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Friday February 17, 2012

Tobacco industry has hands full despite tax reprieve

PETALING JAYA: Despite its first tax reprieve in nine years with the unchanged excise duties under Budget 2012, the tobacco industry still has to deal with losing consumers to contrabands and the possibility of a cigarette price revision by the Government.

While tobacco companies need not raise their cigarette selling price this time around, it can only enjoy its first positive gain in almost a decade if industry volumes stop falling and start to stabilise.

Tobacco companies have had to raise cigarette prices to protect margins against the rising excise duties in the past few years, causing them to lose market share to illicit traders who can provide cost-sensitive consumers with cheaper contrabands.

Illicit trade doubled in 2010, from 15% to 36.6% total cigarettes sold and stayed at that high for the period of June to August last year.

CIMB Research said in its industry outlook report that the level of proliferation of contrabands depended on the ability of the authorities to properly enforce at the important borders where smuggling took place.

“At this stage, we believe this could be a daunting task given the level of illicit trade, which is one of the highest in the world,” it reported.

The research house remained neutral on the sector, giving it credit for its resilient demand though the private consumption was expected to decelerate.

“Unlike the demand for consumer discretionary items such as cars, demand for consumer staples such as tobacco is arguably defensive and inelastic as the smoking habit is hard to break,” it said.

However, it pointed out that while consumption was fairly resilient, the demand for the big tobacco companies' cigarettes could not escape pressure in a depressed economic environment as consumers were still likely to choose cheaper alternatives.

Based on word that the Government is considering a proposal by the Confederation of Malaysian Tobacco Manufacturers to have the licences of retailers who sell contrabands revoked, CIMB said it would turn positive on the sector if these measures were taken to deter errant retailers from selling illegal cigarettes.

On the other hand, CIMB noted that it would turn negative on the industry if the Government decided to raise excise taxes.

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