Tobacco firms ride out bans

Bans reduce smoking but it soon creeps up again. Picture / Reuters

With New Year's resolutions fresh in everyone's minds, many smokers have vowed to kick the habit and opted for the customary nicotine patches and gum to ease the pain.

They are likely to get a helping hand from public smoking bans, which are rapidly spreading from country to country - Spain has just become the latest country to ban smoking in many public places at the start of this year.

Determined to cut smoking levels to reduce national health bills, governments in Britain and Germany also put up taxes on cigarettes last year, and the European Union banned tobacco ads and sports sponsorships. This bodes ill for the global tobacco industry - yet shares in major cigarette companies have performed well over the past year, and some are trading near all-time highs.

Faced with volume losses in Western Europe and America the industry has turned east to tap into emerging markets such as Russia, Turkey and Eastern Europe. Thanks to the addictive nature of nicotine, cigarette makers have put up their prices - in the US, industry prices rose 7.2 per cent in November from a year ago.

Michael Smith, at JP Morgan Chase, said: "The global trading outlook appears the best for 10 years and trading in emerging markets may be the best we have ever seen [in 2006]."

In that sense it is less surprising that tobacco stocks have outperformed benchmark indices over the past year. Of the world's top three tobacco companies, America's Altria rose 22 per cent, British American Tobacco gained 45 per cent and Japan Tobacco 47 per cent.

In Britain, the FTSE 350 Tobacco Index, which represents the three major UK tobacco groups - BAT, Imperial Tobacco and Gallaher - jumped 31 per cent last year, outperforming the FTSE 100 index of blue-chip stocks, which rose only 19 per cent.

And the bull run is set to continue. Jonathan Fell, at Morgan Stanley, said: "Tobacco stocks are once again likely to outperform the broader market during 2006."

BAT has done particularly well, with strong growth in Russia, Turkey, Pakistan and Bangladesh offsetting difficulties in Canada and Japan.

Analysts note that the threat of US litigation raises fewer concerns after a favourable verdict for Philip Morris in December and a considerable downsizing of the Government's claim against tobacco companies. Further major tax increases look unlikely, and smoking bans have had less of an impact than expected.

Smith said: "It is in emerging markets, however, where we think the real upside surprise lies.

Strong pricing power, uptrading to international brands and markets that are now more open to competition than ever before, suggest a bright outlook."

Britain plans to ban smoking in pubs and restaurants from 2007 with an exemption for pubs that do not serve food. Pressure is growing for a total ban, with the cross-party parliamentary health committee calling for it and polls showing the public also backs such a move.

Smoking bans have been introduced in many countries, with Europe initially lagging behind far-flung places such as Iran, Tanzania and Australia, which were first to introduce smoking restrictions. In March 2004, the Irish Republic became the first country in Europe to impose a nationwide ban on smoking in pubs, restaurants and workplaces. Norway soon followed suit, and Italy imposed a ban in indoor public places a year ago.

In the US, New York, Washington DC and Chicago are among a growing number of cities that have banned smoking, alongside several states, some of which have also raised taxes, including the two that grow the most tobacco - North Carolina and Kentucky.

The evidence on whether smoking bans actually reduce smoking levels is mixed. Canada boasts some of the lowest smoking levels in the world, thanks to tough anti-smoking measures adopted in recent years. Fewer than 21 per cent of Canadians over the age of 15 were smokers in 2004, according to the market researchers Euromonitor International. That compares with rising smoking levels in China and Russia, at 43 per cent and 41.5 per cent respectively. In Britain, nearly 25 per cent of adults smoke.

In Ireland, fears that the smoking ban would be widely flouted have not materialised and cigarette consumption initially fell 5 per cent but now shows signs of climbing again.

In France, where the Government raised the price of cigarettes by 20 per cent in October 2003, there was no noticeable difference in Paris's traditionally smoke-filled cafes and restaurants - presumably because smokers crossed borders to buy cheaper cigarettes.

Similarly, in Spain, the second-biggest per capita consumer of tobacco in Europe after Greece, many people reacted defiantly to the January 1 ban. Smoking is banned in most public areas, and bars and restaurants bigger than 100 sq m must have non-smoking areas.

According to Gareth Davis, the chief executive of Imperial Tobacco: "It is clear that smokers will continue to smoke. There may be an initial dip in consumption [after a ban] but this diminishes over time."

- INDEPENDENT