’s policy of financial inclusion to promote the SME sector and micro entrepreneurship.

“The Bank’s role in the development of Sri Lanka’s socio-economic growth will aspire to increase accessibility to the domestic market. Overall, we are proceeding in the right direction to accomplish our set targets for 2012,” Dr Wickramasinghe added.