Tea processing firms in Kenya are looking to more value addition to offer products that fetch higher prices in the international market.
The companies hope to compete with the likes of Sri Lanka and India that supply finished products.
The Kenya Tea Development Authority (KTDA), which works with nearly 600,000 farmers, says it is looking to orthodox, purple, handmade and specialty tea while Sasini Tea and Coffee Ltd is considering green tea — all in a bid to earn more in the face of the glut in the international market.
Analysts, however, said the high cost of value addition could maintain the status quo where Kenyan tea is exported for value addition.
“The cost of production remains a challenge even to the willing partners,” said Godfrey Otieno, an analyst at Sasini.
Purple and orthodox tea fetch 10 times and twice, respectively, than the black cut, tear and crush (CTC) that Kenya exports.
At $3 per kilo, CTC compares poorly with purple tea at $30 and orthodox at $6. The CTC price at the Mombasa auction has averaged between $2 and $2.64 since the beginning of the year, according to the East African Tea Trade Association (EATTA).
The tea agency is currently processing orthodox tea at one of its factories, with about 12 factories earmarked for an orthodox production line. One of KTDA’s factories — Kangaita — is already processing purple tea.
“The market for purple tea is still very narrow. The focus of KTDA currently is to identify and then develop these markets before large scale commercialisation can be done. Currently, KTDA is exporting small quantities of purple tea to China, the US, Germany and other countries,” said Albert Otochi, KTDA general manager.
The local market is the best bet so far for the green and purple tea, according to Mr Otochi.
Failure of Kenya to diversify has left it vulnerable to the available markets. While Kenya is the world’s largest exporter of black CTC tea, Sri Lanka is the leader in orthodox tea.
In their top five export destinations, Kenya commands 69 per cent against Sri Lanka’s 45 per cent. Kenya is therefore more susceptible to supply side substitution and disruptions. For example, Egypt and Sudan’s political instability has negatively affected the performance of the sector.
As the leading exporter of black CTC tea, Kenya does not suffer any deficit to be met through imports. However, smuggling of foreign teas and counterfeiting may be a source of price distortions. According to a report by Deloitte, 79 per cent of tea packed by registered packers in Kenya is from India and Uganda.
Buyers at the Mombasa auction prefer cheaper tea from Tanzania, Uganda, Rwanda, Burundi, Eritrea, Somalia and Sudan.
The Deloitte study established that 70 per cent of tea packed in the past 10 years by registered packers in Kenya is imported. This has implications for quality since most packers do not disclose the source of their tea and market the imported teas as “Premium Kenyan Tea.”
“The government should subsidise tea firms by removing the VAT on locally consumed tea; it should be classified as a food item to push local consumption to at least 10 per cent,” said Edward Mudibo, EATTA managing director. Kenya exports 95 per cent of its tea, consuming only five per cent.
Mr Mudibo is also advocating the scrapping of the ad valorem tax — charged at one per cent of the value of exports. The government is planning to reduce the tax to 0.75 per cent, according to the Ministry of Agriculture.
“If the levy cannot be withdrawn altogether, review the levy payment and charge it at a fixed amount of less than Kshs1 ($0.01) per kg of made tea at the factory,” said Mr Mudibo.
Buyers at the Mombasa auction discount the Kenyan tea in order to recover the one per cent ad valorem fee charged on Kenyan tea. Other taxes in the tea sector include a one per cent of gross value of green leaf and the 16 per cent VAT on local sales.