N E W S L E T T E R2Q 2018

2Q 2018

2017 2018 Change% Orthodox 119,411 123,541 3.46CTC 8,884 10,455 17.69 Green 1,243 1,177 (5.27) Total 129,538 135,173 4.35

Page 2Tea Exporters Association Sri Lanka

Tea Production for the month of May 2018 reached 32.8 million kg compared to 29.7 million kg registered for May 2017 showing a gain of 3.1million kg. Low Grown and Medium Grown have shown a growth YOY whilst High Grown has shown a decrease in 2018 compared to the corresponding month of 2017. When analyzing January - May 2018 cumulative production of 135.1 million kg, a growth of 5.6 million kg (4.35 %) is recorded against the 129.5 million kg produced for January - May 2017 period. On a cumulative basis all elevations have shown a growth with Low Grown sector recording the highest growth.

CTC production for May 2018 of 2.4 million kg has shown a growth of 0.28 million kg vis-à-vis 2.1 million kg of May 2017. High and Medium Grown elevations have shown a growth YOY whilst Low Grown have shown a marginal decrease. On a cumulative basis too January - May 2018 total of 10.4 million kg show a growth of 1.5 million kg (17.68 %) vis-à-vis 8.8 million kg of January - May 2017. The green tea production however has registered a decline of 5.5% during the first five month of 2018.

The category wise tea production figures for the first five months of 2018 are given below. (MT)

SRI LANKA TEA EXPORTS – JANUARY - MAY 2018

SRI LANKA TEA PRODUCTION – JANUARY - MAY 2018

Tea Exports for the month of May 2018 totalled 23.07 million kg showing a decrease of 1.3 million kg vis-à-vis 24.3 million kg of May 2017. All main categories i.e. Bulk Tea, Packeted Tea and Tea Bags have shown a decrease compared to the corresponding period of 2017. Total revenue too of Rs.19.1billion show a decrease of Rs.0.9 billion compared to Rs.20.04billion of May 2017. The FOB value however of Rs.829.26 per kg for May 2018 shows a growth of Rs.4.83 against Rs. 824.43 of May 2017.

On the global front - the Kenyan tea crop for January – April 2018 has gone up by 22 million kg and recorded at 144 million kg. The North Indian tea crop has also gone up marginally by 1.71 million kg during the first four months of the year while the estimated figures for South India indicate a decline of 5 million kg for the same period. Malawi has registered and increase of 1.4 million kg in the tea

production during the first quarter of 2018.

Page 3Tea Exporters Association Sri Lanka

2Q 2018

TEA AGM 2018

The summary of tea exports during January-May 2018 are appended below. (MT).

2017 2018 Change % Bulk 47,824 48,555 1.52 Tea in Packets 53,493 52,804 (1.28) Tea in Bags 8,947 8,734 (2.38) Instant 897 974 8.58 Green 1,679 1,776 5.77 Total 112,840 112,843 0.026

TEA TieA limited quantity of TEA ties are avaiable for sale. It is priced at Rs. 1,250/- per unit. The interested member companies may contact the secretariat for purchase.

We are just two months away from the 2018 AGM that will be held on Friday, 31st August 2018 from 6.30pm onwards at Oak Room, Cinnamon Grand. Members are requested to keep the date free for this important annual event of the Association. The event will also showcase rewarding of outstanding tea producers based on “Total Excellence in Tea Production “covering seven agro-climatic regions.

The cumulative tea exports for January - May 2018 of 112.8 million kg have remained almost same as the volume of tea exported during January - May 2017. Bulk Tea exports have shown growth YOY whilst Tea Bags and Packeted Tea have shown a decrease when compared to the corresponding period of 2017. It is noted that total revenue realized of Rs.93.3 billion have shown a growth of Rs.4.1billion vis-à-vis Rs.89.2 billion of January - May 2017. Consequently the FOB value for the period January - May 2018 of Rs.827.02 per kg recorded a gain of Rs.35.95 vis-à-vis Rs.791.07 of January - May 2017.

Iraq has emerged as the largest importer for the period January -May 2018 followed by Russia and Turkey. Iran, UAE, Syria, China and Azerbaijan are the other noteworthy importers of Sri Lanka Tea.

