Lebanon's smokin' economy: why Beirut is allocating $39 million this year for cigarette production
Lebanon’s tobacco regulatory authority has allocated around $39 million to increase its production of Lebanese cigarettes. Prompted by an increase in demand, both locally and in Syria, the ultimate goal of the investment is to increase production capacity in Lebanon to 50,000 crates per month, around 60 percent of current local consumption.
According to sources familiar with the Lebanese tobacco market, the Régie Libanaise des Tabacs et Tombacs, Lebanon’s tobacco regulatory authority, plans to boost its cigarette production to 50,000 crates a month. As part of the authority’s five-year plan, millions of dollars have been allocated to improve its cigarette factory, increase output, and develop two new cigarette brands.
This situation persisted until the first few months of 2011 when the Syrian crisis erupted and the tobacco manufacturing balance swayed toward Lebanon.Two weeks ago, the authority announced the results of its international tender to purchase new machinery for its cigarette factory. The winning company, Comas from Italy, provided the lowest price for installing the required machinery, 6 million euros ($8.15 million).
In 2005, the authority decided to expand its production activities and invest in the cigarette factory, planning to turn Lebanon into a cigarette-producing center in the Middle East. However, the plan was not feasible at the time. Tobacco multinationals failed to accept Lebanon as a center for commerce and preferred to take their investments to Dubai. Multinationals worried about the cigarette factory’s location on the outskirts of Dahiyeh and the increased cost of production in Lebanon, due to high fuel bills.
The régie administration and workers thought the plan had been forgotten. It was impossible to produce new types of cigarettes with the old machinery, bought in the 1970s or earlier. The factory continued to produce the long “Cedars 100s,” however, demand for this brand exceed 4,000 cartons a month.
This situation persisted until the first few months of 2011 when the Syrian crisis erupted and the tobacco manufacturing balance swayed toward Lebanon.
Several factors prompted this change. Smuggling of cheap Syrian cigarettes to Lebanon began to lessen and Syrian factories were beginning to feel the impact of the crisis. Raw materials for cigarette production could not reach the factory that produces al-Hamra, which is similar to Cedars. Then, the cigarette factory in Aleppo burned down.
These factors turned smuggling operations upside down, and cigarettes had to be smuggled into Syria.These factors turned smuggling operations upside down, and cigarettes had to be smuggled into Syria. Demand for Cedars-brand increased since it is relatively cheaper than imported foreign cigarettes and could be afforded by lower-middle income Syrians.
With demand increased to more than 15,000 cartons of Cedars a month, it became urgent to develop the industry in Lebanon. Although Syrian markets are open to smuggled cigarettes from Iraq and Jordan, Lebanon could also cover a section of the market,without facing much competition.
At the same time, Philip Morris had established a Marlboro cigarettes factory in Jordan, but consumers did not like the flavor it produced. Cigarettes smuggled from Lebanon through Syria started to fare better, although they cost around twice the Jordanian product.
This means that export lines have opened through Syria. However, the question that worries the Lebanese side is whether the demand for Cedars will decrease when the Syrian crisis is over? This leads to an additional question: Should such a huge sum be invested in improving a cigarette factory in Lebanon, if Syrian production is expected to return to the competition and wreck the Lebanese investment?
After a long discussion, it was decided to improve the plant in phases. The first will cover developing the factory's production capacity, increasing it to 12,000 Cedars per minute. The second phase will include an agreement to purchase a machine to produce cigarettes on demand.
The improvements will be "based on the rhythm of the Syrian situation and demand for Lebanese cigarettes there. Despite working in full capacity today, the future of this demand is dependent on the developments in Syria," a régie official told Al-Akhbar.
"Gone are the times of long cigarettes. We need to produce a cigarette similar to the ones being promoted and popular among smokers, such as short stubby cigarettes or thin ones," he said.
The régie conducted a survey on the tobacco sector in Lebanon showing that, between 1994 and 2012, the industry generated around $5.1 billion. The régie’s share of this income amounted to $1.7 billion, of which $583 million was spent on tobacco crop subsidies, $178 million in general expenses, and $186 million in consumables.
During that period, the régie made profits of around $323 million, of which $216 million went to the Lebanese Treasury. However, the treasury's share is not limited to profits made by the régie. It includes customs tariffs, docking fees, transportation fees, and the Value Added Tax (VAT).