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December, 2008

Renegade-Auction

Far East Cigarette Imports Declining
By John Parker

As the international tobacco market moves on, the Far East sectors attempt to become more self-sufficient.

The value for cigarette imports into Far East markets averaged about $5 bn annually during 2005–07. Greater cigarette trade among countries in the region and increased imports from Germany contributed to a steep decline for US cigarette exports to the region. US cigarettes to Far East markets declined about 23% in 2007 to 66.4 bn pieces, after averaging 84.2 bn annually during 2002–06. The pace of decline accelerated in early 2008, as increased German shipments to Japan pushed the US share of the top export destination lower.

The quantity of cigarettes imported from all sources by countries of the Far East declined from about 209 bn pieces in 2001 to a low of about 195 bn pieces in 2004 and then moved up about 1% in 2007 to approximately 229 bn pieces. Singapore and Hong Kong have shifted away from imported UK cigarettes to brands from Asian suppliers. The recent decline for US cigarette exports to the region has been less dramatic the steep slide for UK cigarette exports to the region. Germany has been expanding exports to the region in the last three years, despite comparatively higher prices.

The leading cigarette importers in the Far East during 2007 were Japan, Taiwan, Cambodia, Hong Kong, and Singapore. Japan accounted for 43.7% of Far East cigarette imports in 2006, but the 6.6% decline for total imports in 2007 left Japan with only 40% of the region's cigarette imports. Total cigarette imports reported by Far East countries remained relatively stable in the recent decade. Dramatic gains for importers like Cambodia helped to offset the big decline for imports into South Korea and the Philippines. Changes between 2002 and 2007 included an increase of about 72% for cigarette imports into Cambodia, compared with a decline of 97% for imports reported by South Korea.

Higher Quality Blended Brands Provided By More Asian Exporters:
Total cigarette exports by countries of the Far East increased from an average of about 153 bn annually during 2003–05 to about 185 bn in 2007, valued at about $2.2 bn. South Korea has been the leading Asian cigarette exporter with gains in many markets, especially in the Middle East. As prices of more costly premium brands entering international trade declined, shipments of relatively good quality cigarettes at low prices advanced. The push to produce higher quality cigarettes contributed to a boom for US exports of leaf tobacco in early 2008. While much lower US export prices for cigarettes did not provide increased exports to the Far East, they did prevent a more severe decline, and apparently spurred efforts by Asian manufacturers to shift output to more quality blended brands.

Japan’s Cigarette Imports Peaked In 2006, Declined Afterwards:
Total cigarette imports into Japan declined from a peak of about 98.7 bn pieces valued at $3 bn in 2006, and fell 6.6% to 92.2 bn in 2007. Per capita consumption of cigarettes continues to decline in Japan, although it is still about double the level found in Hong Kong. US cigarette exports to Japan fell from a record of 79.3 bn pieces in 2003 to 68 bn pieces in 2007, and then dropped 40% in early 2008.

The US share of Japan’s cigarette imports declined from 93.6% in 2003 to about 70% in 2007, and was down to about 50% of imports in early 2008. Germany accounted for about 23% of Japan's cigarette imports in 2007. As prospects for further gains in sales of German cigarettes to East Europe slowed after dramatic gains during 2004–06, other growing markets outside the EU were sought. Efforts to keep German cigarette factories busy involved finding expanding export markets. Domestic sales of cigarettes in Germany in the last several years declined, following a series of anti-smoking measures.

Managers of factories owned by Japan Tobacco International in Germany had special connections with import managers in Japan.

Japan Tobacco (JT) accounts for about two-thirds of the cigarette sales in the country. Japan Tobacco introduced new brands in the last several years. Japan Tobacco is the only cigarette manufacturer in the country. JT handled the marketing of Philip Morris brands for 32 years, but the arrangement ended several years ago. Philip Morris has now been able to arrange its own marketing strategy in Japan. Nearly half of the men and a seventh of the women in Japan smoke despite higher prices because of rising taxes.

New measures implemented in the summer of 2008 included identity cards for people over 18 in order to allow them to buy cigarettes from vending machines. The share of cigarettes sold through vending machines was more important in the past, especially in cities. Retail prices for cigarettes rose to over $4 per pack of 20 recently. About three-fourths of the price goes to taxes (a combination of the excise tax and the 5% consumption tax). Mild Seven and Marlboro have been leading brands sold in vending machines in recent years.