Page 4Tea Exporters Association Sri Lanka2Q 2018

Revolution in Tea Packaging

Since brand messaging is less critical, refill packaging can be made more environmentally friendly. Marketing the brand can be assigned to the permanent storage container in which the refills are dispensed.

(World Tea News)

Major beverage maker Ito En Ltd. is considering building a factory to produce green tea in tea bags in the United States, company officials have announced. It will be the company’s first tea bag factory abroad.

Green tea leaves grown in Japan will be processed and packed at the U.S. factory, the officials said, while noting that details about methods to transport tea leaves to the United States and the location of the plant will be decided later. Ito En started to export green tea bags in 2015 under its Matcha Green Tea brand exclusive for overseas markets. Sales of its green tea products, including powdered tea, in the United States in the latest business year to April increased 9.4 percent from the previous year, according to the officials.

Ito En to pack tea in USA

The logistical and financial challenges were no reason to shy away from sustainable alternatives. There are food safe, quality alternatives that meet consumer standards. The packaging features compostable refill bags, forever-use tea tins and a dedicated room where customers can top up their teas, herbs and spices in bulk. “Tea and coffee have a huge environmental footprint,” “Tea and coffee packaging are notoriously indestructible and laden with chemicals “some industry personnel have commented.

An Australian specialty tea company has developed compostable refill packaging and fill-your-own bulk dispensers in support of “Plastic Free “socitey.”Two million Australian consumers already have pledged to avoid single-use packaging, a national promotion that adds momentum to the “refill revolution.”

The packaging films tested were developed by New Zealand Company Convex. Convex’s bags and wrappers, called Econic, are made from renewable, plant-derived materials that compost effectively, unlike some biodegradables which fail to break down.

Refilling decorative tea tins is common practice in the tea lands and a practical option for fast-moving consumer expendables that are replenished on a frequent basis.

The planned local production comes as green tea sales are rapidly increasing in the United States on the back of growing health consciousness among consumers in the country, the officials said. Ito En currently exports green tea products to the United States. The company hopes to construct the U.S. plant in a year or two, according to the officials.

(World Tea News)

2. Forecast for MENA Region – 2017

Page 5Tea Exporters Association Sri Lanka

2Q 2018

FAO medium term projections for world tea industry

2. World green tea output would increase at an even faster rate of 7.5 percent annually to reach 3.65 million tonnes, again reflecting an expansion in China, where green tea output is expected to more than double from 1.53 million tonnes in 2015-2017 to 3.31 million tonnes in 2027. Vietnam is also expected to substantially increase its production of green tea with an average annual growth rate of 6.8 percent despite ongoing quality issues which affect the price and exports earning of the country.

1. The world black tea production is projected to increase by an annual growth rate of 2.2 percent to reach 4.42 million tonnes by 2027, reflecting major increases in China, Kenya and Sri Lanka. The expansion in China would be significant as output should approach that of Kenya, underpinned by strong growth in domestic demand for black teas such as Pu’er.

4. Moderate growth rates ranging between 2 and 3.5 percent are expected in other tea producing countries such as Bangladesh (3.1 percent), India (2.2 percent), Sri Lanka (3.3 percent), Tanzania (1.8 percent) and Vietnam (2.0 percent). Lower consumption growth rates are expected in western countries with UK consumption projected to be negative as black tea struggles to maintain consumers’ interest amid growing competition from other drinks including coffee. Only Germany (1.4 percent) and Poland (1.3 percent), followed by the Netherlands and France (both at 0.6 percent) are expected to have consumption growth rates higher than the region`s average of 0.2 percent.

5. Black tea exports are projected to reach 1.66 million tonnes in 2027 with positive but weak growth rates projected for Africa’s producing countries (0.91 percent), Kenya maintaining its leadership with an average annual growth rate of 2.89 percent, while Asia’s exports growth rates are negative, except for Vietnam (2.6 percent), with an average decline of 0.7 percent. However, by 2027, export volumes for Asia are projected to reach 840, 623 tonnes compared to 711, 816 tonnes for Africa.

8. There is scope for increasing per capita consumption in producing countries as they are relatively low compared to traditional import markets. It is also imperative to understand and address the ongoing declining consumption in the traditional market in Europe. Diversification into other segments of the market, such as organic and specialty teas should be encouraged and the health and wellness benefits of tea consumption be used more extensively in promoting consumption in both producing and importing countries. However, in targeting potential growth markets, recognition of, and compliance with, food safety and quality standards is essential to address the gap between the growing volume of exports and the declining exports earnings for some countries.

