Current Tobacco Industry Dynamics in the Middle East and Africa

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By Dr Iqbal Lambat

Over the past decade, global cigarette consumption has declined from 6.3 trillion sticks to 5.4 trillion with major declines in China (down 0.5 trillion), the EU (down 0.2 trillion), and the Americas (down 0.2 trillion).

Some Asian markets have grown, such as Indonesia (now ranking as the second-largest market in the world after China), Vietnam, Cambodia, and Bangladesh. However, within Asia as a whole, these growth markets have been offset by declines in other Asian markets.

The one geographical region that has shown remarkable growth has been the Middle East and African (MEAF) markets, with an annual growth rate over the past decade of circa 5%. In this article we examine the region as a whole and discuss its prospects for continued growth.

Geopolitics

In order to understand this vast region of over 69 countries, we will split these into sub-regions:

• The Middle East which includes the countries of Lebanon, Syria, Palestine, Israel, Jordan, Iraq, Iran, Saudi Arabia, Yemen, Oman, the UAE, Qatar, Kuwait, Bahrain, and Afghanistan. Population 280 million.

• North Africa which includes Morocco, Algeria, Tunisia, Libya, and Egypt. Population 202 million.

• Sub-Sahara Africa which includes the remaining 49 countries in Africa. Population 1,118 million

The combined population of the region is 1.6 billion representing 20.5% share of world population and growing at 2-3% per year. The average age is 19 years compared to 31 for the world. To summarize, a young population in fast growth with increasing consumer spend.

MEAF tobacco market

The estimated cigarette consumption for the whole MEAF region is 600 billion sticks representing 11.1% of global cigarette consumption. On a per-capita basis, this equates to 375 sticks per annum or literally one stick per day. Compare this to Asia. The total population is 2.365 billion and with an annual cigarette consumption of 3.240 trillion sticks representing 60% share of world. On a per-capita basis, this equates to 1,370 sticks per annum – 365% greater than MEAF. If we apply the Asian per capita ratio to the MEAF current population, “theoretical consumption” would be 2,190 billion compared to the current 600 billion, suggesting strong avenues for future growth. What will drive MEAF growth of cigarette consumption?

• A young and growing population.

• Increasing purchasing power.

• Increased smoking incidence/prevalence.

• Increasing female smoking incidence.

• Cigarettes are widely available and visible at most points of sale.

• Indoor smoking bans in Africa are minimal.

• Outdoor bans in MEAF are non-existent.

Other tobacco related aspects focus on the high consumption of waterpipe tobacco (shisha and narghile), a large production of virginia and burley in Africa representing 10% of world leaf tobacco supply, and arguably the best cigar leaf tobacco in the world grown in the Cameroon. Malawi is now the largest producer of burley tobacco in the world with a crop size of 150,000-200,000 tons produced annually.

Sub-region characteristics

Starting with the Middle East, these comprise a number of markets where cigarettes are manufactured domestically and those where this is prohibited – essentially the Gulf Cooperation Council (GCC) countries of Bahrain, Oman, Qatar, Kuwait, and Saudi Arabia. The total Middle East consumption is 222 billion sticks. The markets are essentially American blend and where slims formats (slims, super slims, nano) have the highest penetration in the world estimated at 50% of total consumption. The main sub-regional characteristics are:

• The Islamic Republic of Iran is the largest market with a consumption of 70 billion sticks. It is a hybrid market with a government monopoly (ITC – Iranian Tobacco Company) and several private manufacturers. ITC’s monopoly status has been reduced to that of “watchdog” to ensure health warning on packs compliance and regulate tar and nicotine ceilings of all manufacturers. Multinational manufacturers located in Iran are JTI, BAT, and KT&G.

• GCC countries consume 60 billion sticks annually, all imported. PMI dominates with its Marlboro brand. The largest market by consumption is Saudi Arabia.

• Conflict zone countries of Iraq, Syria, Afghanistan, and Yemen collectively consume 70 billion sticks which are mostly imported.

• Lebanon with a market size of five billion is still a full monopoly for manufacturing and sales and manufactures its own Cedar brand whilst importing all other brands for onward sale. It has been a key supplier to neighboring Syria whose production facilities have all been destroyed in the ongoing nine-year civil war.

• The United Arab Emirates (UAE), with a population of nine million and a local cigarette consumption of circa two billion has allowed private cigarette companies to establish manufacturing facilities only in the free zones of Jebel Ali, Ras Al Khaimah, Fujairah, and Sharjah. The installed production capacity is in the range of 80-100 billion sticks per annum – brands that are by and large destined to African and Middle East markets as clandestine exports (smuggled and contraband). It is widely rumored that key UAE players Dubai and Abu Dhabi want to protect and enhance their status in the world and will soon force these companies to terminate their illicit activities.

Moving onto North Africa. The five North Africa markets collectively consume 198 billion sticks annually. All five markets are government monopoly markets with a monopoly on production and sale of tobacco products. Although Morocco was privatized to Altadis in 2003 and now belongs to Imperial Brands of the UK, it is still managed as a monopoly. Cigarettes are preferred as American blend and are sold in both soft pack and HLP box. The main sub-regional characteristics are:

• Egypt is the largest market with annual consumption estimated at 95 billion sticks. The market functions through Eastern Tobacco Company, which is partially listed on the Egyptian stock exchange. It is the only manufacturer in the country and enjoys market leadership with its brand Cleopatra. All other players in the market – PMI, BAT, JTI – must supply all raw materials for their brands to Eastern who will manufacture these under licensing agreements for onward sale through private sector distributors. International brands account for 20% share of market.

