Feb 06, 2009 (LBO) - The collapse in Sri Lankan tea prices towards the end of last year has caused a loss of 35 million rupees at Tea Smallholder Factories, a listed unit of John Keells Holdings with Central Finance also holding a major stake, in the December quarter.

The firm, which operates a series of 'bought leaf' factories where green leaf bought mainly from small growers is processed into black tea, made a profit of 52 million rupees in the December quarter of the previous year.

Sales for the three months ending December 31, 2008 plunged 71 percent to 184 million rupees as Colombo tea auction prices collapsed last October following the bursting of the global commodities bubble.

"The gross loss recorded during the quarter resulted from significant declines in the tea prices beginning October 2008," Tea Smallholder Factories said in a stock exchange filing.

"However, there has been an improvement in tea prices since the first week of January 2009."

Sri Lankan tea prices plunged sharply last October and large volumes went unsold in the next two months throwing the industry into a crisis and causing cash flow problems throughout the supply chain.

Factories which pay cultivators for green leaf on a price formula based on the previous month's auction average found they were strapped for cash as demand evaporated and prices collapsed.

Tea prices recovered with the first sale of this year but fell again this week.

Tea Smallholder Factories said net profit for the nine months ending December 31, 2008 was down 48 percent to 64 million rupees from a year ago with sales down 23 percent to 1.3 billion rupees.

The company's nine month net profit was boosted by capital gains of 44 million rupees on the sale of its Randola tea factory in the Balangoda area south of Colombo for 71 million rupees.