VZCZCXRO2326
PP RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHLM #1075/01 3310633
ZNR UUUUU ZZH
P 270633Z NOV 09 ZDK
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0842
INFO RUEHKA/AMEMBASSY DHAKA 2098
RUEHIL/AMEMBASSY ISLAMABAD 9126
RUEHKT/AMEMBASSY KATHMANDU 7372
RUEHNE/AMEMBASSY NEW DELHI 3524
RUEHPF/AMEMBASSY PHNOM PENH 0098
RUEHCG/AMCONSUL CHENNAI 9687
RUEHKP/AMCONSUL KARACHI 2589
RUEHCI/AMCONSUL KOLKATA 0466
RUEHLH/AMCONSUL LAHORE 0099
RUEHBI/AMCONSUL MUMBAI 6981
RUEHPW/AMCONSUL PESHAWAR 0382
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 COLOMBO 001075 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR ETRD CE
SUBJECT: SRI LANKA'S TEA SECTOR: "A GIFT FROM GOD" 
 
REF: COLOMBO 1015 
 
COLOMBO 00001075  001.3 OF 002 
 
 
¶1. (U) SUMMARY: Long Sri Lanka's top export, tea remains one 
of the country's most valuable foreign currency earners 
despite being supplanted by the textile sector in the top 
slot.  The country's highly sought-after "orthodox" teas 
remain global favorites, particularly in the Middle East and 
the countries of the former Soviet Union.  Despite years of 
civil strife, alternating nationalization and 
semi-privatization schemes, and commodity price fluctuations, 
the Sri Lankan tea industry remains competitive and the 
country today ranks as the fourth-largest tea producer in the 
world.  Sri Lanka's tea growers remain confident that thmet with Mr. Vish Govindasamy, Managing 
Director, and Mr. Dushy Ratnasingham, Chief Operating 
Officer, of Watawala Plantations -- one of the largest tea 
producing companies in Sri Lanka with nearly 30,000 acres of 
tea -- on November 18.  Govindasamy noted that Sri Lanka is 
known as the best place to grow orthodox tea (vice CTC, or 
"cut, tear, curl" teas produced more cheaply elsewhere). 
With "orthodox" tea production, the withered leaf is rolled, 
thereby breaking the leaf's veins and releasing the enzymes. 
Govindasmay emphasized that Sri Lanka's climate and soil in 
the growing regions are "a gift from God" -- "perfect for 
growing rich, aromatic teas."  Sri Lanka's export-oriented 
tea production is highly conscious of protecting the quality 
of its tea, and the industry maintains self-imposed standards 
which must be met to receive the "Lion Logo" for Sri Lankan 
tea.  Still, over 55 percent of Sri Lankan tea exports are 
sold in bulk.  Many business leaders think Sri Lanka should 
move to upgrade their tea exports to branded teas to increase 
their earnings. 
 
¶3. (U) According to the Food and Agriculture Organization, 
Sri Lankan tea is categorized as the "cleanest tea" in the 
world, a direct result of the restrictions on fertilizer and 
pesticide usage which limits chemical residue on the leaves. 
Further, the country's tea tasters insist that the CTC tea 
produced in Kenya, India, and Indonesia simply cannot match 
the taste, aroma, and quality of Sri Lanka's orthodox teas. 
Only Vietnam has been able to produce orthodox tea of the 
same leaf standard as Sri Lanka, however, as Govindasamy 
emphasized, they "cannot match our taste."  Indeed, Sri Lanka 
historically get some of the highest prices for teas in the 
world. 
 
¶4. (U) Sri Lanka is currently the fourth-largest tea producer 
in the world after China, India, and Kenya.  It's annual tea 
production in 2008 amounted to approximately 318,000 metric 
tons, which accounts for roughly ten percent of the global 
tea crop.  However, Sri Lanka exports the majority of its 
tea, roughly 300,000 metric tons last year, making it the 
world's second largest tea exporter (about 18 percent of the 
global tea market).  Sri Lanka exports most of its tea to 
former Soviet republics, the Gulf states, other Middle 
Eastern countries, and as a blend to Europe and the United 
States.  In 2008, Sri Lanka's tea industry earned over $1.2 
billion, or approximately 16 percent of export earnings. 
 
