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January/February, 2007


Russian Cigarette Prices to Fall

Moscow — The five largest cigarette producers in Russia — Philip Morris, British American Tobacco, Japan Tobacco International, Gallaher Liggett-Ducat, and Imperial Tobacco — have made a list of maximum retail prices for their products for this year. Those prices are 10% to 15% lower than current average prices. After the last of the cigarettes made last year are sold, sellers will have to lower their prices.

The price decrease will be most noticeable in expensive brands of cigarettes and in large cities, where cigarette prices are especially high. The price to be indicated on a pack of Marlboro, for instance, is 30 rubles (about US$1.13), while it is now selling in Moscow for up to 35 rubles. Kent cigarettes will sell for 35 rubles per pack and now sell for up to 41 rubles 90 kopecks.

A new excise system for cigarettes went into effect in Russia on Jan. 1. That fee is now tied to the maximum retail price of the cigarettes, which will be indicated on the cigarette pack. The excise fee will be 100 rubles per 1,000 filter cigarettes plus 5% of the maximum retail price, to total not less than 115 rubles. Filterless cigarettes will be charged 45 rubles per 1,000 plus 5% of the maximum retail price, and not less than 60 rubles. Sellers will also not be allowed to sell cigarettes for less than the maximum retail price. Cigarettes in the old packaging can be sold until Jan. 1, 2008.

Cigarette producers will be allowed to change their maximum retail prices once a month. In Ukraine, where a similar system is in place, restaurants are exempted from maximum retail prices. Enforcement of the law is overseen by the Federal Consumers’ Rights Supervisory Service.

Bulgartabac Drops Cigarette Prices
Sofia — The Bulgarian tobacco monopoly has announced a dramatic cut in the prices of 21 different cigarette brands as of Feb. 20.

The move reducing the total cost by some 15% comes in reaction to severe competition from foreign brands that enter the Bulgarian market without import duties as of Jan. 1.

The cigarettes branded Sredetz, Prestige, and Femina will sell for BGN 2 (1 euro) instead of BGN 2.30. The brands Arda, Verea, Melnik, and Shipka will be traded at BGN 1.70 instead of BGN 1.85.

However, the price of the most popular Victory cigarettes will remain unchanged, Bulgartabac’s executive director Hristo Lachev said.

Hongta Group Passes Quotas
Kunming — Hongta Group in southwest China’s tobacco-producing Yunnan Province — the largest Chinese tobacco manufacturer — exceeded its annual cigarette production quotas for 2006, with the output of its key Yuxi and Hongmei cigarette brands reaching record highs.

In 2006, Hongta Group also registered continued increases in the production of its Mount Hongtashan cigarette brand for a second consecutive year, with the output and sales volume of Mount Hongtashan significantly exceeding the target of 20 bn cigarettes set by Yunnan Provincial China Tobacco Industry Corp. for the year. The production of Mount Hongtashan has entered a period of rapid growth unseen for years.

As far as the production of export-oriented cigarettes in 2006, the output of Marble brand cigarettes reached 2.35 bn cigarettes in the year, marking a new high for production of exports by Hongta Group. Marble is expected to become the biggest blend-type cigarette brand export for China’s tobacco industry.

In 2007, Hongta Group will aim to strengthen the capacity and improve the quality of Yuxi, increase the output of Mount Hongtashan, and organize cigarette production by orders received, in striving to realize greater business development.

New Blend-Type Cigarette Product Launched
Xiamen — Fujian Provincial China Tobacco Industry Corp. held a ceremony in the city of Xiamen to inaugurate its International Golden Bridge as a new high-grade blend-type cigarette product with Chinese characteristics.

With a retail price of 23 yuan (US$2.90) per packet, International Golden Bridge is made from 16 high-quality leaf tobacco products from around the world, in addition to high-grade leaf tobacco grown in Atlantic regions.

International Golden Bridge is of reduced harm, with a lower content of tar and nicotine, and with a unique rich flavor. The brand uses a whole gunny-cloth creped paper as the wrap, which is advantageous to sufficient burning of cut tobacco and reducing the generation of harmful substances in smoking.

