Tea production in the country is likely to decline 13 per cent in the current calendar year due to restrictions on labour deployment amid the ongoing COVID-19 pandemic and adverse weather conditions, which will result in an increase in production cost, according to a report.

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Factors like restrictions on labour deployment due to the coronavirus pandemic have impacted the bulk tea players in northern India in an unfavourable manner during March, April and May 2020, according to the report by rating agency ICRA.

While there were expectations of production returning to normal levels from June, inclement weather conditions and flooding in Assam in June witnessed crop losses ranging from 15 per cent to 25 per cent, it added.

Some impact of the adverse weather conditions on production is likely to be felt in July as well, the report noted.

On the other hand, the South Indian production witnessed only a marginal loss during the lockdown period, it said.

The report also said that as tea is a fixed cost-intensive industry, a decline in the crop will substantially increase the cost of production for the NI bulk tea industry.

"As per our estimates, domestic tea production in CY2020 is expected to decline by 13 per cent on a year-on-year basis, with production from North India being estimated to decline by 160-170 million kg (mkg), while production from South India is expected to show only a marginal decline," ICRA Vice-President and Sector Head (Corporate Sector Ratings) Kaushik Das said.

Since tea is a fixed cost-intensive industry, the decline in production is likely to increase the cost of production, he added.

"We estimate the cost to increase by Rs 25-30 per kg, that too without considering any increase from the current wage rates," he noted.

The decline in production from NI has substantially pushed up prices at auction centres, where prices, particularly that of CTC teas, have rallied by around 30-35 per cent in May and June, said the report.

However, the current price trends may not be reflective of the full-year trends, the report added.

It also said production from NI is seasonal in nature -- both in terms of quality and quantity.

The crop that has been lost is primarily of the first and second flush, which are the best-quality teas for the year. Such teas are in high demand from packet tea companies to ensure the quality of blend in the packet, it said.

The dearth of such quality tea has resulted in the sharp increase in prices, ICRA said.

Going forward, the ICRA report added that with July being the start of the peak production months in NI, prices are expected to moderate.

However, the extent of moderation would depend on the level of demand -- both in the domestic as well as export markets, it added.

While prices of NI teas have witnessed a significant increase, prices at SI auction centres have started increasing only in the past few auctions, ICRA said.

The divergence in price trends is because of the different supply-demand dynamics. Production pattern and quality of SI teas are largely uniform throughout the year -- unlike those of NI teas. SI teas, particularly the CTC (crush, tear, curl) variety, is used as 'fillers' in blends to control the overall cost per packet.

Also, with a much higher proportion of SI teas being exported, prices are influenced more by global trends.

Coming to production trends in major global centres during the first four months of the calendar year 2020, the Kenyan production has increased significantly by 76 million kg, but the shortfall in production from India and Sri Lanka is likely to result in overall decline in global tea production in 2020, it said.

Nevertheless, the significant increase in Kenyan crop has continued the pricing pressure, as witnessed by the 8 per cent price decline of Kenyan teas in the first half of CY2020, it added.

The report added that this has dampened the export prospects of Indian teas, mainly SI CTC teas to an extent, although the exact grades of tea manufactured by Kenya differ from that manufactured in India.

Indian export volumes have already witnessed a decline of around 18 per cent in the first quarter of 2020. Realisation has also moderated by around 3 per cent in rupee terms, notwithstanding the depreciation of the rupee against the US dollar.

ICRA expects that the NI bulk tea industry will continue to face challenges in the current year owing to significant increase in the cost of production on a per Kg basis, given the loss in crop. Any further material increase in wage rates in the near-term would exacerbate the cost pressures, Das said.

"While current tea prices are robust, substantially higher than the estimated likely increase in cost of production, sustainability of the same remains uncertain. The price trend going forward, especially when the industry enters the high-production months when quality typically is impacted, would be the key factor determining the financial performance of bulk tea companies in FY2021," Das added.