EIU-July 2016 Sector Updates

Transcription

1 EIU-July 2016 Sector Updates Performance and Outlook of Key Sectors - Edition 2 (July 2016) Tea Sector Rubber Sector Apparel Sector Consumer Durables Sector FMCG Sector Tourism Sector Fisheries Sector Weak export demand and poor availability of auction quantities adversely affected the performance of the tea industry. Auction quantities were down by 15.5% and export earnings contracted by 3.8% on YoY basis during the period of January to May Rain and floods severely disrupted the performance of the rubber industry in Q leading to poor availability of auction quantities and importation of latex to meet the domestic market demand. Textile and garment sector recorded a salient growth of 5.3% during January to May 2016 driven by export growth in two major markets, USA (4.7%) and EU (3.7%). Consumer durables sector recorded robust growth levels in sales volumes and revenue during H being less affected by the extreme weather conditions which had severe growth implications for many other economic sectors. The FMCG sector was severely affected by floods leading to subdued volume growth and severe supply disruptions during Q The tourism sector recorded a strong 16.2% growth in arrivals during H (driven by a 22% growth in Q1 and 8% growth in Q2 2016) with a significant growth in arrivals from China. Demand for Tuna in the EU market shot up with the lifting of EU the ban, but catering to demand is a challenge given the noticeable decrease in live fish in Sri Lankan deep waters. Tea Sector Sector Performance: Weak export demand and poor availability of auction quantities adversely affected the performance of the tea industry. Auction quantities were down by 15.5% and export earnings contracted by 3.8% on YoY basis during the period of January to May Auction prices: Average auction prices recorded positive YoY growth for the fourth consecutive month (from April to June 2016), driven by significant shortages in quantities available for auctions. Auction prices recorded a YoY average growth of 9.4%, while auction quantities contracted by 15.5% in Q Tea Exports: Cumulative export earnings between January to May 2016 recorded a YoY drop of 3.8% as a by structurally lower oil revenues and other internal instabilities in key export markets (sanctions on Russia, ISIS attacks and other terrorism related conflicts in the middle east region, war in Ukraine) Export earnings in May 2016 alone contacted by 20.4% on YoY basis. Weak economic conditions in Russia has led to the practice of predatory pricing. A tea expert commented that some of the big tea firms in the Russian market have embarked on heavily discounted promotions to attract consumers with constrained budgets during the economic downturn. Russian market is dominated by few large retailers having oligopoly control over the market and resulting indirect price controls where tea prices have been fixed at low levels that other firms find it difficult to compete. 1 Edition 1 of CCC sector updates stated that Industry anticipates a further drop in tea volumes and improved auction prices in Q due to the prevailing drought conditions.

2 January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June AUCTION QTY (KG) PRICE (F.O.B.) - LKR/KG The tea industry anticipates a slight improvement in the Middle East, Russia and other CIS countries during the second half (H2) of 2016, and overall 2016 to be a better performing year than The Russian market has already started to indicate signs of recovery with further strengthening of the Russian ruble (RR) against the US dollar (USD) approximately by 2 compared to January 21 st low of US$/RUB: 82.5 (Russian Ruble ranged between USD/RUB 62.8 to 64.8 in July 2016) aided by the improvement in oil prices. The price of Brent oil increased approximately by 64% during same period (USD to 45.7 from 21/1/2016 to 23/7/2016). The outlook does not look very positive for the tea industry, particularly for Regional Plantation Companies (RPCs). Currently, cost of production among RPCs stands at LKR 460 per kg and high grown tea fetches an average auction price of about LKR 388 per kg leading to a loss of LKR 72 per kg. This adds up to about LKR 11.8 Bn loss for RPCs. Figure 01: Average Tea Prices and Volumes at Colombo Auction ( ) 8,000 7,000 6,000 5,000 4,000 3,000 2, Auction Qty (kg) Average Auction Prices (Rs) Source: Central Bank Annual Report 2015 and Economic Intelligence Unit of CCC Rubber Sector Sector Performance: Rain and floods severely disrupted the performance of the rubber industry in Q leading to poor availability of auction quantities and importation of latex to meet the domestic market demand. Auction prices: Prices at the Colombo auction have seen an improvement in RSS1 and scrap crepe rubber during Q while latex crepe weakened throughout the first half (H1) of Auction price of RSS 1 on a YoY basis declined for 15 consecutive months (from January 2015 to March 2016). This trend reversed in the beginning of Q with prices not just improving but also recording a positive growth for the 4 th consecutive month in July Auction price of scrap crepe No 1Xbr started a steady decline from July 2015 and bottomed out in March Although the auction prices for Q recorded a negative growth, prices improved for the fourth consecutive month in July Auction price of latex crepe continued its declining trend with price levels falling and continuing in the negative growth territory from May to 3 rd week of July Rubber Exports: Industry experts commented that Sri Lanka used to dominate the supply of special grade rubber to niche markets (in USA and Japan) for the manufacture of medical and pharmaceutical products. Demand for Sri Lanka s special grade rubber in these niche markets have significantly deteriorated throughout 2016 with these markets switching their demand to cheaper grades of substitute rubber.

