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July/August, 2006

U.S. Tobacco Cooperative

Middle East Market Report

By John Parker

Middle East cigarette import market sees heightened competition, as total imports increased to about 164 bn pieces in 2005, valued at about $1.8 bn.

Major cigarette exporters from the European Union, Russia, Ukraine, and Bulgaria were searching for extra sales beyond their established market areas in the recent year. This contributed to greater efforts to expand cigarette sales to markets in the Middle East. The way Poland became an important exporter of cigarettes to Iraq after joining the EU in 2004 indicates how new trade flows have emerged. The U.S. share of total Middle East cigarette imports declined in 2005, while the share for EU countries increased. Total cigarette imports into the Middle East increased to about 164 bn pieces in 2005, valued at about $1.8 bn.

Iraq Diversifies Cigarette Imports: Growth in Iraq’s cigarette imports is coming from a wide range of countries, including new suppliers from East Europe. The lack of direct shipments from the U.S. through early 2006, indicates that multinationals designated European and Asian associates to cultivate the Iraqi market. No system has yet been put into place for arranging customs duties.

Iraq is an unusual market for imported cigarettes. Per capita use may be rising, despite turbulence for the overall economy. The high unemployment rate of over 40% tends to dampen demand for some other consumer items more than it does for cigarettes. Before March 2003, few people in Iraq had access to U.S. dollars or other foreign exchange. The Kurdish dinar was more desired by transit traders from Jordan and Turkey. Regulations concerning the Iraqi dinar were stiffening, and it had little value outside of Iraq. The shortage of foreign exchange was major problem for importing cigarettes into Iraq during most of the recent decade. A different setting appears to be evolving, as private traders begin to operate in Iraq. About a year ago the United Nations had the delivery of $12 bn in $100 bills flown to Baghdad. That stemmed from the accumulation of funds for the Oil-for-food program of the UN where much of the money was never used. Without an efficient banking system, it is a mystery of just where all those $100 bills are located now. It appears obvious that much of the cash floating around Iraq is used to buy cigarettes. Even some small traders are able to import cigarettes.

Cigarette imports into Iraq were in the range of 19 bn pieces during 2005, according to matrix tables for shipments to Iraq, and estimated deliveries through transit traders in bordering countries. This indicates that cigarette imports have increased about 50% since 2003. Greece and Turkey were major exporters of cigarettes to Iraq during 2000-03. By 2005, greater availability of foreign exchange and especially U.S. dollars helped more small importers to participate in the trade. The value for Iraq’s cigarette imports increased to a range of $164 mn in 2005, compared with $78 mn in 2003, and $144 mn in 2004.

Output of cigarettes in Iraq has not yet rebounded enough to affect demand for imports. The lack of domestic output is one of the reasons for the increase in cigarette imports between 2003 and 2005. The brand Babylon contains a significant proportion of flue-cured tobacco. Before March 2003 the search for larger imports of flue-cured tobacco appeared to indicate that larger purchases in China and Zimbabwe were being explored. Stocks of tobacco declined steeply between 1991 and 2003. Cigarette output fell to a range of 5 bn pieces in 2002, compared with an average of about 14 bn annually during 1988-90.

A lack of machinery for some functions performed in a modern cigarette factory tended to limit output by the factory at Sulayimaniyah. Some Kurdish traders bought cut tobacco from transit traders in Turkey to allow the factory to produce blended brands. Attacks from insurgents have been a problem for attracting multinational cigarette manufacturers. Yet, investments in the more safe area around Sulaiyimaniyah could provide a valuable factory for purchases of leaf tobacco from Kurdish farmers. Production of leaf tobacco in Iraq declined from an average of 18,000 tons during 1985-88 to a range of 3,000 tons annually during 2000-03. USAID projects for reconstruction of Iraq have included some horticultural crops, but not tobacco.

German cigarette exports to Turkey zoomed upward to 3.4 bn pieces in 2005, compared with 784 mn pieces in 2004. Turkey’s trade data did not reflect that quantity of German exports. Apparently most of the German cigarettes shipped to Turkey were eventually sent by trucks to Iraq and Iran. The route for trucks from Turkey by roads through Silopi Pass tends to make it more convenient for traders to sell those cigarettes to customers in Iraq. A different arena of small cigarette importers operating in the Gulf provide most of the cigarettes imported into Iran.

