Sri Lanka Tea Industry -
1998 in retrospect
No bullish
sentiments for 1999
On the completion of the final tea auction for
1998, the following favourable features emerge on
the performance of Sri Lanka's Tea Industry.
PRODUCTION
Sri Lanka's tea production appears to be
set for another record year surpassing the 1997
figure of 276.8 million kgs. although the surplus
of 8.4 million kgs recorded upto the end of
October against the corresponding figure last
year has been reduced to 2.7 million kgs. with
the release of the November 1998 production
figure at 21.9 million kgs compared with 27.5
million kgs in November 1997. This would make it
the fifth consecutive year of all time highs
which is a record in itself. The outstanding
feature of the production pattern is the growth
of the low grown sector which now comfortably
exceeds 50% of our total production and in fact
high and mid growns reflect lower figures
compared with last year on the data available
upto November 1998.
EXPORTS
Exports too appear to be set for an all
time high in terms of volume and value. On the
data available upto the end of October, total
exports including imported tea re-exported
amounts to 228.1 million kgs against 221.8
million during the corresponding period last year
and it is therefore likely that total exports for
the year should surpass the 1997 figure of 268.5
million kgs which included 10.8 million kgs of
imported tea re-exported.
Value of exports upto the end of October
amounts to Rs. 43 billion as against Rs. 34.4
billion during the corresponding period last
year. In fact, total export earnings for the
calendar year 1997 amounted to Rs. 42.5 billion
which has already been exceeded by the end of
October and total export earnings in rupee terms
should therefore reflect around a 25% increase on
last years performance. Of course in terms of the
US Dollar the increase would not be as dramatic
taking into account the depreciation of the Sri
Lanka rupee vis a vis the US Dollar of just over
10% during the year compared with 1997.
The disappointing feature of the year was that
the momentum in which the tea market opened could
not be maintained during the final quarter when
the 'Russian Rouble' crisis had a fairly adverse
impact on the fortunes of the Colombo tea market
with the low growns most to suffer in this
respect. Therefore we enter 1999 not quite as
bullish and optimistic as we entered 1998. There
are however always silver linings in a gloomy
outlook which we will be analysing and sharing
with our readers in the New Year. - Forbes & Walker
Economics of Substitution
By Ravi Randeniya
DAP Management Consulting
When there is a scarcity, any kind of
economy attempts to maximise the output from its
inputs. That is, to get the most value for its
costs. Since resources have alternative
utilisation and alternative products have
consumer satisfaction, substitution, is a crucial
factor of economic life both in production and
consumption.
We already know that how the same ingredient
can go into many different products and those
products can be ingredients in a consumer's sense
of well being. People generally think of physical
similarities as substitution: Toyota and Fiat,
rye bread and whole wheat, arrack and beer etc.
However, today people would choose between
spending their disposable income on buying
property or spending on children's education,
going out for dinner or buying cloths etc. The
physical nature of the satisfaction need not be
the same.
Substitution does not always means perfect
substitution. We now know that there are all
kinds of substitutability: people would consider
a glass of fresh milk as a perfect substitute for
a glass of powdered milk in water, but would
consider watching a game of cricket on TV a poor
substitute for a political discussion on the
ethnic war. It is difficult to implicitly link
how well one thing substitutes for another by how
similar they are physical characteristics or even
by pure objective criteria.
Economists define substitutability in terms of
people's subjective preferences as revealed by
their overt behaviour. If a rise in price of Tea
causes people to drink more coffee, then
economically speaking, there are substitutes
without investigating the chemical or physical
characteristics. For example, if the price in
cloths causes the public to buy more food
instead, then in economic terms were observe
these as substitutes, without further analysing
the material disparity or even the implausibility
of the connection.
The little we know of the economics,
substitution takes place in production as well as
consumption. The use of copper, fibre optics,
steel, aluminium or other alloys as electrical
conductive material strictly vary according to
the respective price. Here the substitution
should not be perfect; if the requirement is for
high electrical conductivity, the use of fibre
optics diminishes the weight advantage of
aluminium. If not for that, in general sense the
price advantage immediately supersedes the
technical requirement by substitution by copper.
Through substitution, an economy can
effectively transform one product into another by
shifting some the common inputs. For example, the
economy can easily accomplish the transformation
of steel for weapons manufacture into industrial
equipment by manipulating labour, machinery and
managerial know-how. It is implied, from an
economic point of view, that it really does not
matter whether one product is transforming to
another. What matters in a resource scarce
economy is that there would be a reduction in the
output of one product leads to the increase in
the output of another. In a war situation, the
same process would reserve to increase weapon
production instead of industrial equipment.
Neither in production nor in consumption does
substitution imply total substitution. More
realistically, there is an incremental
substitution accepting somewhat less of one thing
in order to get somewhat more of another. We
almost never have to attempt as difficult as
deciding categorical priorities - whether food is
important than shoes or studying for exams more
important than watching tale-dramas. Moreover,
because we usually decide to have some of each
option, even the relative importance of each
possible choice changes as the respective
quantities that we have already changed. To
illustrate this, if you have a dozen of oranges
and a kilo of rice, you would probably be less
interested in another kilo of rice. However, you
may be interested in giving up either one for a
dozen of apples or pineapples. In other words,
substitution ratios are incrementally variable
rather than categorically fixed.
Simple as all this sounds, it goes completely
counter to rhetoric that is often heard, about
the urgency to 'establish priorities' either
nationally or in a business or other
organisation. It implies that there is urgency
for one thing over at the expense of other
things. But often we see that it is only a matter
of time before the changing proportions of the
two things change the relative urgency of adding
more of each. It seems categorical priorities
ignore this fact, unless they are reversible or
very flexible - in which case they can not be
'priorities.'
