Tobacco Targets Illusory

EghtesadOnline: Iran will be self-sufficient in the production of tobacco in five years. This is what the designers of Sixth Five-Year Development Plan (2017-22) have envisioned, but the plan seems unlikely to transpire given the sorry state of Iran’s tobacco industry.

News ID: ۷۷۹۶۶۹

08 October 2017

The plan has set the goal of producing between 40,000 and 50,000 tons of tobacco a year. This is while, according to the head of the Center for Tobacco Planning and Supervision, Ali Asghar Ramzi, only 20% of this amount are now being produced in Iran and the remaining 80% are imported from Latin America, Africa and India.

Noting that imported tobacco is 30-40% more expensive than local brands, the official said, “Plans have been made to increase land under tobacco cultivation by 500% to achieve self-sufficiency.”

However, former tobacco farmers, who now grow rice or other agricultural products, are not willing to switch back to tobacco, the Persian daily Sharq reported.

Most tobacco farms in northern Iran have been used to build villas or converted to paddy fields, according to Financial Tribune.

State-Run Monopoly

The Iranian Tobacco Company was launched in 1928 as a state-run monopoly to develop the tobacco industry in Iran.

One of the oldest tobacco companies in the Middle East, ITC is engaged in the cultivation of tobacco and production of cigarette, pipe and hookah tobacco. It owns factories in Tehran, Kurdestan, West Azarbaijan, Isfahan, Gilan, Mazandaran and Golestan provinces and produces different brands of cigarettes, including Bahman, Zika, Caspian and Farvardin.

The law gives ITC a strong authority over Iran’s entire tobacco industry, making it the only domestic player in tobacco in Iran and confers upon the company complete control over all tobacco-related commercial activities throughout the country, including imports, exports, production and distribution.

For years, ITC was the only customer of tobacco grown by Iranian farmers and always stated that increasing tobacco production was one of the main objectives of the company. But, in actuality, this objective has never been realized. In fact, the company has never made any significant effort for achieving self-sufficiency.

Privatization, Beginning of Crisis

Repeatedly removing and replacing ITC’s top officials, employing unqualified executives, objections raised by authorities in health sector against development of tobacco industry and lack of scientific and practical plans are among the reasons holding back the progress of tobacco industry in Iran.

But ITC’s predicaments are not limited to these problems. Many experts believe the privatization of the company during the second term of former president, Mahmoud Ahmadinejad (in 2010), when 55% of the shares of the company were transferred to Steel Industries Pension Fund as part of the government’s debt to the organization, marked the onset of a major crisis for the company.

The privatization process had numerous proponents and opponents from the very beginning. Many believed it was only a change of ownership between two government agencies and some believed it was a significant move toward streamlining tobacco industry. There were more problems to come.

Soon muscle-flexing by shareholders of Steel Industries Pension Fund, when it came to selecting executives, provoked the discontent of ITC’s seasoned managers and professionals. They saw new executives of the company, who barely had any knowledge of tobacco industry, acting as destabilizing elements. Critics believe the pension fund’s shareholders view ITC as a piggy bank to solve the problems of the fund.

Under the circumstances, the decline in ITC’s revenues gave rise to further problems, including complications in providing raw materials for production lines, substantial cuts in the payments of employees or poor insurance service to workers.

All these problems robbed the company of the chance to pursue bigger goals like increasing domestic production of tobacco by lending support to farmers. The one-two punches of these crises, together with the activities of foreign rivals and smugglers, further reduced the share of ITC from the Iranian cigarette market.

In fact, these problems directly affected farmers of this strategic product, as they only had ITC as their customer. The company’s less-than-expected buying prices or its delayed payments to farmers disheartened tobacco farmers. They shifted to growing other agricultural products.

Bitter memories of those days might be the main reason farmers remain reluctant to consider tobacco production again.

Int’l Giants in Iran

In 2002, ITC reached agreements with several major multinational cigarette manufacturers, including British American Tobacco and Japan Tobacco. This enabled these major players to import and jointly produce products in Iran in cooperation with ITC.

These international companies have grabbed the lion’s share of domestic cigarette market with few but popular brands such as Kent for BAT and Magna for Japan Tobacco Inc. A small fraction of tobacco needed by these companies is provided by local tobacco producers.

The absence of a domestic rival for BAT and JT has led to the dominance of the duo over half of Iran’s cigarette market.

Iranians smoke about 55 billion cigarettes annually.

Latest statistics show some 1.4 billion cigarettes were imported during the six months to Sept. 22, registering a 56% decline compared with the similar period of last year.

Domestic production of cigarettes reached 23.13 billion over the same period, posting a 20% rise compared with the corresponding period of last year.

The Center for Tobacco Planning and Supervision estimates that about 27.5 billion cigarettes were consumed over the six-month period, noting that the area under tobacco cultivation is around 6,000 hectares and about 9,000 tons of tobacco are produced annually.

On the other hand, 3.13 billion cigarettes were smuggled into Iran during the same period, 38% less compared to last year’s corresponding period.

Cigarette smuggling was around 12 billion in the fiscal 2014-15, 8 billion in 2015-16 and 6 billion in 2016-17.