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Growing Chinese, Indian taste for tea to spur price rally

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Coffee prices have had a rally. Now it's tea's turn.

Tea prices will see a "continued rebound" into 2016, broker Charles Stanley said, as consumption increases in emerging markets.

And Sipef highlighted a supply threat, after dryness hit prospects in Kenya, the top tea exporting country.

"The actual impact of the drought will be felt for months," Sipef said, noting that Kenyan output dropped 16 year on year over January and February.

"We expect higher prices during the second [April-to-June] quarter, as tea factories in Kenya are running below 50% of their capacity due to the lack of green leaves."

Tea prices in Mombasa reached over $3 a kilo last week, the highest point since March 2013.

Strong consumption

London-based Charles Stanley warned that, while output of the leaf is increasing worldwide, it will fail to keep pace with the growth of demand from China and India, helping prices to rebound from a five-year low reached last year.

In a report on Camellia, a major tea producer listed in London, Charles Stanley sees tea prices reaching $2.86 a kilogramme in 2016, from an average of $2.72 in 2014, after only modest growth in 2015.

2016 will see strong tea demand, with particularly strong growth in India and China, reducing the proportion of the crop available for export, the broker said.

"Strong consumption growth will support a continued rebound in prices in 2016".

Booming demand

Although tea consumption is static or declining across developed economies, demand from emerging markets is booming.

Tea consumption

Country ('000s tonnes)

2012A

2013A

2014A

2015E

2016E

China

1,482

1,614

1,743

2,005

2,005

India

939

1,001

1,071

1,149

1,234

EU

238

242

247

252

259

Turkey

227

228

234

240

245

Russia

173

159

155

153

157

Global

4,823

5,028

5,243

5,633

5,770

% change

4.0

4.7

4.3

5.0

4.9

Normal 0 false false false EN-GB X-NONE X-NONE Source: FAO; Economist Intelligence Uniit

India and China are the world's biggest tea producers and consumer. The two countries make up more than half the world's tea demand, and 63% of global tea production, but per capita consumption remains relatively low.

As incomes increase, and domestic demand for tea increases, tea exports are falling.

The proportion of the Global tea crop available for export has fallen from 47% in 2004, to around one-third.

Global tea production is expected to grow by 3.3% in 2016, faster than in the previous two years, but not enough to offset increased demand.

Immune to speculation

Charles Stanley sees the tea market remaining driven by fundamentals, remaining free of significant speculative influence.

"Tea prices will continue to be relatively immune to external financial dynamics such as the sharp fall in the oil price, the tea market has not attracted a significant amount of investor interest, with prices still determined by local supply-demand factors."

By William Clarke

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