3. Black tea consumption is projected to grow at 2.5 percent annually to reach 4.17 million tonnes in 2027 reflecting the strong growth in consumption in producing countries, which should more than offset projected declines in traditional tea importing countries. The largest expansion within the five top producing countries is expected in China where an annual growth of 5.9 percent is projected over the next 10 years. African countries are expected to show higher growth in their consumption with Rwanda leading the move (9 percent) followed by Uganda (5 percent), Kenya (4.4 percent), Libya (4.4 percent), Morocco (4.2 percent), and Malawi (4.2 percent).

6. World green tea exports are projected to grow by 5.0 percent annually to reach 605, 455 tonnes by 2027. China is expected to continue to dominate the export market, with an export volume of 416, 350 tonnes, followed by Vietnam at a distant second with 148, 493 tonnes, Indonesia with 12, 889 tonnes and Japan at 10, 445 tonnes.

7. In the medium term, the projections suggest that supply and demand of black tea will be in equilibrium in 2027 at a price of USD 3.0 per kg. Prices over the last decade increased from an annual average of USD 2.39 per kg in 2008 to USD 3.15 per kg in 2017.

Page 6Tea Exporters Association Sri Lanka2Q 2018

Iran to ban non-essential Imports

Iran has also imposed new regulations on travel to control the outflow of dollars. Iranians have to pay an exit fee when leaving the country, which is liable to increase. According to Eghtesad News, Iranians crossing land-borders with neighboring countries for the first time have to pay 220,000 toman. A second visit will cost them 330,000 toman, and a third time 450,000 toman. The fees are designed to discourage Iranians from travelling and spending money abroad.

The Iranian Central Bank has established a secondary currency market to allow exporters of non-oil goods to sell their foreign currency earnings to importers of consumer products as part of Tehran's strategy to ease conditions amid the resumption of US sanctions. The Iranian Central Bank believes that the secondary currency market would help "minor importers" buy their dollars, and emphasized that the price of the dollar would be set according to market supply and demand. The move will allow some 20% of the dollars from the export of non-oil products (also excluding steel, petrochemical and minerals) to be sold in the secondary currency market at rates mutually agreed upon by exporters and importers.

9. New growing markets are also building on product innovations and diversification into new segments of consumers. The bulk of the tea consumed in the United States today is iced tea, at 85 percent of consumption, but hot tea has been growing in popularity. Tea popularity is being driven by the Millennial (1981-1997) and Baby Boomer (1946-1964) generations. Ready-to-Drink tea consists of 48.6 percent of the market, with loose leaf (specialty) teas consisting of 17.5 percent of the market. These two markets segments both experienced large growth rates, while other market segments (instant, bagged, pod) are experiencing stagnant levels of growth.

Iran has prepared a list of 1,339 items that will soon cease to import in order to protect domestic producers and manage the outflow of currency as the nation braces for fresh US sanctions.

Mohammad Shariatmadari, Iran’s minister of industry, mines and business, announced the bans on 23rd June 2018, according to Tasnim news agency. Since the US decision to withdraw from the nuclear deal, several multinational companies have announced the suspension of operations in Iran, including the French oil company Total, the world’s largest container shipping company Maersk, and multinational airplane producers Airbus and Boeing.

In the last six months, Iran’s currency has lost more than 50 percent of its value. Iranians have reacted by trying to invest in dollars and gold. The Iranian government is trying to restrict demand for dollars by putting a ban on “unnecessary” and “lucrative” foreign items and could be bought from local producers. Banned items will include clothes, sugar, cars, shoes, makeup and pharmaceuticals.

10. Other factors that could expand tea demand significantly over the next decade, but which have not been factored into the projections as data is not completely available, would be the innovative developments from non-traditional players in the retail and service sectors. The demand for tea has accelerated due to the ongoing retail revolution and the growing investment into tea education bringing new clientele to know more about tea, where it is sourced, the benefits of drinking tea, and how to properly brew it. Due to this, loose leaf tea has seen a new relevance in the United States of America. Promoting tea culture based market development and immersion in the cultural identity of societies across the world should be one of the strategies to sustain and expand consumption.

