Category: News This Week

This morning, I received an unsigned e-mail from a person who says he has studied Paraguayan cigarette production.

The writer estimates 2008 cigarette consumption at 2.43 billion cigarettes. There are 50 licensed factories, and based on export activity, the e-mailer suspects that 32 factories are producing on a regular basis.

Paraguay’s total production is around 35 billion cigarettes, according to the author—but the 2007 legal exports registered in the customs system were only 2.7 billion!

He estimates the total volume of Paraguay-made cigarettes smuggled into Brazil at 18 billion cigarettes in 2007.

The incentive is clear: The average price of a master case of cigarettes (50 cartons) at the Brazilian border is $55—11 times cheaper than that of legal products in Brazil.

While cigarette smuggling primarily affects cigarette manufacturers, Brazilian leaf dealers are facing an entirely different set of challenges.

The U.S. dollar—the currency in which they are paid for their exports—has lost some 20 percent of its value against the Brazilian real in recent years, while the cost of production has gone up.

The exchange rate makes it difficult for exporters to pass on these expenses to their customers.

Leaf merchants say there’s little room to reduce their cost of operation. Consolidation and rationalization initiatives in recent years have made them as lean as they can possibly be.

Some dealers also expressed concern about the future of Brazil’s integrated tobacco production system, in which the buyers supply farmers with inputs and agronomic assistance and recover these expenses when the tobacco is delivered.

“Pinhookers” are damaging the system by buying tobacco from farmers who have been sponsored by other companies.

If trust in the system isn’t restored, they say, Brazilian volumes could start to decline and buyers will lose control over the cleanliness of their tobacco.

Some suggest the dealer’s plight could trigger vertical integration, with one of the major manufacturers—or even the increasingly assertive Chinese tobacco industry—purchasing a leaf merchant to secure its supply.

Last night, we had dinner with a representative of a major leaf merchant who was too diplomatic to question our sanity but impressed on us to be very careful as we probe the black market.

Apparently, manufacturing cigarettes is so lucrative that some Paraguayan tobacco executives drive armored cars to protect themselves against kidnapping—not the bulletproof types that protect against small arms fire, but vehicles designed to withstand mine blasts.

Regarding leaf exports, the tobacco trader told us that the Brazilian government years ago tried to cut the supply of Brazilian leaf to Paraguay by implementing a 150 percent tax on tobacco exports.

The Paraguayan government, however, successfully challenged that measure as a violation of the Mercusor free-trade agreement, and the export tax was removed.

But that doesn’t mean the smuggled cigarettes are made from high-quality Brazilian leaf. Rather, they are said to contain “funny ingredients” such as chicken feathers or even sand.

I knew Santa Cruz had a sizable population of German heritage, but there’s something bizarre about speaking German with a tanned taxi driver while zipping past palm trees in balmy 32-degrees-Celsius (90 degrees F) weather in a very un-European landscape.

Santa Cruz is said to have the world’s second-largest Octoberfest after Munich.

Too bad it’s only February.

While Paraguay obviously has the manufacturing capacity, it is not a major leaf-producing country.

Where does it obtain its tobacco, and are leaf producers in a position to help curtail the illegal cigarette trade?

To find out, we’ll travel to Santa Cruz do Sul, the largest tobacco-producing area in the region.

If you are looking for a bargain, Rio’s Centro Uruguaiana is the place to be. Normally expensive brand-name sneakers, faux designer purses and wristwatches sell at rock-bottom prices—as do cigarettes.

The challenge facing legitimate cigarette manufacturers in Brazil is enormous. Illicit product accounts for a whopping 28.6 percent of the domestic cigarette market.

And while that is down from 34 percent in the mid-1990s—due to a combination of improved law enforcement, new tracing technologies and other industry initiatives—this still means that roughly one in three cigarettes sold in Brazil is unlawful.

In terms of sales, Brazil’s illegal cigarette market ranks fourth in Latin America, outstripping the total market in several countries.

Counterfeits account for a comparatively small part of the black market. Smuggling and tax evasion are even bigger concerns.

