European Commission Proposes More Tobacco Restrictions

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On Wednesday, the European Commission announced proposed revisions to the Tobacco Products Directive, last updated in 2001. Several of the main elements of the proposal could be net negatives for the major tobacco players (including Philip Morris International PM , British American Tobacco BTI , and Imperial Tobacco ITYBY ) should the European Parliament and the Council of Ministers adopt the proposal in 2014 and implement the suggestions during 2015-16.

Although the commission’s proposed changes would probably hurt tobacco demand in Europe, we believe the major global cigarette companies will vigorously lobby against many of the recommendations.

The main elements of the proposal include:

(1) All cigarettes and roll-your-own packages must contain a picture and text warning covering 75% of the front and back of the package.

(2) Ban tobacco products with strong flavorings, including menthol.

(3) Smokeless tobacco (snus) will continue to be banned, except in Sweden.

(4) Electronic cigarettes will now be regulated. They must carry health warnings and only allow a limited amount of nicotine. Higher-concentration e-cigarettes will only be allowed if authorized as medicinal products.

(5) Fight the illicit trade by adding tracking and tracing systems as well security features such as holograms.

The proposed ban on menthol cigarettes would affect roughly 5% of the total cigarette market in the European Union (about 28 billion sticks in 2010), but as much as 20% of the market in Finland and 10% of the market in Poland and Sweden.

Philip Morris said that if enacted, the commission’s recommendations “will result in numerous unintended adverse consequences.” Specifically, the company believes that the additional restrictions placed on tobacco products will result in growth in the illicit trade, resulting in lower excise tax receipts for member countries.

Analysts tend to agree with Philip Morris: Cigarettes are already a profitable venture for bootleggers and smugglers, and banning menthol will not only shrink the legitimate tobacco companies’ addressable market but also probably expand the overall size of the black market.

 

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