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THERE HAVE BEEN retrenchments at British American Tobacco [JSE:BTI] South Africa – so far mainly at its head office in Stellenbosch. But it could get much worse if draft regulations published by the Department of Health become law, possibly leading to the closure of BATSA’s Heidelberg factory and the loss of more than 1 300 jobs. Government wants all South African cigarette producers to comply with standards for reduced ignition propensity (RIP) cigarettes. If the draft regulations go through, cigarettes made for the local and export markets would be stamped with the wonderfully ironic abbreviation RIP. But it could also be RIP for large parts of BATSA, which currently has around 85% of the “legal” cigarette market in SA.
BATSA has responded with a submission to the Health Department pointing out the “unintended consequences” of the regulations in their current form. Apart from affecting the future viability of the Heidelberg factory, it would threaten business and indirectly related jobs in the towns of Heidelberg and Ratanda, income for the Lesedi Municipality, about 430 suppliers to the Heidelberg factory and 90 farms and 8 000 farm workers where tobacco is grown, BATSA says in its submission.
Fay Kajee, director of corporate and regulatory affairs at BATSA, says it seems Government has more or less copied RIP legislation introduced in Canada in 2005. RIP standards are about self-extinguishing cigarettes that go out when burnt down to a band. The idea, and what Government seems keen on, is this will help prevent fires.
But Kajee says research on the product conducted worldwide only applies to indoor fires. It would have no effect on outdoor fires, though she adds local research shows only around 3% of outdoor fires are caused by discarded cigarettes.
But it seems clear from its submission that BATSA’s main concern is the effect the regulations would have on exports. Around 25% of its production at its Heidelberg plant is exported to 32 markets worldwide. It has spent a further R600m on the plant to expand that export capacity.
While BAT has been selectively closing some factories overseas it has also identified what it calls “strategic factories” for further investment. Heidelberg is one of those factories. “Of the 32 markets we export to, 27 have tobacco control legislation in place but none have RIP regulations in place. Many of our customers in those markets have indicated to us they’d source their supply of cigarettes elsewhere rather than buy RIP cigarettes from SA,” Kajee says.
In its submission, BATSA says the loss of cigarette exports would have an “immediate initial” impact of the loss of around 200 permanent jobs at the factory. But as a strategic factory losing exports will also almost certainly mean closing the facility down and production being moved to a BAT factory overseas.
Suppliers would also be hurt: one being Nampak, which earns about R250m/year from the Heidelberg factory. The submission, says Nampak, has indicated it would have to retrench around 360 staff if the factory closes.
“We now have to wait for Government to respond to the submission. In the current form the regulations will further open up the market for illegal cigarettes, which account for about one in four of the cigarettes bought in SA,” Kajee says.
Investors will be watching developments closely. BATSA will be found in the top 10 holdings of most institutional investors. So will Remgro, a significant shareholder.
Though BATSA has no doubt laid out the worst possible scenario in its submission, if the regulations do result in the closure of the Heidelberg factory and loss of export capacity, it will be a fundamentally changed share.
BATSA has responded with a submission to the Health Department pointing out the “unintended consequences” of the regulations in their current form. Apart from affecting the future viability of the Heidelberg factory, it would threaten business and indirectly related jobs in the towns of Heidelberg and Ratanda, income for the Lesedi Municipality, about 430 suppliers to the Heidelberg factory and 90 farms and 8 000 farm workers where tobacco is grown, BATSA says in its submission.
Fay Kajee, director of corporate and regulatory affairs at BATSA, says it seems Government has more or less copied RIP legislation introduced in Canada in 2005. RIP standards are about self-extinguishing cigarettes that go out when burnt down to a band. The idea, and what Government seems keen on, is this will help prevent fires.
But Kajee says research on the product conducted worldwide only applies to indoor fires. It would have no effect on outdoor fires, though she adds local research shows only around 3% of outdoor fires are caused by discarded cigarettes.
But it seems clear from its submission that BATSA’s main concern is the effect the regulations would have on exports. Around 25% of its production at its Heidelberg plant is exported to 32 markets worldwide. It has spent a further R600m on the plant to expand that export capacity.
While BAT has been selectively closing some factories overseas it has also identified what it calls “strategic factories” for further investment. Heidelberg is one of those factories. “Of the 32 markets we export to, 27 have tobacco control legislation in place but none have RIP regulations in place. Many of our customers in those markets have indicated to us they’d source their supply of cigarettes elsewhere rather than buy RIP cigarettes from SA,” Kajee says.
In its submission, BATSA says the loss of cigarette exports would have an “immediate initial” impact of the loss of around 200 permanent jobs at the factory. But as a strategic factory losing exports will also almost certainly mean closing the facility down and production being moved to a BAT factory overseas.
Suppliers would also be hurt: one being Nampak, which earns about R250m/year from the Heidelberg factory. The submission, says Nampak, has indicated it would have to retrench around 360 staff if the factory closes.
“We now have to wait for Government to respond to the submission. In the current form the regulations will further open up the market for illegal cigarettes, which account for about one in four of the cigarettes bought in SA,” Kajee says.
Investors will be watching developments closely. BATSA will be found in the top 10 holdings of most institutional investors. So will Remgro, a significant shareholder.
Though BATSA has no doubt laid out the worst possible scenario in its submission, if the regulations do result in the closure of the Heidelberg factory and loss of export capacity, it will be a fundamentally changed share.