The connections with Japan Tobacco International in many countries provide opportunities for greater cigarette exports as well as arrangements to make sales back in Japan as German manufacturers have done. Japan’s cigarette exports increased from an average of about 13 bn pieces annually during 1998–01 to 18 bn pieces in 2007. Taiwan accounted for about half of Japan's cigarette exports in 2007. Hong Kong and China were other important markets for Japan’s cigarette exports.

About Half of Taiwan’s Cigarette Supply Is Imported:
Taiwan is a significant importer of cigarettes from Japan, United States, UK, Switzerland, and South Korea. About half of the cigarettes sold in Taiwan are imported. The second major Far East net cigarette importer in 2003–07 was Taiwan. Taiwan’s cigarette imports averaged about 20 bn pieces annually during 2002–04, and reached a peak of 26 bn pieces in 2006, before dropping 6% to 24.6 bn pieces in 2007. US cigarette exports to Taiwan fell from 2.15 bn pieces in 2003 to a low level in early 2008. Taiwan has improved the quality of some domestic brands. Cigarette exports from Taiwan rose to about 1 bn pieces in 2007, with shipments to other Asian customers.

Hong Kong’s Cigarette Trade Rebounded In Recent Years:
Hong Kong’s cigarette exports fell from 79.6 bn pieces in 1996 to 24.6 bn in 2001, but then rebounded to 29.3 bn in 2007. Greater output of quality cigarettes from the Nangang Brothers factory helped to boost exports of cigarettes from Hong Kong to neighboring Asian markets, and also to some countries in the Middle East. Hong Kong expanded cigarette exports to Turkey and the UAE in 2007.

Many smokers in Hong Kong prefer major premium brands of US cigarettes. Retail prices are among the highest in Asia because of taxes, and some residents buy less costly cigarettes when they travel north to cities of China. The previous market US cigarette exports had in China tended to blink out in early 2008, as arrivals from competitors advanced. US cigarette exports to Hong Kong declined steeply in early 2008. Total cigarette imports into Hong Kong increased 1% in 2007 to 17.8 bn pieces. Singapore, United States, Germany, South Korea, China, and Japan were important suppliers. The UK accounted for less than 1% of Hong Kong’s cigarette imports in 2007, compared with about 29% in 2002. The 1 mn cigarettes exported from the US to Hong Kong in 2007 for $11 mn were only about half the level recorded in 2000–02.

Macau Imports Cigarettes Mostly From Asian Suppliers:
Cigarette imports into Macau were in the range of 2 bn pieces in 2007 - about double the 2000–02 average. China, Hong Kong, and South Korea were important suppliers. Hong Kong shipped 267 mn cigarettes to Macau in 2007. A large share of the retail sales in Macau are made to tourists.

Singapore's Cigarette Exports Rebounded Recently With Greater Sales To ASEAN Customers:
Exports of cigarettes from Singapore declined from 27.6 bn pieces in 2000 to a low of 14.3 bn in 2003. Greater duty free sales to customers in ASEAN markets helped to spur an upward trend during 2004–07. By 2007, Singapore's cigarette exports reached 24.1 bn pieces. The shift to greater imports of less costly brands caused the value for cigarette imports into Singapore to decline to $178 mn in 2007, compared with $315 mn in 2006.

Singapore's cigarette imports declined from 56.2 bn pieces in 1996 to a low of 13 bn in 2003 as arrivals from the UK dwindled, but total cigarette imports rebounded to 17.4 bn pieces in 2007. The previously flourishing transit trade in more costly UK brands has diminished. Greater deliveries from other ASEAN countries contributed to the rise. Indonesia increased shipments to Singapore and to Batam Island, a duty free area of Indonesia just south of Singapore.

South Korea’s Cigarette Exports Reached A Peak In 2007:
The way South Korea expanded cigarette exports between 2000 and 2007, with some fluctuations along the path is amazing. Exports of 48.1 bn cigarettes in 2007 pushed South Korea into first place among Far East cigarette exporters in terms of quantity. The astonishing increase came from rapidly expanding sales to non-traditional markets where a wide range of brands were popular among smokers. The top customer for South Korea’s cigarette exports during 2000–03 was Afghanistan, but shipments directly to Afghanistan were smaller in recent years as competition from Kazakhstan and some other Former Soviet Union countries increased.

