2.5 DEVELOPMENTS IN TOBACCO PROCESSING AND MANUFACTURING

2.5.1 Cigarette industry

Cigarette production peaked at 189.3 billion pieces in 1998, and subsequently declined after the imposition of an export tax in 1999. Consumption peaked in 1989 and 1990, but then fell off, in part due to the antismoking campaigns and the ban on smoking in public places (Table 2.10).

The average price of a pack of 20 cigarettes increased from US$0.50 in the 1980s to more than US$1.40 in the mid-1990s. Currently, retail prices are between US$0.50 and US$0.90, making Brazilian cigarettes among the cheapest in the world.

In 1994, the macroeconomic stabilization plan (the Real Plan) eliminated the inflationary tax (which had reached almost 90 percent per month). In the following two years, consumption was stable at around 119 billion pieces. However, the exchange rate appreciation that followed the Real Plan stimulated smuggling, and where there is significant smuggling, cigarette consumption tends to be underestimated, because consumption estimates are based primarily on manufacturers’ reported sales.

Nominal annual per capita consumption has been decreasing, from 1 177 pieces in 1980 to 720 pieces in the late 1990s. In 1992, smuggling was estimated to supply 5 percent of domestic consumption, but soared after 1995. It is now believed that smuggling approaches 30 percent of the official consumption figures, as traditional Brazilian brands are now counterfeited in neighbouring countries and smuggled into Brazil. The extent of smuggling explains a substantial part of the apparent decrease in consumption.

Table 2.10: Cigarette production, consumption and price in Brazil

Source: Afubra and Abifumo.

2.5.2 Employment in manufacturing

The impact of modern technology of processing and manufacturing has been to reduce the labour requirement in the tobacco industry, with the number of workers almost halving in 15 years (see Table 2.11).

Cigarette factories are highly automated and employ relatively little labour (30 000 directly employed workers). According to INCA estimates, the industry pays a relatively small price for each kilogram of tobacco leaf, which yields approximately 1 200 cigarettes. Cigarette packs are light, and easily stored and transported, leading to low transport and inventory costs, making this undertaking highly profitable.

The production of leaf tobacco for cigars, cigarillos and dark cigarettes in Brazil’s northeast involves a large number of companies, which provide numerous jobs and drive local economies. Investment in new production technologies has helped improve prospects in both export and the domestic markets.

Table 2.11: Index of employment in the tobacco industry in Brazil

Source: IBGE. Index 1985 = 100

Employment in the tobacco industry can be quite significant in an area. For example, in Santa Cruz do Sul, one tobacco processing unit has up to 2 500 employees, and there are several companies of similar size, and between them provide about 40 percent of the total ICMS value-added tax revenues for the municipality. The effects spill over to neighbouring counties and benefit a major part of the state.

Alongside current operations, investment is also very important. One company has invested some US$200 million since 1997, creating another 1 000 jobs. All the six main processors are making capital investments, ranging from US$60 million to US$500 million, and this will have a positive impact on employment over the next decade.

For each three-year investment of US$100 million - yielding about US$250 million in export sales annually - it is estimated that 400 jobs are created directly from the installation or restructuring of existing operations, and another 10 000 jobs are permanently created in the fields. A large company with 4 000 to 5 000 direct employees in the south would work with some 30 000 growers and could create an additional 150 000 indirect jobs in farm work, transport, services, etc.

2.5.3 Impact of changes in tobacco manufacturing technologies

All major companies have modernized their processing technology. New machinery and improved processing have contributed to reduced component prices, to improved cigarette quality and to reduced waste. Tar and nicotine levels have been reduced through filterization, thus reducing potential health damage from smoking. The advances in technology of processing and cigarette quality reflect the global trend of the industry, which is striving to remain competitive and meet consumer preferences.

However, smaller manufacturing companies have not modernized at the same pace as the leading industries, relying on old fashioned machinery, with poorer quality control of the tobacco. They have resorted to price competition focused on class C and D - relatively cheap - cigarettes. As a consequence, and due to the severe competition with smuggled cigarettes, small companies have been unable to generate savings to invest in modern technology.

Product quality

With improved technology and consumer preference for high quality products, companies are investing in total quality management for ISO 9002 certification. ISO certification is an improvement in product quality, giving clients an additional guarantee. To ensure optimum quality, tobacco companies are reducing foreign matter and routinely testing all products for chemicals, including alkaloid levels.

In part, this is achieved by working with growers to ensure supplies of requisite tobacco through the “integration” system, whereby all producer activities are supervised by the company’s extension services. “Integration” participants have to adhere to the farming practices recommended by the companies, particularly with regard to cultivars, following a schedule of planting at the optimal time for each region, proper plant spacing, increasing the number of leaves per tobacco stem by using the appropriate fertilizer and harvesting at ideal maturation. The aim is to produce cigarette tobaccos that are more orange in colour (grade O), rather than dark (R). Alkaloid levels have been falling significantly, and the average nicotine level, which earlier was about 3.81 percent, dropped to 3 percent in recent years.

Volumes of leaf being processed into cigars

New processing technologies have also been introduced in the cigar industry, with substantially increased volumes of leaf processed. For exports, “loose tobacco leaf processing” is used, which consists of selecting high quality tobacco leaf, grading at delivery point, fermenting, extracting impurities and off-grade leaves, baling, stacking and fumigation. This produces a dark wrapper leaf of high quality for cigars. This processing technology is almost all manual, and gives a semi-processed product.