(FAO Secretariat)

2. Forecast for MENA Region – 2017

2Q 2018Page 7 Tea Exporters Association Sri Lanka

Starbucks moves into heart of China's tea industry

India tea exports to grow by 5%

India achieved the highest tea exports in 2017 after 36 years, exporting 251.91 million kilograms in the last calendar year, up by 13.24 per cent from 222.45 million kilograms exported during 2016.

Even before Donald Trump announced in May that the U.S. would be leaving the nuclear accord, Iran’s central bank imposed tight restrictions on foreign currency transactions in an effort to shut down a flourishing black market and halt a slump in the value of the rial against the dollar. Iran has also sought to wean its economy off the dollar by doing more trade in the euro and other currencies, though traders and analysts say that will not be enough to mitigate the impact of sanctions on its economy.

U.S. coffee giant Starbucks opened its first outlet in Pu'er City, southwestern Yunnan province recently, placing the coffee chain close to China's largest coffee production base, Xinhua reports.

Surrounded by undulating green hills, Pu'er, a border city in Yunnan, is traditionally known as the home of China's most sought-after tea, Pu-erh. It was not until Nestle first introduced the Catimor coffee bean to Pu'er in the late 1980s that China's coffee business really took off.

The Seattle coffee chain recently announced plans to build nearly 3,000 new stores in mainland China over the next few years. It's aiming to almost double its number of coffee shops in the world's second largest economy, from 3,300 at the moment to 6,000 before the end of 2022.

That means opening 600 new Starbucks a year in China -- or one every 15 hours -- a significant increase on the company's earlier goal of around 500 a year.

Starbucks expects its rapid expansion in the traditionally tea-drinking nation to boost its bottom line. It plans to triple its revenue and double its operating profit in China between 2017 and 2022.

India’s tea exports are expected to clock a 5 per cent growth this year in terms of volume, provided shipments to Iran do not get disturbed, said Tea Board chairman P.K Bezboruah.

“There are some challenges in the current year in terms of tea exports. India’s tea exports to Iran, which was a good customer last year, may get disrupted as the US has threatened to re-establish [nuclear programme-related] sanctions on Iran. The centre is working on it so that bilateral trade between the two countries [India-Iran] continues,” Bezboruah told IANS.

Indian exporters are keen to regain market share in Kazakhstan, which used to import significant volumes of Indian tea earlier, he said.

“The exports growth this year would not be spectacular but it is expected to go up by 5 per cent in terms of volume, provided exports to Iran do not get disturbed,” he said.

(IRNA)

Starbucks is pushing "a coffee culture in China where the reward will be healthy, long-term, profitable growth for decades to come," CEO Kevin Johnson said in a statement. In December, Starbucks opened its largest store in the world in Shanghai.

(CNN)

2Q 2018

Tea Exporters Association Sri Lanka Page 8

Russian Economy recovery continues

Bezboruah exuded confidence that tea exports will continue to expand in the UAE, the US, China, Russia and the Middle East.

On the production front, the crop’s production was at 1.32 billion kilograms last year, having registered an increase of 74.56 million kilograms on 2016-17 figures.

Production of the crop is expected to be higher this year though estimated production in April, which stood at 85.74 million kilograms, was down by 7.21 per cent year-on-year, he said.

Russia’s economic recovery continues, amidst relatively high oil prices, enhanced macroeconomic stability, gradual monetary loosening, and ongoing momentum in global economic growth, says the World Bank’s latest Russia Economic Report .However, the country’s growth prospects for the period 2018-20 remain modest.

Russia’s growth is forecast at between 1.5% and 1.8% over the next three years. In the short-term, however, this forecast may be adjusted because of changing oil prices – which were projected to average US$ 65/bbl in 2018 and 2019, and US$ 66/bbl in 2020, but which may increase further, especially in the short-term.

In 2017, growth was mainly driven by non-tradable sectors. The unemployment rate declined to 5.2%, while real wages and pensions increased on the back of low inflation. In 2018-20, consumer demand is expected to be the main engine of GDP growth, while the poverty rate is expected to decrease slightly.