3 Outlook doesn t look very positive for the rubber industry with many companies incurring losses, particularly regional plantation companies (RPCs) due to fall in auction prices. According to expert views; Currently RPC Cost of production stands at LKR 332 per kg and RSS1 grade rubber fetches an average auction price of about LKR 250 per kg leading to a loss of LKR 82 per kg. This adds up to about LKR 2.4 Bn loss for RPCs. Companies with a diversified portfolio in rubber trading such as those engaged in offshore trading are better positioned to absorb the losses. Industry leaders stress the need for building strong market relations with China - the leader of global rubber imports. Currently there are many non-tariff barriers (NTMs) when entering the Chinese market, and the industry is keen on GoSL s engagement in trade discussions with China. Figure 02: YoY % Change in Rubber Auction Prices (2015 & 2016) RSS No 1 & RSS No 2 Scrap Crepe No. 1Xbr Latex Crepe RSS No1 RSS No2 J F M A M J J A S O N D J F M A M J J 5% -5% - -15% -2-25% -3 J F M A M J J A S O N D J F M A M J J 25% 2 15% 5% -5% - -15% -2-25% No.1 1X J F M A M J J A S O N D J F M A M J J Source: Economic Intelligence Unit of CCC Apparel Sector Sector Performance: Apparel sector recorded a salient growth of 5.3% during January to May 2016 driven by export growth in two major markets, USA (4.7%) and EU (3.7%). Exports: Apparel exports grew by 5.3% on YoY basis during the first five months of Cumulative exports to EU grew at 3.7% (a recovery from the negative growth recorded in the same period of 2015) while exports to USA recorded a 4.7% growth. EU (41.8%) and USA (45.3%) together accounted for a share of 87.1% of total apparel exports of Sri Lanka within the period in concern. 96% of the change in growth of textile and garment exports came from HS chapter 61 (Articles of apparel and clothing accessories, knitted or crocheted). HS chapter 62 (Articles of apparel and clothing accessories, not knitted or crocheted) and 63 (Other made up textile articles; sets; worn clothing and worn textile articles; rags) contributed 2% each. Flood effects: One industry leader stated that 21 of their plants located in 6 different geographical areas were impacted. Livelihoods of a majority of the employees in these areas were affected. Most established large scale apparel exporters that work on 2-4 week turnaround time had a challenging time in getting orders ready on time during the flood affected period and one such exporter which incurred no damage to the stocks or assets forecasted that an additional cost of USD 700,000 was needed to get orders ready on time (due operational and logistics expenses such as overtime, airfreight, etc.) Despite these negative consequences, the industry remains optimistic about changes that are taking place such as the possibility of regaining of GSP+ in early 2017.

4 Industry specialists also commented that the loss of GSP+ market access to UK as result of BREXIT has a potential for bringing positive outcomes such as creation of a level playing field as a result of all countries losing duty free access to UK. This implies that competitors such as Bangladesh which has Everything but Arms (EBA) market access to the EU will have to compete with Sri Lanka in the UK market without the benefits of duty free-quota free access. Global market volatility and labour shortages remains key concerns of the Sri Lanka apparel Sector. Mixed sentiments on the outlook for H with some industry leaders expecting moderate growth while some exporters are anticipating a very low growth in epxorts. Major companies have begun expansion plans covering the Northern territory of Sri Lanka seeking some relief for the labour shortages. The big players in the apparel industry are keen towards developing a new business model where Asian region can serve as a hub in the global value chain for apparel. Sri Lanka s large scale apparel exporters have recently begun expanding their businesses to cost-competitive overseas markets, which also have strategic market access to key global apparel importers such as USA and China. Figure 03: Growth in cumulative Apparel Exports ( Jan - May: ) 25% % 15% 5.3% Total 5% -5% % 0.7% Apparel and clothing accessories, knitted or crocheted Apparel and clothing accessories, not knitted or crocheted Other -15% -2.8% Source: Sri Lanka Apparel Exporters Association Consumer Durables Sector Sector Performance: Consumer durables sector recorded robust growth levels in sales volumes and revenue during H being less affected by the extreme weather conditions which had severe growth implications for many other economic sectors. Growth drivers: Industry leaders commented that there has been a remarkable growth in mobile phones and IT product category in H These products are expected to be a key growth driver in consumer durables market given the current trend of consumers switching to smart phones. Flood effects: Although sales performance in Q started strong driven by a bountiful harvest and strong seasonal demand, impact of May floods and explosion in Salawa military camp had a considerable dampening impact on the sales volumes in the Western province. This also had an impact on the repayment capacity of customers under hire purchase agreements leading to rescheduling of collections and certain write offs. Tighter market conditions are expected in H due to tax rate increases, increasing inflationary pressure, possible hike in the interest rate and exchange rate volatility.