The combination of low prices for blended brands of cigarettes and diligent market research contributed to the development of newer customers to replace Afghanistan. The leading destination for South Korea’s cigarette exports in 2007 was the UAE with the shipment of 15 bn pieces, mostly entering the transit trade to Iran. South Korea’s direct cigarette export to Iran spiraled up to 2 bn pieces in 2007. South Korea increased cigarette exports directly to Iraq with the shipment of 7.9 bn pieces in 2007.

Strong gains were made for shipments to Kazakhstan in recent years. Korean cigarette exports to Kyrgyzstan increased through 2005, and then dropped back moderately. South Korea’s cigarette exports to Russia rose to 3.4 bn pieces in 2007, providing most of Russia's total cigarette imports. The average export price in the range of 16 cents per pack contributed to low retail prices in Siberia, even after taxes were added.

The previously high per capita rate of smoking in South Korea has been declining as anti-smoking measures were implemented. Sales of a wide range of imported brands did well before a big hike in import duties apparently contributed to the rise in smoking. Recently, higher import duties and taxes bolstered the average retail price, but sales were still at 104 bn pieces in 2004. A tax hike of 49 cents per pack in 2004 contributed to a tumble for cigarette imports. Over half of the men and about 3% of the women smoke. Retail prices for cigarettes range from about $2.40 to $3.50 per pack. KT&G provides about three-fourths of the domestic output of cigarettes. BAT, Philip Morris, and Japan Tobacco International are other participants in the market.

Improved quality for blended domestic cigarettes contributed to a slowdown for imports. South Korea’s imports of cigarettes increased from 20 bn pieces in 2000 to 5.8 bn in 2003, as preparations for the upcoming tax hikes were made. By 2007, South Korea's cigarette imports were less than 500 mn pieces. US cigarette exports to South Korea fell 110.7 mn in 2001 to 3.6 mn in 2004 and completely blinked out in 2007.

Indonesia’s Cigarette Exports To Southeast Asia Peaked In 2007:
Indonesia sharply expanded exports of cigarettes to a peak of 45.7 bn pieces in 2007 - double the 22.7 bn pieces exported in 2003. Gains in sales to markets in Southeast Asia during the recent decades were spurred by investments from multinationals in Indonesia. Spectacular growth in Indonesia's cigarette exports to Cambodia to 21.6 bn pieces in 2007, contributed to the overall upward movement. Trade opportunities provided by free trade among countries of the Association of Southeast Asian Nations (ASEAN) have provided substantial benefits for Indonesian cigarette exports. Shipments to Myanmar rose to 690 mn pieces in 2007, and Japan was a customer for 371 mn pieces.

China’s Cigarette Exports Were Steady During 2004–07:
China’s cigarette exports suffered from rising competition from other countries in Southeast Asia in the late 1990s. A lack of business in Hong Kong and smaller sales to Burma caused the value for China’s cigarette exports to drop to a low of $113 mn in 1999. However, the value showed an upward trend during 2000–07, reaching a peak of $262 mn in 2007. China's cigarette exports advanced with greater sales to Vietnam, and some countries in the Middle East.

China’s cigarette exports rose from 13.8 bn pieces in 2002 to 15.6 bn pieces in 2007. China faces strong competition from Hong Kong traders in the Philippines and Vietnam, and from Indonesia in Cambodia, Thailand, and Laos. China exports small quantities of cigarettes to Saudi Arabia, Iran, and some other countries in the Middle East in the last several years.

Focus On Providing More Quality Domestic Brands Limits China’s Cigarette Imports:
The output of about 2.2 tn cigarettes annually places China well above other producers. That is a quantity greater than output in three other major cigarette producers - Russia, United States, and Germany. Lower duties and less stringent trade barriers implemented under WTO guidelines have not done much to spur imports of cigarettes into China from sources other than Hong Kong. China's manufacturers have reduced the number of brands produced, but about 100 different brands provide a wide range of quality and prices. Arrangements to produce more high quality blended brands contributed to the doubling of China's imports of US flue-cured tobacco in early 2008. Hong Kong’s re-exports of cigarettes to China and Taiwan were reported in the range of 10 bn pieces for 2007, compared with about 4.4 pieces in 2002.