In the commercial world because sober analysis
seldom has the appeal of ringing rhetoric,
priorities often do get established, and outlive
the necessities that gave rise to them. One major
problem in the corporate world is the
determination of what kind of flexible and
reversible transformations, which permit
continuous adjustments to changing environment,
which can be counterproductive under new
circumstances.
The economics of substitution dictates that
knowledge of consumer preferences or incremental
trade-offs is conveyed in an effective form to
measure the degree of priority. How much, and in
what direction, the incremental substitution
takes place depends on their respective values.
Value being ultimately subjective, it varies not
only from person to person but from time to time,
and varies according to how much of the given
good one already has.
In the process of determining which
incremental substitution should take place, we
find that one at first weighing the subjective
value of a good against its objective cost,
intrinsically we see a comparison of subjective
value of one good against the subjective value of
another good. If we are faced with identical
technologies and resources setting the limits of
what is possible at a given time, different
combinations of goods may be produced according
to the subjective preferences of decision makers
whether they are strategists or consumers. In the
economics of substitution the importance of
having a mechanism for utilisation of knowledge
to assess the value for substitution can not be
underestimated.
Less demand from the west
The fiftieth and the final sale of the year
which was concluded today had on offer a total of
5.3 million kg of which Ex Estate offerings
comprised of a 0.83 million kgs. In the Ex Estate
catalogue a select range of Westerns showed a
further improvement in quality whilst the others
together with Nuwara Eliyas and Udapussellawas
showed no significant change. There was less
demand this week from most western markets as is
customary at this time of the year on account of
the Christmas holidays and consequently there
appeared to be less airmail bids which mainly
effected the prices of better liquoring teas. At
the bottom end of the market, there was some
improved interest for the brokens possibly from
shippers to the CIS whilst their corresponding
BOPFs were mainly sought after by shippers to
Egypt.
It was rather encouraging to witness a firm to
dearer trend in prices for Low Growns
particularly in the best and below best category.
There appeared to be improved interest from
shippers to Iran and to Dubai in particular.
As predicted by us last week the parity
between the Low Grown and High Grown average has
narrowed down and reflect a marginal advantage of
a mere 86 cents per kg in favour of Low Growns.
The November 1998 crop figure, details of
which are given elsewhere in this report has been
released at 21.9 million kgs sharply lower on the
corresponding figure last year of 27.5 million
kgs which was an alltime record for a month of
November. It must however be pointed out that
last years November production figure was
slightly distorted due to late returns during the
month of October 1997 which was counted with the
November production figures. This was
particularly so in respect of High Grown CTCs
which had a figure of 2.3 million kgs in November
1997 as against a normal monthly average of
around 500 to 600 thousand kilos. -
Forbes & Walker
Low Growns record price gains
The years final auction was concluded on a
positive note. This was particularly significant
to the Low Growns, which recorded price gains
after one month of continual downward price
movement. Todays upward movement in prices my be
short covering demand on account of this sale
being the last for the year 1998 and also due to
a break of approx. two weeks for the next sale.
In the Ex Estate catalogues the best liquoring
teas were irregularly lower. Buyers for U.K.,
South Africa and other western markets were not
as active. The larger weight of below best and
plainer types met useful support and was
generally firm on last week's levels. The BOPFs
continued to enjoy a premium over the c
corresponding BOPs. In keeping with this trend
CTCs remain strong with buyers rewarding better
liquoring teas by paying a much higher level of
price when compared with the plainer teas.
Conditions have brightened considerably on the
western side of the island. Bright mornings and
cold nights are likely to impact on offerings
from around end January sales. Initially it is
likely that a wider range of coloury bright teas
will come up on offer. It is too early to predict
when seasonal quality teas would be available as
the traditional weather pattern seas conditions
drying up from around mid January.
It should be noted however that in the recent
past the weather has not followed a historical
pattern. Both Producers and Traders would do well
to be alert to respond to opportunities that
would arise from an early season. Should the dry
weather that has just set in continue, then teas
with some quality would be available on private
sale from around end January and at the Auction
from about to mid to end February onwards. - Asia Siyaka
Ceylinco Life first to top Rs. 1
billion in premium income
Ceylinco Insurance's Life premium income for
the current year topped the magic Rs. 1 billion
mark last week, establishing a historic first in
the private sector insurance industry.
Announcing this milestone, the company said
premium income had grown by more than Rs. 60
million over the previous year, to exceed Rs.
1000 million by December.
'Ceylinco Insurance is the first private
sector life insurer in Sri Lanka to collect more
than a Billion Rupees in a financial year,' said
Mr. R. Renganathan the company's Director/General
Manager (Life), adding that the Life Division now
accounts for 42 per cent of the private sector
life insurance market.
Ceylinco Insurance has also been ranked No. 1
among private insurance companies in Sri Lanka by
the Lanka Monthly Digest (LMD) in its ranking for
1997/98. The company's overall ranking in the LMD
50 places it among the top 25 companies in Sri
Lanka, some of which are diversified
conglomerates.
The company, which was ranked 8th in the
banks, finance and insurance sector, is the No: 1
in the private sector insurance industry in terms
of total assets, earnings per share, price
earnings ratio, dividend yield and in price to
book value.
All
Time Record Price
The final Tea Auction for 1998 was concluded
on the 22nd of December and the feature of the
sale was the new All Time Record Price of Rs. 268
obtained for a Low Grown BOPF grade from Kelani
Estate, Yatiyantota. The tea was purchased by
Unilever Ceylon Limited - Tea Division. This new
Record betters the former Record Price of Rs. 250
held by the same Estate.
This Estate is managed by the new Blue Chip
Kelani Valley Plantations Limited whilst the
Broker Handling the sale was Somerville &
Company Limited.
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