“Russia’s economy continued its recovery in 2017, but growth prospects for 2018-20 remain relatively modest, and well below the current global growth average of over 3%,” World Bank reports. “In the next few years, greater focus on education, health and infrastructure investments will require

the government to find fiscal space through further improvements in tax administration, optimization of non-tax revenues, increased efficiency of public expenditures, and potentially some tax policy changes.”

Moderately tight monetary and fiscal policies, in combination with a favorable external environment, let the Central Bank of Russia reach a record low-level of consumer price index (CPI) inflation, which averaged 3.7% in 2017. Annual inflation now stands below the Central Bank’s target of 4%, while inflation expectations, though trending downward, remain elevated.

Driven by a rebound in disposable income and consumption, the poverty headcount declined marginally in 2017 to 13.2%, after reaching 13.3% in 2016. The poverty rate is projected to decline in 2018, 2019 and 2020 to 12.5, 11.9 and 11.4%, respectively, as income and consumption grow further. Among the factors that could fuel real income growth are a general recovery of the economy and further deceleration of inflation.“With enhanced macroeconomic stability, the key challenge for achieving higher levels of economic

growth is to increase productivity.” said World Bank Country Director for Russia. “This requires improved infrastructure connectivity, strengthened competition across the economy, further improvements in the business climate, vibrant innovation activity and the reduction of the skills gap. Investments in human capital will be key.”

(Economic Times)

A strategic focus on digital transformation has enabled Russia to build a national digital infrastructure to support universal broadband and mobile communications. However, to fully reap the socio-economic benefits of this digital infrastructure, Russia will need to implement policies that accelerate the digital transformation of the traditional enterprise sector, and promote R&D, innovation and entrepreneurship.(World Bank)

2Q 2018Page 9Lanka Tea Exporters Association Sri Lanka

US Tea Market expects CAGR 3-5 %

On a regional basis, the South and Northeast have the greatest concentration of tea drinkers.

Year-on-year, imports are holding steady, but there is a distinct shift away from green tea vs. previous years.

Approximately four in five consumers drink tea, with Millennials being the most likely (87% of millennials drink tea).

The industry anticipates strong, continuous growth, with a CAGR of 3-5%. This growth will come from all segments driven by variety, convenience, health benefits, sustainability, availability, continued innovation and the discovery of unique, flavorful and high-end specialty tea. Long term success relies on the continued adoption of tea by new consumers who continually seek healthy food and beverage choices.

Hot tea and specialty tea continue their growth. Green tea has lost some of its steam, now representing only 13.2% of imports.

In 2017, total U.S. black and green tea imports were 279 million pounds. This is a very slight decline vs. 2016 and is most probably due to timing of imports.

The RTD tea category continues its solid growth and is expected to have experienced another 4% growth in 2017. Category volume exceeded 1.8 billion gallons in 2017 (est). The canned/bottled RTD tea segment comprised just under 50% of the market share and is expected to continue to grow an estimated 30 – 35% (4 – 6% CAGR) over the next five years.

Currency Brief

USA Tea Association

(Reuters)

• The Sterling Pound rose 0.4% to 1.3279 to USD in the recent weeks. The Pound is expected gain ground against the US dollar when UK departs from EU early next year.

• Turkish Lira slides in last few months over mounting economic imbalances and political uncertainty. Lira to end at 4.05 per USD by end 2018 and 4.22 by end 2019.

The bagged/loose leaf tea segment continues to lag, showing little to no growth, although it appears to have recovered some of the market share losses in 2016. While comprising an approximate 23% market share it remains an important segment, particularly to new users. Foodservice, refrigerated teas and high-end specialty teas continue to grow at 7 – 10% per annum.

In 2017, Americans consumed over 84 billion servings of tea, or more than 3.8 billion gallons. About 86% of all tea consumed was black tea, 13% was green Tea, and the small remaining amount was oolong, white and dark tea.

• China’s Yuan to remain pressured by trade war with USA. The currency lost about 3.3% of its value in June and slide continued in to July 2018. The Yuan would strengthen to 6.57 by the end of the year but in the next 12 months would place at 6.80-7.20 per US dollar.

• The Russian Ruble depreciates slightly last month due to fall of oil prices. The Bank of Russia has set the official rates at 63.22 per US dollar and 73.70 per Euro. EU has extended sanctions on Moscow over

• The recent resurgence of USD will last three months and possibly up to six months but its dominance may fade by next year.