Japan Tobacco plans price hike

Japan Tobacco Inc, the world's third-largest tobacco firm, said it is likely to hike its domestic cigarette prices within the next three years to secure a profit amid a steadily shrinking market.

Like other developed nations, Japan's smoking population has been declining due to growing health awareness, hitting Japan Tobacco, a former state monoply which controls 65 percent of the domestic cigarette market.

There has been growing speculation that Japan Tobacco would hike its cigarette prices for the first time since July 2006 after it set a target of keeping its core profit from its domestic tobacco business steady for the three years through to March 2012.

"Some analysts see it as our intention to raise prices (based on the firm's three-year profit targets), and it's fine to see it that way," Japan Tobacco President and CEO Hiroshi Kimura said in an interview with Reuters.

The firm has forecast its domestic tobacco business' earnings before interest, tax, deprecation and amortisation (EBITDA) to fall 9.7 percent to 246 billion yen (NZ$3.97 billion) for the year ending in March 2010. It expects domestic tobacco sales to drop 4.6 percent to 152.5 billion cigarettes for the year.

"It's difficult to achieve (the three-year targets) without a price hike. There is not much room for further cost cutting," said Tomonobu Tsunoyama, an analyst at Tokai Tokyo Research Center, prior to the interview.

Kimura said, however, that such a price hike was not likely to come any time soon, citing tough economic conditions. "We have to make decisions very carefully," he said.

FAVOURABLE FOREX MOVES

Kimura also said the Russian rouble and other foreign currencies had moved to more favourable exchange rates than the company had expected.

He said that Japan Tobacco could save US$300 (NZ$477) million if rates stay around current levels, but that it would have wait until the end of September to make a firm prediction on this.

The company's exposure to foreign currencies increased following its $15 billion acquisition in 2007 of Britain's Gallaher Group, which has a major presence in Russia.

Kimura added that Japan Tobacco could expand output capacity at its Russian factories given strong demand in the country.

The company's two factories in Russia are running at their full capacity of an annual total of about 150 billion cigarettes.

He said the firm would first consider ramping up capacity at its existing facilities, although it may build a new factory in the future. And if it does, it would acquire enough space to allow for an eventual expansion of capacity to up to 200 billion cigarettes a year.