Turkey Expands Cigarette Output As Export Potential Grows: Turkey has the largest cigarette output of any country in West Asia, with production of about 150 bn pieces annually. Most of Turkey’s exports of about 14 bn cigarettes annually go to customers in Middle East countries, especially Iraq and Iran. Transit traders in Turkey also transport cigarettes from Europe on their way to Middle East markets. Estimates for cigarettes from Turkish factories delivered to Iraq are in the range of 3 bn annually. An estimated 3.5 bn cigarettes from Greece were delivered to Iraq in 2005, mostly by trucks driven through Turkey. A decline for the transit trade through the Gulf for cigarettes on their way to Iran had added to the importance of movements of cigarettes from Europe to Iran through Turkey.

The modern BAT factory near Izmir has been able to provide more blended brands for export. Other manufacturing facilities by multinationals are expected to contribute to greater cigarette exports in the future. Greater output of blended brands contributed to increased imports of U.S. tobacco in 2005.

Israel’s Cigarette Imports Showed Upward Trend Through 2004, But Declined in 2005: Imports of cigarettes into Israel increased steadily from 5.07 bn pieces in 2001 to about 7.2 bn pieces in 2004, but declined slightly in 2005. A shift to other suppliers occurred in 2005, including some deliveries from East Europe. U.S. cigarette exports to Israel declined from 5.05 bn pieces in 2004 to 1.66 bn pieces in 2005, as the average price rose 17.7% to 26.4 cents per pack.

Lebanon Maintains Busy Cigarette Trade: Lebanon’s cigarette imports rose slightly to a range of 7 bn pieces in 2005, partly for distribution to customers in other nearby countries. U.S. cigarette exports to Lebanon remained steady at 3.9 bn pieces in 2005, valued at $42 mn. German cigarette exports to Lebanon increased sharply to nearly 1 mn pieces in 2005, partly because increased deliveries to customers in Syria. Cigarette exports from the UK to Lebanon declined from 317 mn pieces in 2002 to about 130 mn annually during 2003-05.

Syria’s Cigarette Imports Fluctuate: Syria’s total cigarette imports averaged about 4.3 bn pieces during 2003-05, compared with 1.95 bn pieces in 2001. U.S. cigarette exports to Syria declined from a peak of 1.64 bn pieces in 2003 to 265 mn pieces in 2004, and ended in 2005. A shift to European suppliers of improved blended brands contributed to the cessation for imports of U.S. cigarettes. German cigarette exports to Syria doubled in 2005, reaching 175 mn pieces, valued at $4.6 mn.

Jordan Expanded Cigarette Output as Export Demand Increased: Jordan bolstered imports of leaf tobacco and special blends of cut tobacco in the last several years to allow increased output of cigarettes. Jordan’s exports of cigarettes to Iraq expanded sharply during late 2003 and 2004, but the pace of growth slowed in 2005. Competition from a wide range of suppliers in other countries made the Iraqi market more competitive for Jordan by 2005. An increase in the number of shoppers from Iraq visiting Jordan meant that much of the increase in domestic sales was really from foreign visitors. Jordan became a busy transit trade center for cigarettes on their way to Iraq in 2005. German cigarette exports to Jordan zoomed upward to 2.1 bn pieces in 2005 — about triple the 2004 level. Iran Importing More Cigarettes

Total sales of imported cigarettes in Iran increased to a range of 48 bn pieces in 2005, and arrivals came from more countries that during the 1990’s. Most European countries have some exports of cigarettes to Iran, including newer exporters in CIS countries. The import value for cigarettes entering Iran was estimated at about $500 mn for 2005, and the retail value may have been about $1 bn.

The high price for crude oil in the range of $70 per barrel has contributed to exports of over $60 bn annually from Iran. Government spending on projects and subsidies contributed to substantially higher income for many Iranians. Relatively high prices for agricultural commodities added to rural income. Demand for cigarettes has increased as per capita income rose. Most of the increased demand was met with imported cigarettes, although the setting for domestic output recently showed some changes.