5 Industry also remains optimistic on the positive spillover effects of the improvement in the real estate sector, where certain classes of property developments such as condominiums offer demand for built in range of high end consumer goods. Outlook remains positive with an average growth of 6- predicted in sales volumes but driven by lower spending power and a lower growth pace compared to FMCG Sector Sector Performance: The FMCG sector was severely affected by floods leading to subdued volume growth and severe supply disruptions during Q Flood effects: Although there was an immediate surge in demand as dry rations, clothing, pharmaceuticals, food and other items were purchased for displaced and flood-affected people, industry leaders commented that it would only help to mitigate about 1/4 th of the lost in demand during the period. Similarly business operations of many companies operating within the FMCG sector was severely affected by floods. Dairy and beverage product manufacturing was severely affected with some manufacturing plants being flooded and machinery and storages being severely affected. The post-flood effects will be visible through unfavorable revenue impacts such as incremental expenses associated with the deployment of its business continuity programs, compensation to employees etc. Two of the severely affected companies in the FMCG sector incurred an insured loss worth LKR 6 Bn. Market leaders anticipate consumers to be watchful in their spending given the increasing inflationary pressure and the price hikes resulting from tax adjustments. However such changes are expected be temporary until the consumers adjusts to new price levels and not lead to significant change in the underline consumption patterns. Weak market conditions in EU remains a concern for confectionary exports. Tourism Sector Sector Performance: The tourism sector recorded a strong 16.2% growth in arrivals during H (driven by a 22% growth in Q1 and 8% growth in Q2 2016) with a significant growth in arrivals from China. Arrivals: Tourist arrivals in June 2016 was significantly low, with some large hotel chains recording 5 less occupancy rates compared to the same period in India continued to be the top destination for arrivals in H claiming a 17.9% share in total arrivals. There was a significant 40.4% YoY growth in arrivals from China which enabled china to improve its share in arrivals from 11.4% in 2015 to 13.8% by end of H This highlights the importance of having destination promotions in mass markets with potential like China. Current issues: Human capital remains one of the key issues faced by the tourism industry. Apart from this, ad hoc changes in entry fees to key tourist attractions has also affected revenue of tour operators as majority of tourists visit Sri Lanka on prepaid packages. The Bandaranaike International Airport (BIA) is scheduled to be partially closed for three months from January to March 2017 to carry out maintenance work on the runway. This coincides with the peak season for tourism. Industry leaders commented that rescheduling flights from China and UK is difficult and it will adversely affect arrivals in Q Instability in the Middle East, impact of the BREXIT and the recent terrorist attacks in the European region has made Asia a more attractive tourist destination. Prospects remain positive for H2 2016

6 No of Arrivals and the industry focuses on attracting tourists with higher spending power such as UK (high per capita spending of about USD 800 per visit). Figure 04: Tourist Arrivals by Country of Residence - Top Ten Countries ( Jan - Jun: ) % 40.4% 19.5% 13.2% 11.9% 3.6% 16.3% -15.7% 16.7% 16.3% India China U.K. Germany France Maldives Australia Russia U.S.A. Canada Source: Sri Lanka Tourism Development Authority (SLTDA) Fisheries Sector Sector Performance: Demand for Tuna in the EU market shot up with the lifting of EU the ban, but catering to demand is a challenge given the noticeable decrease in live fish in Sri Lankan deep waters. Lifting of the ban: The European Commission lifted the ban imposed on Sri Lankan Fisheries products in June The fisheries ban which was in place for 15 months had a significant impact on the performance of the fisheries industry with a forgone revenue of approximately USD 100 Mn. Since the lifting of the ban, demand for Tuna in the EU market has shot up and an industry expert commented that catering to demand is a challenge given the noticeable decrease in live fish in the Sri Lankan deep waters. Despite the lifting of fisheries ban to EU, export of edible fish products in June 2016 stood at USD Mn compared to USD Mn in May This was a 56.7% contraction in YoY growth and was recorded as the lowest level seen since Strategic The fish industry is becoming increasingly sensitive to sustainability issues and Sri Lanka needs to engage in capacity building of those engaged in the industry to adhere to harvest management measures. Dynamics in the global fish market are rapidly changing. In 2012 nearly 5 of the global fish supply came from cultured fish. This has increased to 58% by 2015, implying that there has been a significant decline in wild fish catchment. Hence commercial viability of wild fish industry remains questionable in the years to come. This highlights the importance of Sri Lanka engaging in a strategy for the development of the fisheries sector. Prepared by Economic Intelligence Unit (EIU), The Ceylon Chamber of Commerce. For queries, contact Jayani on jayani@chamber.lk