Thailand Importing More Cigarettes:
Thailand’s cigarette imports increased about a tenth in 2007 to 12.3 bn pieces, compared with an average of about 11 bn pieces annually during 2003–06, and about 4 bn pieces annually during 1997–99. Modern cigarette factories in Thailand use quality imported tobacco to blend with the relatively mild domestic tobacco. Despite efforts to provide excellent quality cigarettes, imports from ASEAN suppliers recently showed an upward trend. Thailand’s cigarette imports showed an upward trend in recent years, rising from $25 mn in 1998 to an average of about $71 mn annually during 2000–04. Even Burma has developed a new border trade for the delivery of cigarettes to Thailand.

Malaysia’s Cigarette Imports More Than Doubled In 2007, And Exports Were Steady:
Cigarette imports into Malaysia have been on an upward trend during the recent decade and arrivals reached 7.7 bn pieces in 2007 - more than double the 2006 level. Shipments of cigarettes from Singapore to bordering Malaysia reached 2.7 bn pieces in 2007.

The competitive situation for cigarette trade in Southeast Asia caused a decline for exports from Malaysia from a peak of 13.8 mn pieces in 2003 to about 11.5 bn pieces in 2007, which was a notch above the 2006 shipments. Loss of large sales in Hong Kong contributed to the decline. Malaysian factories use high quality imported US and Brazilian tobacco for a high proportion of some premium brands, which helps to lessen the amount of imports the duty-free ASEAN setting might otherwise allow.

Myanmar Importing and Exporting More Cigarettes:
Multinational investments and technicians from Indonesia contributed to greater output of quality cigarette brands in Myanmar in recent years. This contributed to greater imports. Also, ASEAN free trade arrangements allowed some rebound for cigarette imports. After rising in the 1990s with significant arrivals from China, cigarette imports into Myanmar dropped to a value of about $15 mn in 2004, before rising to about $21 mn in 2007. Myanmar had only token cigarette exports in the 1990s, but shipments were in the range of 400 mn pieces in 2007.

Vietnam Strives To Boost Domestic Output And Reduce Imports:
Cigarette imports into Vietnam were in the range of 12 bn pieces in 2007 - about double the 2001 level. Free trade arrangements through ASEAN contributed to Indonesia’s export of about 5 mn cigarettes to Vietnam in 2007. Hong Kong exported about 2 bn cigarettes to Vietnam in 2007. China and the Philippines have advanced cigarette exports to Vietnam.

A large share of the cigarettes produced in Vietnam come from government owned and operated factories. Multinationals and smaller private factories provide about a fifth of the domestic supply. Cigarette exports from Vietnam increased to an average of about 660 mn annually during 2005–07, compared with an average of about 131 mn pieces annually during 2000–02. Use of imported US tobacco contributed to greater demand for some brands made in Vietnam among smokers in neighboring countries.

Philippine Imports Of Cigarettes Peaked In 2003 And More Foreign Investments Bolstered Exports:
Philippine passengers clearing through customs in Manila after a flight from Hong Kong may often have plenty of cigarettes and other items in their suitcase. The customs officials may waive most American passengers on through, because they need to spend time calculating the import duties the Philippine passengers need to pay. The big demand for imported cigarettes can show up in trade numbers when changes contribute to a system making legal imports easier. Imports of cigarettes into the Philippines soared from $108 mn in 2002 to $365.4 mn in 2003, and remained at a high level in 2004. Exporters in Hong Kong, Indonesia, and China have found good prospects for greater sales in Philippines.

About half of the men in the Philippines smoke. Some domestic brands are available at low prices. More smokers recently shifted to higher quality brands. Fortune Tobacco Corporation is a major producer of cigarettes. Philip Morris made an investment of about $300 mn in 2003 to build a cigarette factory in Batangas Province. This apparently contributed to the rise in Philippine cigarette exports from 2.9 bn pieces in 2002 to a peak of 20.3 bn pieces in 2005. Strong competition within ASEAN apparently influenced the decline to 17 bn pieces for Philippine cigarette exports in 2007, when Vietnam was a major market.


Tobacco International - December, 2008

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