• Algeria is the second largest North African market with an annual consumption of 45 billion sticks. The market monopoly is Société National des Tabacs (SNTA) which was defacto established by SEITA, the French Monopoly, during the French occupation of Algeria (1830-1962). Most cigarettes consumed are Algerian brands with some limited presence of PMI and JTI.

• Morocco is the third largest North African market with an annual consumption of 30 billion sticks. The market operates through the Regie des Tabacs Marocaine. The most popular local brand is called Marquise and remains the market leader due to a low selling price. As the monopoly is also responsible for importing international brands, and as Imperial Brands owns the Regie via its acquisition of Altadis (French monopoly SEITA and Spanish monopoly TABACALERA) in 2007, it is understandable that it will push its own brands such as Fortuna, Gauloise, West, Davidoff, and Embassy, at the expense of PMI and JTI brands.

• Tunisia is the fourth largest North African market with an annual consumption of 18 billion sticks. The country operates two tobacco monopolies – Regie Nationale des Tabacs et Allumettes (RNTA) based in Tunis and Manufacture des Tabacs de Kairouan (MTK) located in Kairouan. Similar to other North African monopolies, RNTA and MTK account for all local production and import of international brands. Three local brands Mars, Tanit, and Crystal collectively account for 70% of the market.

• Finally, conflict zone country Libya intends to re-install its tobacco monopoly. Formerly operating through GTC (General Tobacco Company), this operation was significantly destroyed through the civil war that began in 2014 and is ongoing. The government-appointed by the United Nations is already discussing the formation of LTC – Libya Tobacco Company and have solicited the assistance of Star Agritech in all related fields (tobacco government policy, cigarette taxation policy, establishing manufacturing facilities, supply of tobacco and related raw materials, etc.). The market consumption is estimated at 10 billion sticks and the national brand is called Riadi.

Finally, moving onto Sub-sahara Africa, which we can further break down into Southern Africa, East Africa, Central Africa, and West Africa. This sub-region consumes 180 billion sticks annually and has broad differences and several oxymorons, which are highlighted below. Some 42% of consumption of this sub-region is controlled by multinational tobacco companies. BAT controls South Africa, Kenya, D R Congo, Nigeria, and Mauritius. JTI controls Tanzania, Ethiopia, and Sudan. Imperial Brands, by way of the acquisition of Bollore France, controls 11 Francophone West African countries, Madagascar, and Reunion that lie in the Indian Ocean. And yes, you got it! PMI is virtually nowhere in Africa with small shares in a couple of West African countries and a large RYO business in South Africa.

• In Southern Africa, the largest market is South Africa with an annual consumption of 50 billion sticks. It is also the largest Sub-sahara market by consumption. The market used to be controlled by BAT but their market share has fallen dramatically to less than 50%, largely driven by cheaper brands offered by new private manufacturers as well as the influx of cheap illicit products from Mozambique, Zimbabwe, and Botswana. South African cigarette consumption has doubled from the end of Apartheid in 1994 making it one of the fastest-growing cigarette markets in the world. Central to this explosive growth has been the opening-up of distribution access to townships such as Soweto via informal ‘spaza’ or ‘shebeen’ outlets. South Africa, with a 6,000 tons per annum RYO consumption, is in the world’s top 10 RYO markets. All products smoked in these countries (South Africa, Namibia, Botswana, Lesotho, Zimbabwe, Zambia, Malawi, and Mozambique) are virginia blend and in full flavor.

• The Central African markets of D R Congo (Kinshasa), Congo (Brazzaville), Central African Republic, and Chad consume annually 40 billion sticks. One of the reasons for the low cigarette consumption is the lack of local infrastructure thereby making cigarette distribution to wholesale and retail extremely difficult outside the main cities. If this can be addressed, markets such as Angola and D R Congo would become mega-markets like South Africa.

• In East Africa, the main markets of Tanzania, Ethiopia, and Sudan are controlled by JTI and, Kenya and Uganda are controlled by BAT. While the major markets at present are Kenya and Tanzania, demographics suggest future fast track growth in cigarette consumption will come from Sudan and Ethiopia, hence the recent expensive acquisitions made by JTI of NTE in Ethiopia and Haggar in Sudan. Madagascar, controlled by Imperial Brands, is also expected to offer strong growth from its current low base of six billion sticks per annum. Djibouti remains the main staging point for contraband to East and Central Africa.

• In West Africa is located the most populous country in Africa – Nigeria with a population of 202 million people. Yet, it boasts one of the smaller cigarette consumptions in Sub-sahara Africa at a mere 20 billion sticks per annum. Most of the other West African countries consume between 5-10 billion sticks per year. The main brand preferences here are American blend. Strong future growth is expected to emanate from the Cameroon, Ivory Coast, Senegal, and possibly Nigeria. Guinea Conakry remains the main staging point for West African contraband.

In conclusion, this vast MEAF Region will progressively transform economically to make this region an attractive investment zone for the future of tobacco!

Dr. Iqbal Lambat is president and c.e.o. of Star Agritech International, a global tobacco merchant supplying tobaccos from Latin America, Africa, Indonesia, Turkey, and China.