Trouble in smokers' paradise?

Published in Van Zorge Report VOL.X No.7 — April 15, 2008

Soaring tax and excise and public restrictions have left them undeterred. They have also managed to convince the government not to sign nor ratify the international Framework Convention on Tobacco Control. But there is one thing that has been troubling the country’s cigarette producers and it is more difficult to fight — an increasingly unpredictable Mother Nature.

Extreme weather in the past year has ruined clove crops, a key ingredient in the kretek cigarettes favoured by Indonesians. Local producers can presently provide only 70 percent of the total 100,000 tons of cloves a year needed by cigarette factories. As a result, the price of cloves has soared almost 100 percent since December 2007,
from Rp 30,000 a kilogram to Rp 55,000 a kg.

This situation has led to serious problems for the nation’s many small cigarette producers, particularly the about 20 medium-scale producers and the estimated 5000 small home industries in Java alone that supply cigarettes to their local communities.

For these small businesses, importing cloves is out of the question—because distance and the associated costs make the endeavour prohibitive. Indonesia is the largest clove producer in the world after overtaking the island of Zanzibar and the island nation of Madagascar, both in Africa. Singapore has some limited but insignificant stocks, mostly stored by speculators.

Egged on by the smaller players, the larger cigarette companies are now calling for increased government support for the industry and for it to delay imposing the terms of an industry roadmap that is set to remove all government help for the local industry by 2015. At this point, the public health costs for smoking are also supposed to be reflected in increased taxes for cigarettes. If this deadline is not pushed back, the producers now warn, government revenues and tens of thousands of jobs will be at risk.

However, anti-smoking activists note that the clove price hikes have not yet affected the retail prices of the major cigarette brands. This is because the major manufacturers—Gudang Garam, Djarum, H.M. Sampoerna, Bentoel and Noyorono, which together control 80 percent of the market—have sufficient clove stocks to last for another two years.

Of these big tobacco firms, many have been experiencing high rates of growth of late. Last year, Gudang Garam enjoyed 35.23 percent net profit growth from Rp 900 billion in 2006 to Rp 1.22 trillion in 2007. The profit was mainly boosted by a 6.24 percent increase in sales to Rp 21.79 trillion. Meanwhile, the smaller Bentoel saw its net profit increase from Rp 136 billion in 2006 to Rp 167 billion in 2007. Despite the clove price increases, the company says it plans to move ahead with to construct a new factory in Malang, East Java.

The most lacklustre player in terms of recent growth is also one of the nation’s
most profitable by volume —Sampoerna, now owned by industry giant Phillip Morris International tobacco, only booked a 0.03 percent net profit increase over the previous year, but still managed to bank Rp 3 trillion. However, the company’s net sales did drop slightly to Rp 22 trillion in 2007, down 3.28 percent on the previous year.

Labels: Business

Posted by hera at Tuesday, April 15, 2008 1:14 AM | Permalinks