Surprisingly, a major exporter of cigarettes to Iran is the U.S. A shift from large purchases of less costly U.S brands in 2004 to more premium brands occurred in 2005. The average price for U.S. cigarette exports to Iran was only 5.7 cents per pack of 20 in 2004, but it jumped to 24.8 cents per pack of 20 in 2005. The success for sales of inexpensive U.S. brands in 2004 indicates that a potential for repeat business may be significant. U.S. cigarette exports to Iran declined from 14.4 bn pieces in 2004 to 4.05 bn pieces in 2005. The value for U.S. cigarette exports to Iran increased from $41.2 mn in 2004 to $50.3 mn in 2005. During January-March 2006, U.S. cigarette exports to Iran increased 79.7 % to 1.44 bn pieces, valued at $18.2 mn.

It is ironic that a major supplier of cigarettes directly to Iran is the U.S., while most European suppliers use the transit traders in contact with many small traders from Iran shopping in neighboring countries. Many dhows and boats go from Iran each day to the trading centers of United Arab Emirates and Oman to purchase a wide range of goods for distribution in Iran. Dubai’s duty-free zone in United Arab Emirates is a leading center for sales of cigarettes to traders from Iran. It is possible to see more boats from Iran entering Dubai’s harbor than any other location on the Gulf. Dubai’s traders have become wealthy providing manufactured goods for Iran. UAE has a strong convertible currency and modern efficient banks. The Iranian rial has lost value in recent years. It now takes over 9,000 Iranian rials to buy one U.S. dollar, or triple the amount needed three years ago. In contrast the conversion value for the UAE dirham has remained steady at a value of 27.5 cents.

The move to raise the import duty for cigarettes to 150% ad valorem for all Gulf Cooperation Countries (GCC) in 2004 caused a reduction for the cigarette transit trade moving through Oman and United Arab Emirates. Other members of GCC are Saudi Arabia, Bahrain, Qatar, and Kuwait. A decline for the average price for cigarettes exported from some European countries tended to allow the transit trade to still remain important in 2005. The move tended to hurt the transit trade prospects for Kuwait, thus giving some extra business for traders in Turkey and Jordan.

Most of the cigarettes exported from European countries to UAE are destined for the Iranian market. German cigarette exports to UAE increased sharply to 3.3 bn pieces in 2005, compared with 1.9 bn pieces in 2004. UK cigarette exports to UAE averaged about 1.8 bn pieces annually during 2003-05, compared with 2.8 bn pieces in 2002.

The monopoly for manufacturing tobacco products in Iran has been held by Iranian Tobacco Company for about half a century. Recent moves to introduce new blended brands and to improve the quality of cigarettes helped to boost output to a range of 17 bn pieces annually, compared with the 2002-04 average of about 15.4 bn. The large Tehran factory may be further expanded in the future. Investments from Imperial are scheduled to implement arrangements made earlier before Reemstra was purchased.

Iran recently became a larger exporter of leaf tobacco to Russia and some other CIS countries. Apparently a relatively new two-way trade of leaf tobacco is evolving for Iran. Stocks of oriental tobacco are being exported. Then imports of flue- cured tobacco are scheduled to increase. To save time for producing newer blended brands, imports of 8,613 tons of cut tobacco and tobacco products other than cigarettes or cigars moved into Iran in 2004, according to FAO data.

The leading domestic brands are Magna and Bahman. They may be behind Marlboro as the leading brand in overall sales, because of the way imports dominate the market. Also, different versions of Marlboro come from more than a dozen countries. Germany was a major supplier of Philip Morris brands to Iran in 2005. Sales of Winston and Kent are important. The excess supply of cigarettes manufactured by multinationals in Russia and Ukraine may mean greater exports from those countries to Iran in the future. There may even be some arrangements to export more cigarettes from CIS countries when they increase imports of leaf tobacco from Iran.

United Arab Emirates Transit Trade In Cigarettes Peaked in 2002: Cigarette imports reported by United Arab Emirates jumped by 80% in 2002 to 39 bn pieces, apparently in preparation for the GCC move to boost the import duty to 150% ad valorem. Many shoppers from around the world visit Dubai. Cigarette retail prices in Dubai remain relatively low. The average price for U.S. cigarette exports to the UAE declined 15% to 19.5 cents per pack of 20 in 2005. Even with the import duty added, the retail price for cigarettes in some stores in Dubai may be less than $1 per pack.