As is often the case, differentials in tax rates are to blame. Brazil taxes cigarettes at about 70 percent of their retail price, compared with 20-25 percent in Paraguay. It doesn’t take an advanced degree in mathematics to picture the potential profits to be made from manufacturing in Paraguay and sneaking your product across the border for sale in Brazil.

And many appear to have made that calculation. According to some estimates, Paraguay has 40 cigarette factories—on a population of less than 4 million.

If they were serving the domestic market only, Paraguayans would be consuming an ungodly number of cigarettes, and their country would probably replace Asia as the World Health Organization’s top priority.

The insignia thief must have turned himself in, because we’re allowed off the plane.

But while the flight attendant has her decorations back, we’re without luggage. It’s still in Miami, where we had a tight connection.

Fortunately, there are two more Miami-Rio flights that day. The airline promises to deliver that afternoon.

There’s something oddly liberating about being bagless. I make a mental note to quietly throw my luggage on another conveyor belt upon return in Raleigh.

If I file a report with the airline’s lost and found office, someone else will bring it home free of charge.

Stinky and empty-handed, we head to our hotel.

We haven’t even landed in Latin America yet, and we’re already being threatened with detention—not for investigating the counterfeit cigarette trade, but for theft.

As the plane descends, a terse flight attendant announces that a pin and some other American Airlines insignia have disappeared from a cabin crew member’s uniform.

If the decorations aren’t returned promptly, she thunders, the passengers will not be allowed to disembark in Rio de Janeiro.

This being a U.S. airline, pins are considered a security threat.

“That’s the stupidest thing I’ve ever heard.”

The leaf merchant was not impressed with our suggestion to track down a cigarette counterfeiter in Paraguay and interview him for an upcoming article in Tobacco Reporter about the illicit tobacco trade.

“You’ll never find one. And even if you do, they will kill you.”

Good. That confirms our idea has legs.

We will travel to Ciudad del Este in Paraguay to find an illegal trader and visit some legitimate manufacturers en route to get their perspectives.

Global drive brands thrive

Volume sales by British American Tobacco during the nine months to the end of September, at 504 billion, were 1 percent down on those of the nine months to Sept. 30, 2006.

The fall in volumes was attributed mainly to the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany.

Sales of BAT’s four global drive brands, however, grew by 10 percent—18 percent during the third quarter.

Sales of Kent were reported to have grown by 18 percent. The brand enjoyed good growth in Russia, Romania, Ukraine and Chile and was said to have benefited from “significant volume increases from the brand migrations in Western Europe and new markets in Azerbaijan and Kazakhstan.”

Dunhill sales rose by 7 percent, driven by strong performances in South Korea, Russia, France, Italy, South Africa and Saudi Arabia, though volumes were lower in Malaysia and Taiwan.

Lucky Strike volumes were described as having been “slightly up” as the growth in Spain, Italy, France, Argentina and the Czech Republic was almost offset by declines as a result of lower industry volumes in Germany and Japan.

Pall Mall continued its growth with an increase of 9 percent, driven by its performances in Italy, Hungary, Russia, Uzbekistan and Turkey and partly offset by lower volumes in Romania, Spain and Greece. Significantly, this strong performance was achieved despite the absence of Pall Mall StiX in Germany this year.

In the company’s Europe region, volumes, at 180 billion, were down by 2 percent, with reductions in Germany, Russia, Switzerland, France and Ukraine partly offset by an increase in Romania.

In the Asia-Pacific region, volumes, at 109 billion, were 3 percent higher as a result of strong growth in Pakistan, South Korea and Vietnam partly offset by declines in Malaysia and Bangladesh.

In the Latin America region, volumes, at 111 billion, were 2 percent down as an increase in Venezuela was more than offset by declines in Mexico, Argentina and Central America.

In the Africa and Middle East region, volumes, at 73 billion, were 3 percent lower due to supply disruptions to the Middle East and a change in distribution model in Turkey.

In the America-Pacific region, volumes, at 31 billion, were decreased by 4 percent mainly as a result of the decline in industry volumes in Canada partly offset by the growth in Japan.