China: Regional Tobacco Industry Under Pressure in Raw Material Supply

Source from:  Xinhua News Agency 07/26/2004

The tobacco industry of southwest China's Yunnan Province – the largest tobacco producing region in China – is under pressure in raw material supply as a result of leaf tobacco price hikes and greater market demand for leaf tobacco supply. Over recent years, the tobacco industry of Yunnan has accelerated its pace in acquiring tobacco manufacturing enterprises in other Chinese regions and associating with its counterparts in other Chinese regions in jointly developing cigarette brands, leading to increases in the total cigarette output. Consequently, the supply of leaf tobacco as a raw material for cigarette production has become problematic for the provincial tobacco industry. [b]PRESSURE FROM LEAF TOBACCO PRICE HIKES[/b] Before the fundamental structural reform of China's tobacco industry as a whole, Chinese tobacco manufacturers were able to buy leaf tobacco at very low prices set by the State. As the manufacturing sector of the tobacco industry has been separated from its commercial sector in structural reform, prices of leaf tobacco in inter-provincial trade have kept going up. In 2004, the State is planning to raise leaf tobacco prices, fueled by increases in prices of farm produce. Meanwhile, the State now allows an increase of 15 percent in the price of State-allocated leaf tobacco. After negotiations with the manufacturing sector, the commercial sector of the provincial tobacco industry has agreed to raise only a 7 percent. Because of leaf tobacco price hikes in China, the tobacco industry of Yunnan will see its annual cigarette production cost go up by some 1.9 billion yuan (228 million U.S. dollars) as of 2004. [b]PRESSURE FROM GREATER MARKET DEMAND FOR LEAF TOBACCO SUPPLY[/b] The tobacco industry of Yunnan produces 310 billion cigarettes (6.2 million cases) annually. Along with acceleration of the pace in the acquisition of tobacco manufacturing enterprises in other Chinese regions, the annual cigarette production capacity of the provincial tobacco industry will gradually increase to 400 billion cigarettes (8 million cases) or 500 billion cigarettes (10 million cases). Accordingly, its demand for the annual supply of leaf tobacco as a raw material for cigarette production will increase to 8.8 million dan (440,000 tons) or 11 million dan (550,000 tons) gradually. However, the supply of leaf tobacco for the provincial tobacco industry was only 6.8 million dan (340,000 tons) in 2003. Besides, it will also be a question whether the structure of leaf tobacco supplied to the provincial tobacco industry will meet its demand. In an effort to solve the problem, Yunnan Provincial Development Planning and Economic Restructuring Commission has proposed that the provincial government of Yunnan adopt a policy on priority supply of leaf tobacco to the provincial tobacco industry as soon as possible. Enditem