Sri Lankan plantation sector as a whole saw positive earnings during the last two quarters ending its earnings lull due to peaked tea prices (which is now consolidating) and escalating rubber prices. The sector which comprises of 18 listed companies posted net earnings of LKR1,937.8 mn in 2010/FY2010 recording an impressive two-fold growth whilst the last quarter (which is 4QFY10/1Q2010 ended 31st March 2010) saw earnings worth of LKR LKR1,313.7 mn versus a loss of LKR391 mn in the corresponding period previous year.
Sri Lankan tea prices marked a strong recovery mid 2009 onwards where it touched the highest ever prices in mid September which was recorded at LKR456 per kg (up 70% YTD) owing to the low supply from Kenya and India due to unfavourable weather conditions. Sri Lanka too faced adverse weather patterns and produced only a national output of 290mn Kg (down 9% YoY) in 2009.
Consequently the Net sales average (NSA) for tea rose to LKR361 per Kg in 2009 from LKR301.6 per Kg in 2008. However going forward, with the recovery of global production (tea output up by 75% YoY in Kenya and 12% YoY in India during the first 4 months of the year) along with increase in Sri Lankan tea output (up by 30% YoY to 102.3mn Kgs in Jan - Apr 2010) we expect the prices to consolidate at current levels and pick up from mid July onwards and reach LKR375 per kg by the end of 2010.
Cost of production (COP) of tea increased by a sharp 17.1% YoY in 2009 due to the 40% increase in estate labour wages. The two year termed collective agreement on wages expired in April 2009 and daily wage of estate labour was revised from LKR290 to LKR405 resulting +LKR60 mn additional wage cost per month and a near LKR80-100 mn increase in gratuity provisioning for the year, for each plantation company. We forecast national average COP to rise to LKR330 in 2010 on the back of increasing fertilizer and energy prices with the global activity levels picking up.
With current tea prices at LKR340 per Kg (down 5.8% from average NSA for 2009), we anticipate that the Sri Lankan tea business would see marginal profits in 1QFY2011/2Q2010. However, with the prices picking up from mid July 2010 onwards (starting of Russian winter buying and lower production in Kenya due to colder weather) we expect the gross margins of tea to improve from 1H2010, which would sustain the profitability.
Sri Lankan rubber prices which recorded the lowest in December 2008 reached all time high levels in June 2010 due to global shortfall in production coupled with the gradual recovery of global activity levels from recessionary pressures. Further, with the increase in crude oil prices, making synthetic rubber (which is made out of crude oil) more expensive, natural rubber producers are expected to enjoy high prices in the short term. Prices of Ribbed Smoke Sheets (RSS1) in local auctions increased by +30% YTD during the first six months of 2010 whilst Crepe prices rose by 59% YTD. However with the increased production coming from major rubber producing nations in the coming quarters we anticipate the rubber prices in the global exchanges to consolidate by the end of 2010. We expect NSA of rubber to reach LKR320 per Kg in 2010, up by a sharp
50% from LKR211.6 per Kg in 2009.
COP of rubber too increased to LKR118.4 per Kg in 2009 owing to the 40% increase in wages. Going forward, with increasing fertilizer and energy costs on the back of rising global activity levels and stable estate wages we project a COP of LKR124 per kg for rubber (marginally up 4% YoY) in 2010.
Going forward, with increasing rubber prices and stable cost of production Sri Lankan plantation companies which has exposure to rubber would secure healthy profits in coming quarters.
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