GROWERS HIT BY RECESSION BUT REMAIN STRONG 
 
¶5. (U) The small tea growers, with plots smaller than 50.  Still, 
growers large and small have suffered in 2008-2009 as global 
commodity prices crashed.  In addition, a drought in early 
2009 also resulted in a significant drop in production, with 
cumulative production for January-October 2009 amounting to 
only 234,000 metric tons -- the lowest level since 1999.  Due 
to a world wide crop shortage, tea prices at Colombo tea 
 
COLOMBO 00001075  002 OF 002 
 
 
auctions recovered recently -- hitting an all-time high of 
over $3.70/kilo in September (versus $2.22/kilo in October 
2008 and $2.93/kilo in 2007).  A kilo of tea is currently 
fetching around $4.45. 
 
¶6. (SBU) Sri Lanka,s large tea plantations -- those once 
owned by English and Scottish operators -- are run by 
regional plantation companies (RPCs) and contribute about 40 
percent of tea production.  The government nationalized these 
large tea plantations in the early 1970,s and tried to 
manage them (without success).  In 1996, the GSL privatized 
the management of the plantations by signing five-year 
management agreements.  Now-a-days, the privately-owned RPCs 
manage the plantations under 53-year lease agreements.  The 
land remains under government ownership, however.  This may 
limit the amount of money the RPCs (themselves listed on the 
Colombo Stock Exchange) are willing to invest in 
infrastructure and production improvements, especially as the 
end of the lease draws near. 
 
LABOR INCENTIVES AND GOVERNMENT ASSISTANCE EXPECTED TO HELP 
 
¶7. (SBU) Labor relations in the tea sector can be thorny as 
union leaders are often members of Parliament and Cabinet, 
creating a highly politicized environment.  Plantation 
workers are descendants of Indian Tamils brought to Sri Lanka 
by the British in the late 1800s.  The workers have jobs for 
life on the large plantations, but Ratnasingham lamented that 
wages and productivity were traditionally not linked.  (NOTE: 
Small plantations are not covered by the same labor 
regulations.  END NOTE.)  To rectify this, a productivity 
component was included for the first time in the October 2009 
collective bargaining agreement with plantation workers. 
Wages were increased to SLR 405/day up from SLR 290/day, and 
includes a SLR 285 basic wage, SLR 30 productivity incentive, 
and SLR 90 attendance incentive.  If these incentives result 
in higher productivity, the wage increase should not 
negatively affect the bottom line.  However, insiders 
indicate profitability could be hit should production or 
prices drop.  On top of their wage, companies also provide 
workers with health, maternity and child care benefits, along 
with basic housing.  Unfortunately, alcoholism-caused truancy 
remains a serious social and economic problem on the 
plantations, and poverty rates among tea plantation workers 
are the highest in the country. 
 
¶8. (SBU) The conflict in the North and East with the Tamil 
Tigers had little effect on the tea plantations.  (NOTE: The 
plantation Tamils arrived centuries later than the Tamils in 
the North, are considered a separate ethnic group, and were 
not Tamil Tiger members.  END NOTE.)  The conflict negatively 
affected resources for ancillary institutes like the Tea 
Board (which used to successfully market Sri Lankan tea but 
is today nearly defunct), and the Tea Research Institute 
(which used to provide top R&D to the industry but is today 
underfunded).  Still, despite the government's need to fund 
the war, it did not raise export duties and collects just SLR 
4/kg cess on exports, and tea machinery -- a high-value 
imported input -- also remains duty-free.  In fact, Sri Lanka 
has the highest amount of tea bagging machinery in one 
country.  With the war over, and the possible EU withdrawal 
of GSP Plus (reftel), tea insiders expect the GSL to focus 
increased resources on the tea industry to ensure Sri Lanka's 
tea exporters maintain their envious market position. 
FOWLER