Reduced buying power in Iran may disrupt Sri Lankan tea demand, weighing on exports to a country which imported 9,804 metric tonnes worth $62 million in the first eleven months of 2025, according to a report by CAL.
Despite a small risk of prospective US trade action, the disruption is attributed to the sharp collapse of the Iranian rial, which has depreciated dramatically against the Sri Lankan rupee.
In January, the US suggested a potential 25% tariff on goods from Iran’s trade partners, but CAL argues this is less of a risk than Iran’s currency pressures. Tea imports are largely discretionary and price-sensitive, especially in mass-market segments, so currency weakness translates quickly into lower buying interest rather than delayed or deferred demand.
CAL has observed this dynamic at Colombo auctions, where weaker participation from Middle Eastern buyers is coinciding with lower prices. This makes Iran’s currency depreciation the chief near-term concern for exporters.
“The biggest risks are for tea producers and exporters that rely heavily on the Middle East, which accounts for around 50% of Sri Lanka’s tea exports, especially those selling low-grown tea”
Early Signs of Weakness at Tea Auctions
CAL notes that reduced buying interest from Iran and the broader Middle East was evident at the 12th–13th January auctions. Low-grown tea prices recorded a cumulative decline of around 6% over four weeks, reflecting both weaker demand and a cautious buyer stance. While many factors influence auction outcomes, the decline coincided with heightened currency stress in Iran, suggesting that softer demand from key buyers played a significant role.
Exporters are now faced with multiple challenges. Lower prices compress margins, while weaker demand risks reducing export volumes. Together, these effects could weigh on near-term tea export revenues, particularly for producers and exporters with heavy exposure to low-grown teas.
Oil Prices Add a Broader Regional Headwind
Across the Middle East, CAL highlights falling oil prices as a medium-term constraint on tea demand. According to the report, Sri Lankan tea exports have historically shown a positive correlation with oil prices. Consensus forecasts cited by CAL point to oil prices remaining “subdued” through 2026 at $55–57 per barrel, below the two-year average of $78, reflecting excess global supply of around 2.8 million barrels per day and slower structural demand amid weaker global growth.
Even if Iranian demand stabilises, CAL believes weak demand across the broader region could limit any meaningful recovery in prices, particularly for lower quality teas.
Iran’s Role in Sri Lanka’s Tea Export Mix
Although its market share has fallen since the US’ 2018 sanctions, Iran remains Sri Lanka’s seventh-largest tea export destination, accounting for more than 4% of total tea export earnings last year.
Iranian demand is concentrated in low-grown teas, which is more exposed to price swings and volume volatility. This amplifies demand shock from Iran; low-grown teas lack the same pricing resilience as higher-elevation varieties sold into premium markets.
Sanctions Are Not the Main Concern
Although the US has warned it may impose tariffs on countries that trade with Iran, CAL believes this is not the main risk for Sri Lanka’s tea exports. The situation remains uncertain, and past shifts in US trade policy suggest that such measures could be postponed, softened, or changed altogether.
In addition, much of Sri Lanka–Iran trade takes place through a tea-for-oil exchange, which is mainly used to settle past payments rather than support new trade. Around $100 million is still outstanding under this arrangement. Sanctions-related uncertainty could slow these settlements if tea exports decline, but CAL expects the overall risk to remain limited.
Implications for Producers and Exporters
The biggest risks are for tea producers and exporters that rely heavily on the Middle East, which accounts for around 50% of Sri Lanka’s tea exports, especially those selling low-grown tea. Companies like Maskeliya Tea Exports and Talawakelle Tea Estates are particularly sensitive to price changes in this segment and could see their profits affected if demand stays weak. For the tea sector overall, the main worry is less a sudden drop in exports, and more a slow decline in prices and profit margins.