In an address at the inaugural ceremony, the general manager of Fujian Provincial China Tobacco Industry Corp. said the company is striving to turn International Golden Bridge into a representative product of Chinese-style blend-type cigarettes, in efforts to successfully compete against foreign tobacco products on the domestic market.

JTI to Expand D-spec Category
Tokyo — Japan Tobacco Inc. is launching three new cigarette products — D-spec H Side Slide Box, D-spec R Side Slide Box, and D-spec C Side Slide Box — in Tokyo, Chiba, Saitama, Kanagawa, and Fukuoka prefectures, in response to stronger demand for its innovative D-spec reduced-odor products.

D-spec reduced-odor segment products incorporate the company’s odor-reducing technology in response to consumer demands for the reduction in the unpleasant smell of smoke. After six years of research and development efforts, JTI introduced this new and innovative technology to mask the unpleasant odors. The company has received a large amount of positive feedback from consumers regarding the benefits of D-spec products such as reduced smoke smell in clothes and hair.

With the introduction of the three new brands, 22 D-spec products will be available in the Japanese market.

BAT, Others Face Lower Sales
Kuala Lumpur – Legitimate cigarette makers may see declining sales volume in Malaysia this year due to high levels of illicit trade and rapid growth of an exceptionally low-priced cigarette segment, says British American Tobacco Malaysia Bhd (BAT).

The two issues pose the biggest challenge to BAT and the legitimate cigarette making industry in Malaysia, said BAT managing director Bart Alkemade.

For the first nine months of last year, total industry volumes fell by 16.8%, with illicit trade rising to an unprecedented high of 21.5% in March.

“This trend could well continue into 2007, putting great pressure on the volumes of the legitimate tobacco players and, hence, affect their demand for local leaf,” Alkemade told Business Times.

He expects demand for local tobacco leaf to fall by about 18% this year compared to 2005.

Declining demands, compounded with the impact of the Asean Free Trade Area (AFTA) in 2010, is putting great pressure on the tobacco-growing industry in Malaysia, he noted.

Currently, the price of tobacco leaf in Malaysia is one of the highest in the world.

“With the implementation of AFTA in three years, it will be cheaper to import leaves from Asean countries, which will inevitably impact the livelihoods of the farmers in Malaysia if we do not work to boost the competitiveness of our local tobacco-growing sector,” he said.

PMI to Acquire Lakson Tobacco
Karachi — Philip Morris International (PMI), a subsidiary of Altria Group Inc., agreed to acquire an additional 50.2% majority stake in Lakson Tobacco Ltd., based in Karachi, for approximately PKR20.6 bn (US$338.9 mn) in cash. The company currently holds a 40% stake in Lakson, and the transaction will bring its total interest to roughly 90%. Under the Pakistan securities law, PMI will make a public tender offer for the remaining shares.

Lakson Tobacco is Pakistan’s second largest tobacco company.

BATU Sets 21 New Leaf Tobacco Standards
Kampala — In its effort to return to profitability, British American Tobacco Uganda has introduced 21 different buying grades so as to buy more tobacco from farmers this year.

The tobacco giant has also disclosed that to capture large market and compete favorably with others in the business, it has increased the number of tobacco farmers from 29,000 to 40,000, to drive output to 18,000 tons in the short term by the end 2007.

“To achieve competitive advantage in the world export market, we should be focusing on three main areas: right quality, right quantity, and right price. BATU’s quality is already competitive and to gain the advantage the company needs to achieve higher volumes in order to offer the best prices to its export customers,” BATU leaf director Serhat Eroglu said at a meeting of the Uganda Securities Exchange (USE).

He added that one of Uganda’s biggest competitive advantages on the global leaf export market is that Uganda produces high-quality tobacco in both the flue-cured Virginia and burley types.

Eroglu said BATU will make profit out of 18,000 tons of leaf export in the short term and 25,000 tons in the medium term in the world market.

“Our first seedbed audit, conducted at the end of December [2006] and start of January, indicates that the number of seedlings prepared will support an 18,000-ton crop, which will be a fantastic achievement for the direction of the business,” he said.

