[Intl-tobacco] South Africa: Despite Laws, SA Still a Smoking Hot Market for Global Tobacco

[Robert Weissman]

*Despite Laws, SA Still a Smoking Hot Market for Global Tobacco*

*Business Day* (Johannesburg)
NEWS
March 31, 2005
Posted to the web March 31, 2005

By Charlotte Mathews
Johannesburg

SA's tough antismoking laws, high duties on tobacco products,
competition from illegal imports and the domination of the local
cigarette market by British American Tobacco (BAT) are not enough to
deter international tobacco groups from setting up shop here.

Although BAT, whose biggest brands include Rothmans and Peter
Stuyvesant, has about a 93% share of the local tobacco market, Japan
Tobacco International, which has been in SA since 1997, has gradually
grown its share to about 5% with brands such as Camel and Winston.

Swedish Match, which entered SA in 1999 through the acquisition of
Leonard Dingler and two other tobacco-related businesses, describes SA
as one of the group's more important markets. It sells Taxi snuff as
well as Boxer and Black and White pipe tobacco.

Two years ago Philip Morris, which is the biggest tobacco group in the
world, established an office in SA, from which it sells Marlboro.
Earlier this month, the Financial Times reported that Gallaher, maker of
Benson & Hedges and Silk Cut cigarettes, was buying a factory site in SA
and would start production later this year.

The Daily Dispatch in East London reported last month that Carolina
Tobacco was about to start production at a factory in Wilsonia,
replacing liquidated African American Tobacco.

Tobacco Institute of SA chairman and CEO Francois van der Merwe says the
local tobacco market is shrinking, but is still a good market. "However,
we don't know for how long."

One of the advantages of SA is that it offers a springboard to the rest
of Africa.

In SA, 23- 25-billion cigarettes are consumed a year and the equivalent
of about another 8-billion cigarettes is consumed in the form of pipe
tobacco, hand-rolled cigarettes and snuff. But in the past 10 years
consumption of cigarettes has fallen by about a third as a result of
strict laws and higher taxes.

It is estimated that the illicit trade, including smuggled and
counterfeit products, accounts for about 10%-15% of cigarettes consumed
in SA, Van der Merwe says.

In the last budget, duty on tobacco products rose between 7% and 15%.
The health department has also put forward proposals to make current
restrictions on promoting tobacco products even more stringent.

Van der Merwe says the new proposals include further limits on smoking
in public places, with an increase in fines for contravention and a
complete absence of tobacco product displays at points of sale.

Tobacco warnings on packets will also have to be increased and the
tobacco industry will be prohibited from social spending.

SA is not the only developing market where international tobacco groups
are establishing a foothold. According to a report last year from the
United Nation's Food and Agriculture Organisation (FAO), world tobacco
consumption in developed markets is expected to continue declining until
2010 while demand in developing countries will keep rising.

In Africa, tobacco demand grew throughout the 1990s and reached a record
growth rate of 3,5% in 2003. According to the FAO this growth rate is
expected to be maintained until 2010.

Philip Morris recently agreed to acquire a 40% stake in Sampoerna, one
of Indonesia's biggest cigarette firms, for $5,2bn. Indonesia is the
fifth-largest cigarette market in the world after China, the US, Russia
and Japan.

The Economist Intelligence Unit says in this month's outlook for the
global tobacco industry that access to China is a priority.

But the Chinese government is reluctant to allow foreign companies to do
more than sign distribution agreements with Chinese companies, and it
said in January that no new cigarette plants would be built, even as
joint ventures between international and Chinese companies.