Special Report

WORLD CIGARETTE SITUATION

Country Analysis By Region

NORTH AMERICA

Mexico - Mexican cigarette production is forecast to increase slightly or reach 47 billion pieces in 1999. Low to medium priced cigarettes are preferred more than higher priced imported brands. Cigarette consumption is likely to increase marginally to 47 billion pieces in 1999 as a result of population growth.

United States - U.S. cigarette consumption in 1998 is estimated at 470 billion cigarettes, 2 percent less than a year ago. Declines in consumption can be attributed to health concerns, an aggressive anti-smoking campaign, price increases, and decreased social acceptance of smoking. Consumption is expected to decrease again in 1999.

Cigarette production fell 6 percent in 1998 to an estimated 680 billion pieces about the level of 1990 due to a decline in exports and domestic consumption. Approximately two-thirds of U.S. cigarette output goes to the domestic market with the remainder going for export. Production is projected to fall another 4 percent in 1999 in line with reduced consumption prospects.

Cigarette exports in 1998 totaled 201 billion pieces, down 7 percent. The leading U.S. cigarette export markets in 1998 were Japan, Belgium/Luxembourg ( a major transshipment point for cigarettes destined to other European markets), Lebanon, Saudi Arabia, and the Russian Federation. Exports in 1999 are projected to drop slightly to 200 million pieces as world demand for tobacco products decrease. The United States is not a significant importer of cigarettes.

SOUTH AMERICA

Brazil - Brazilian cigarette production is forecast at 175 billion pieces in 1999 as compared to 170 billion pieces in 1998. Consumption is expected to remain constant in 1999 at 100 billion pieces. Sources report that contraband cigarettes from countries such as Paraguay represent a major concern for Brazilian cigarette companies. Cigarette exports are estimated at 75 billion pieces, up nearly 3 percent. Major export markets for Brazilian cigarettes are Belgium, Paraguay, and the Russian Republic.

Argentina - Argentine cigarette production for 1999 is estimated to increase nearly 2 percent or to reach 42.5 billion pieces. Cigarette exports for 1999 are forecast to remain constant at 2.4 billion pieces. Over 75 percent of cigarette exports are destined for Paraguay, followed by Chile and Uruguay. Imports for 1999 are also projected at 2.4 billion pieces, unchanged from 1998. Cigarette smuggling in the northern provinces continues to be a problem. A large portion of Argentina's trade consists of cigarettes that are exported, then illegally re-imported in order to bypass duties and taxes.

EUROPEAN UNION

Austria - Duty free shops will no longer have tax advantages within the EU. Sources forecast that cigarette sales will increase in 1999 as domestic consumption is expected to increase slightly to 15 billion pieces. Production is projected to increase 3.5 percent or total 23 billion pieces in 1999 as a result of increased exports and domestic consumption. Exports are estimated to rise by 9.5 percent due to increased shipments to Germany, France, China, and Japan.

France - SEITA is the largest cigarette manufacturer in France followed by Philip Morris. SEITA continues to reduce its production of dark non-filter cigarettes in order to meet consumer demand for a lighter flavored tobacco product which is perceived as less harmful to one's health. Cigarette production for 1999 is to reach 4.2 billion pieces, down nearly 2 percent. Non-filter production is estimated to drop dramatically, from 109 billion pieces in 1997 to 8.5 billion pieces in 1999. Consumer demand is to remain constant in 1999. Imports, which account for 50 percent of cigarettes consumed, are expected to remain relatively constant.

Germany - Despite world-wide anti-smoking efforts, cigarette consumption in Germany continues to increase. Domestic consumption is estimated at 137 billion pieces, up 4.5 percent in 1999. Some of this growth is attributed to the influx of Eastern European immigrants. Production is forecast to decrease slightly to 180 billion pieces. Sources also report that Germans are changing their smoking preferences. German consumers are becoming more price sensitive as a result of high unemployment and slow economic growth. Big packets, which contain 24 to 27 pieces, captured 11.6 percent of the market. Purchases of big packets are expected to increase further in 1999 and may impact total cigarette consumption in the future.

Netherlands - The Netherlands continues to be the largest exporter of cigarettes in Europe. Approximately 99 percent of its total production was exported to countries within the European Union, especially Italy and France. Cigarette production is expected to remain constant at 116 billion pieces in 1999. Domestic consumption is estimated to drop about 3 percent or total 29 billion pieces in 1999 as a result of cigarette smokers switching from cigarettes to cigars. Many cigarette smokers perceive cigars as being less harmful to one's health than cigarettes. Exports are estimated to rebound slightly to 105 billion pieces in 1999, while imports are expected to reach 18 billion pieces.

EASTERN EUROPE

Poland - New restrictions on tar and nicotine levels and anti-smoking campaigns prompted manufacturers to invest in new facilities capable of producing Western-style brands. Cigarette production is estimated to remain constant at 97 billion pieces in 1999. Imports are forecast to drop by 9 percent in 1999 as a result of more domestic cigarette producing facilities. Cigarette exports are expected to rebound by 25 percent or 5 billion pieces in 1999.