UAE cigarette imports drifted downward to 33.5 bn pieces in 2003, and apparently lagged in the two following years. Some ships may not need to deliver cigarettes for storage in warehouses in Dubai. The containers with cigarettes may be delivered outside the harbor to boats headed for Iran. More trade in cut tobacco for the transit trade to Iran moved through UAE in the last two years. New facilities to manufacture cigarettes in Dubai have been able to use cut tobacco prepared specially for their brands. UAE is a major market for India’s exports of tobacco products.

Oman’s Transit Trade Business Declining: The northernmost peninsular of Oman is relatively close to Iran. That physical setting contributed to a boom in the transit trade in cigarettes through Oman until recently. Oman reported imports of 35 bn cigarettes in 20-0-1 and 27.5 bn for 2002, compared with 17.4 bn by 2003. Further reductions were reported for 2004 and 2005. By 2005, cigarette imports clearing customs into Oman were only about a fourth the 2001 peak. This indicates that the GCC import duty of 150% ad valorem made Oman’s cigarette trade a casualty. While Iran has been kind to small traders, it appears that GCC policies have become a problem for some Omani traders.

Saudi Arabia’s Imports Shift Moderately to European Suppliers: Saudi Arabia’s cigarette imports remained steady in the range of 19.7 bn pieces during 2005 for a value of about $260 mn, and the share of imports from the European suppliers increased. The U.S. share of Saudi cigarette imports declined from about 57% in 2004 to about 47% in 2005. The average price for U.S. cigarette exports to Saudi Arabia declined from 22.8 cents per pack of 20 in 2004 to 18.9 cents per pack in 2005. UK cigarettes accounted for about a fifth of sales during 2003-05.

Sales of cigarettes for an average retail price of about $1.80 per pack remained strong. The opening of new supermarkets in major cities added to the opportunities for shoppers to buy cigarettes. The 150% ad valorem import duty contributed to a rise in the average retail price. For about a decade prior to 2004, the import duty for cigarettes had been 100% ad valorem.

Kuwait’s Imports Show Upward Trend: Rising per capita income in Kuwait and population growth due to immigration added to the demand for cigarettes in recent years. Cigarette imports into Kuwait increased steadily from, about 4 bn pieces in 2003 to 4.6 bn by 2005. The average price for U.S. cigarette exports to Kuwait declined a fifth to 17.6 cents per pack of 20 in 2005. Yet, U.S. cigarette exports to Kuwait declined 2.2% in 2005 to 1.74 bn pieces. The U.S. share of the market for cigarettes in Kuwait drifted downward to about 38% in 2005, while the UK share remained steady at about 21%. Asian exporters have sought to expand sales of premium brands in Kuwait at prices slightly below those from the UK.

Bahrain Importing More Cigarettes: Bahrain has become a busy place for shoppers from Saudi Arabia because of the causeway connecting the two countries. U.S. cigarette exports to Bahrain increased 23.3% in 2005 to about 361 mn pieces, and the average price declined about a fifth to 17.6 cents per pack of 20. Bahrain’s total cigarette imports advanced about 6% in 2005 to about 1.7 bn pieces, compared with an average of about 1.36 bn pieces annually during 2001-03.

Qatar Importing More U.S. Cigarettes: U.S. cigarette exports to Qatar increased 7% in 2005 to 426 mn pieces, and the average price declined 17% to 18.1 cents per pack of 20. Total cigarette imports into Qatar rose about a fifth to approximately 1.8 bn pieces in 2005. The UK provided about 22% of the cigarettes imported into Qatar during 2003-05, compared with 65% in 2002.

Yemen Importing More Cigarettes: During the 1990’s a large share of the cigarettes sold in Yemen came through traders in Saudi Arabia, partly because of the efficiency of Saudi banks and foreign exchange transactions. Improvement in Yemen’s banking and greater petroleum exports have made direct sales for cigarette exporters more convenient. Total cigarette shipments directly to Yemen by major suppliers increased to about 240 mn pieces in 2005, compared with about 135 mn annually during 2002-04. U.S. cigarette exports to Yemen increased 44.9% in January-March 2006 to 20.9 bn pieces. During 2003-05, U.S. cigarette exports to Yemen averaged 56 mn pieces annually. Cigarette exports from the UK and Asian countries to Yemen fluctuated widely in recent years. Yemen is a large importer of cut tobacco used for water pipes.


Tobacco International - July/August, 2006

SMOKE Magazine - Cigars, Pipes, and life's other desires


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