Tea prices to Middle East affected by US sanctions

‘Oil for tea’ deal suggestion yet to get Govt. approval

Tea prices continue to be affected by the US sanctions on Iran, Sri Lanka’s biggest tea buyer, while despite promises, there are few options being offered by the Government, tea industry officials and bankers said.

Suggestions, which have received the blessing of the industry, to design a contra-trade mechanism or an escrow account to minimize the impact, has also drawn little Government attention.
“There have been some (US dollar) payments that we are receiving from Iran in the past week,” noted Niraj de Mel, Chairman of the Tea Exporters Association, adding that, “nevertheless the problem continues.”

While buying by Middle East buyers continue despite the crisis, the impact is essentially in getting better prices. “If there was no crisis in that region we would have obtained better prices particularly since Iran is Sri Lanka’s biggest buyer, pays higher prices and buys low grown tea which account for 55% of total exporters,” said Anil Cooke, Chairman of Asia Siyaka Brokers.

He said some private factories manufacturing low grown teas were facing severe losses while the leaf prices have also fallen. A few months ago, the Bank of Ceylon (BoC) had suggested that payments for fuel imports, with 30-40 % of Sri Lanka’s crude coming from Iran, be set off against tea exports. “So while Iran gets our tea and is unable to pay for it and we cannot pay for fuel in US dollars, Sri Lanka keeps the balance (difference between oil payments and tea dues) in an escrow account until this money can be remitted,” one bank source said, adding however that the Government or the Central Bank is yet to accept this suggestion.

Mr. de Mel said that one of the problems now is that there is no pre-shipment credit which is normally granted by the BoC to Iran. “Because of the crisis, exporters don’t have access to these funds and only those companies which have (their own) funds can execute these orders, which distort the market because (cash-strapped) smaller players are at a disadvantage,” he said. Pre-shipment credit is when an order is received by a seller who then seeks credit from a bank to execute the order.
The crisis in Syria is also affecting price trends, Mr. de Mel said.

According to news agency reports, India and Iran are also looking at alternative payment mechanisms with one of the solutions being for India to pay 45 % of the oil imports from Iran in Indian rupees while Tehran will use the balance to pay for imports from India.

Meanwhile the US dollar appeared to be stabilizing locally, gaining by just over a rupee this week, compared to much more in previous weeks since the Central Bank withdrew from pumping dollars into the market.

Some analysts said the US currency is expected to Rs. 125 to Rs. 130 per dollar by the end of the year.

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