Russia - Russian cigarette production is estimated to total 190 billion pieces in 1999 as compared to 180 billion pieces in 1998 as a result of increased foreign investment in the area. Over the next 2 to 3 years foreign investment is expected to total over $500 million in tobacco manufacturing industries. With the increase in domestic production, imports are expected to fall in 1999. Imports are forecast to decline by 31 percent and total 44 billion pieces in 1999. Domestic demand for cigarettes is forecast at 232 billion pieces in 1999, down about 5 percent. This decrease is attributed to the Russian financial crisis.

Turkey - Sources report there is fierce competition among cigarette manufactures to gain larger shares of the growing Turkish cigarette market. TEKEL controls about 72 percent of the market share, followed by Phillip Morris with 23 percent and RJR with 5 percent. To meet the increased demand, both in the domestic market and export market, manufacturers are increasing production capacity. For 1999, cigarette production is forecast to increase by nearly 2 percent and total 12 billion pieces. And domestic consumption is forecast to increase to 11.1 billion pieces, up 2 percent in 1999.

AFRICA

South Africa - The anti-tobacco lobby has strengthened in South Africa, as the current South African government is reportedly against smoking. A very strict Tobacco Products Control Bill was passed by the Parliament earlier this year, which included a 20-percent tax hike on tobacco products. As a result, the tobacco industry was affected as consumer demand for cigarettes in 1998 dropped 5 percent, to 31 billion pieces. For 1999 domestic consumption is projected to drop 3.4 percent to 30 billion pieces. Cigarette production is expected to marginally decline to 29.5 billion pieces in 1999 as compared to 30.5 billion pieces in 1998. Sources attributed this decline to lower exports and reduced domestic demand.

ASIA

China - The official estimate for cigarette production, is forecast to remain constant at 1.6 trillion pieces in 1999. Consumption, which grew slightly in 1998, is forecast to continue growing marginally this year. Sources attributed the difference between increased consumption and stable production of cigarettes to illegal production in China. The government has undertaken an aggressive campaign against both illegal production and smuggling, with mixed results. China cigarette exports declined by 52 percent in 1998 as a result of the Asian financial crisis. A marginal recovery is forecast for 1999 due to declining prices for Chinese cigarettes and improved economic performance in Asian markets. Official imports of cigarettes dropped by over 50 percent in 1998, as a result of the governments efforts to bring supplies under control. However Hong Kong re-export data indicate that the value of cigarettes smuggled into China from Hong Kong alone are three times that of legal imports. Imports are expected to increase slightly in 1999 to 4.8 million pieces, but remain lower than 1997 levels.

Hong Kong - Cigarette production for 1999 is projected to decrease 4 percent and total 12.2 billion pieces as a result of depressed economies in South East Asia. Although Hong Kong has one of the lowest smoking rates in the world, domestic consumption is projected to increase to 5.9 billion pieces as compared to 5.4 billion pieces in 1998. Sources attributed this increase in cigarette sales to the influx of immigrants. Over 83 percent of Hong Kong's cigarette imports are re-exported to China and South East Asia. For 1999, cigarette imports are estimated at 29 billion pieces, up 6 percent as a result of gradual economic improvements in the region. Total cigarette exports are estimated at 36 billion pieces, up 2 percent in 1999.

Indonesia - Cigarette consumption is forecast to marginally increase to 207 billion pieces despite the economic crisis. A price increase earlier this year caused some consumers to switch from higher priced brands to cheaper brands. Cigarette production is estimated to drop by 1.5 percent to 219 billion pieces in 1999 as a result of a new government law that standardizes the excise system and sets minimum prices for white and clove cigarettes. Clove cigarette production, which accounts for 60 percent of cigarette production, is estimated at 183 billion sticks, down 3.9 percent from 1998. White cigarette production is forecast at be 24 billion sticks in 1999, down 23 percent.

Singapore - British America Tobacco (BAT), one of the only two cigarette plants in Singapore has stopped manufacturing cigarettes. The other company, Rothmans, will continue to operate its plant. Both companies have merged their distribution and marketing sectors, giving them a combined market share of 34 percent in Singapore. For 1999, cigarette production is estimated at 12 billion pieces, up 13 percent. Re-exports of cigarettes which are about twenty times greater than local consumption are destined for Asian countries such as China, Hong Kong, Vietnam, Russia, Cambodia, Qatar and India. In 1998, re-exports fell by about 10 percent compared to 1997 partly because of the recession in neighboring countries and Myanmar's new restrictions on imports. Cigarette imports in 1999 are forecast at 49 billion pieces up 9 percent while exports are up by 10 percent and total 58 billion pieces in 1999.

Taiwan - Domestic cigarette production is expected to remain constant at 25 billion pieces in 1999. With the Taiwanese legislature dismantling the monopoly, these changes will definitely affect the tobacco industry. One bill under consideration by the Legislature, includes provisions for a tax surcharge that will replace the monopoly tax and a value-added tax. Cigarette manufactures estimate that these new taxes will increase the retail price of cigarettes by 10 percent and decrease cigarette consumption by 4 to 14 percent. Cigarette consumption is not expected to rise in 1999 but remain constant at 40 billion pieces. Cigarette imports are also projected to remain constant at 15 billion pieces in 1999 due to the possibility of new taxes.