He added: “All indications at the start of the year showed that the company was on track to achieve targeted volumes of more than 15,000 tons of tobacco grown this season.”

BATU suffered a setback three years ago when the world market cancelled orders following concerns over the quality of its leaf.

The introduction of 21 buying grades is to ensure that quality issues are clearly controlled with each grade priced differently.

United States
Cutbacks Announced at Reynolds
Winston-Salem, NC - R.J. Reynolds Tobacco Co. will eliminate 80 management positions over the next 12 to 15 months as part of an overall restructuring that began in January.

The job cuts will take place at the company’s Winston-Salem, N.C., operations, spokesman David Howard said. He said that the job cuts affect “management level or above.”

The main subsidiary of Reynolds American Inc. also said it is shifting some local cigarette production to its plant in San Juan, Puerto Rico, as part of the restructuring. Howard said that the goal is to reduce the amount of hourly employee overtime “to normal levels.”

The job cuts are the first since R.J. Reynolds Tobacco Holdings Inc. bought Brown & Williamson Tobacco Corp. for $4.4 bn in July 2004, Howard said. Reynolds American was formed from that merger.

Before the merger announcement, Reynolds Tobacco said in September 2003 that it was cutting 2,600 jobs — 40% of its work force — within a year. That job cut was finished before the merger with Brown & Williamson was completed.

Howard said that Reynolds officials recently informed employees of the company’s overall restructuring plans, emphasizing the need to reach a work-force balance with “the volume of business that we are doing.”

The impacted employees will receive severance packages “along normal guidelines,” and they will be evaluated for jobs in other parts of the company, Howard said, adding, “We expect many of those affected will be asked to assist with the transition period, which could mean staying with us for most of the transition.”

Howard said that Reynolds is in the early stages of evaluating the need to increase cigarette production overseas.

Reynolds required production employees to work 10 mandatory overtime weekends between August and November to help alleviate a cigarette shortage related to a packaging-supply problem that affected several of its brands. Howard said that the shortage has since been resolved.

United States
PMI Spinoff Predicted
New York — Citigroup believes that the Altria Group is likely to spin off its international tobacco business, Philip Morris International, by the end of the first half of this year, according to a recent tobacco industry note that suggested also that PMI would play a role in future tobacco consolidations.

The note highlighted three hot topics for this year: Altria’s restructuring, global mergers and acquisitions, and further activity in the smokeless tobacco market.

Altria has already announced that it intends to spin off its Kraft Foods division, effective in March.

Meanwhile, Citigroup played down reports about the resurrection of a U.S. bill aimed at giving the Food and Drug Administration authority to regulate the sale, distribution, and advertising of tobacco products.

These reports have been fueled by the Democratic realignment of Congress since the start of the year, but Citigroup says that it has not heard of any significant change in support for the bill. Even if the bill were passed it would be unlikely to be implemented for several years, it added.

FDA regulation of the U.S. tobacco industry would probably boost the positions of the major cigarette manufacturers by helping them to maintain or increase their market shares.

United States
Universal to Sell Non-Tobacco Assets
Richmond, Va. —Universal Corp., the world’s largest tobacco leaf merchant, plans to sell its remaining non-tobacco agricultural products businesses in six to 12 months.

The company said selling the units will allow it to focus more management and financial resources on its core tobacco business. The company buys tobacco from farmers in the United States and other countries, processes the leaf, and sells it to cigarette makers.

Universal plans to sell Red River Foods Inc., a Richmond-based trading subsidiary that imports nuts and dried fruits; Nestmink Ltd., a London-based company that sells nuts, dates, and apricots; and Madera Quality Nut Inc., a California nut-processing company. The companies employ fewer than 150 people worldwide.

In the fiscal year that ended March 31, 2006, the businesses reported combined revenue of about $325 mn and a combined operating loss of about $6 mn, Universal said. The company’s tobacco revenue was $1.8 bn, with operating profit of about $156 mn.

The company said it would use proceeds from the sales to strengthen its balance sheet. The businesses were reported as discontinued operations for the third quarter that ended Dec. 31, 2006.

Tobacco International - January/February, 2007

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