The decision by British American Tobacco (BAT) to stop producing cigarettes in South Africa due to rampant illicit cigarette sales will put more than 35,000 jobs at risk, devastating tobacco growers who have relied on BAT for more than 100 years.

The Limpopo Tobacco Processors (LTP) contracts about 100 South African commercial and small-scale farmers to produce more than 7-million kilograms of tobacco in Limpopo, North West and Mpumalanga. The lion’s share of the crop is sold to BAT South Africa.

At the peak of the relationship, BAT procured 90% of the total crop produced in South Africa. However, Francois van der Merwe, a director at LTP, said BAT has scaled back its procurement over the past five years as illicit cigarettes took hold of the market, and it now buys about 60% of the crop.

“Today feels like a funeral. Tobacco farmers and BAT have been joined at the hip since the early 1900s, with interdependent relations with tobacco farming engineered around BAT operations,” Van der Merwe said.

“The decline of the industry accelerated with the ban on the sale of tobacco products over the course of the Covid-19 outbreak, and the industry has never recovered.

Today feels like a funeral. Tobacco farmers and BAT have been joined at the hip since the early 1900s, with interdependent relations with tobacco farming engineered around BAT operations.—  Francois van der Merwe, a director at LTP

“The ban, which was later found illegal by the courts, saw illegal cigarette merchants fill the vacuum. With BAT’s numbers plunging, farmers experienced a 50% decline in volumes they sell to the industry.”

That could have been avoided had there been decisive political leadership, Van der Merwe said. “The decline in volumes is not because people are smoking less, but because the market is dominated by illegal cigarettes.”

BAT has, however, committed to continue buying leaf from South African farmers, “which is great news for the farmers amid the bad news of the factory closure”, according to Van Der Merwe.

However, he said while this is a relief, a long-term, sustainable solution is needed.

“If the government does not address the illicit trade and things get worse for BAT and other legal companies, the entire legal industry can go under, including the farmers.”

BAT, whose shares are traded on the JSE and in London, on Thursday said it will mothball its Heidelberg plant at the end of the year and instead import tobacco to service the local market but insisted the move wouldn’t cause a surge in cigarette prices.

Johnny Moloto, head of corporate and regulatory affairs at BAT Sub-Saharan Africa, said the local industry has been in decline since 2014, when legal manufacturers supplied about 70% of the total cigarette market. Criminal syndicates now control about 75% of total cigarette sales.

“In 2014, local manufacturers declared about 22-billion cigarettes to the South African Revenue Service (Sars) and generated R12.6bn in excise revenue, according to National Treasury figures,” Moloto said.

“A decade later, declarations collapsed to just 8.3bn cigarettes in 2024, while excise collected by Sars on that was R8.3bn, despite large excise increases over the period.

“While the legal market and excise tax revenue from cigarettes have collapsed, total annual cigarette consumption in South Africa has increased due to illicit trade,” Moloto said.

“As an example, an additional 1.6-billion cigarettes were smoked in 2021 [the year after the Covid-induced sales ban], compared with 2019 [the year before the sales ban].”

Steve Poré, CEO of BAT South Africa, was tasked with breaking the news to the leadership of the Lesedi municipality, where the plant is located, that the company will bring the curtain down on the facility and retrench its workers.

Poré, who leads a company that produces brands including Peter Stuyvesant, Pall Mall and Dunhill, outlined the challenges facing the company in a letter, seen by Business Day, to the mayor of the municipality, Nelson Nkosi.

“Our Heidelberg manufacturing facility is operating at only 35% of total capacity, making it operationally unsustainable. The company’s decision to close the facility is final,” Poré said.

“BAT is not exiting the South African market. It will retain its secondary listing on the JSE and will continue serving customers through a supply importation model.”

The decision to shut the plant comes shortly after the company decided to pull the plug on its Mozambican operation. Business Day reported at the time the move put pressure on authorities in South Africa to rein in the infiltration of illegal cigarettes, which have cost the group 40% of sales volumes in the past five years.

The decline in volumes rose sharply in 2020 due to the explosion in the availability of illicit cigarettes after the then co-operative governance and traditional affairs minister Nkosazana Dlamini Zuma banned the sales of cigarettes as the Covid-19 pandemic raged.

BAT’s Heidelberg plant, which has been operational since 1975, is the company’s sole facility in South Africa and the eighth-largest in the group’s portfolio, serving 140 markets.

The socioeconomic effect of the plant’s closure is laid bare in a report by Oxford Economics, which shows the facility supports nearly 4,000 jobs in the Lesedi district and a further 31,300 in the rest of South Africa.

The plant, which exports to eight other markets, including Botswana, Namibia, Malawi, Zambia and Zimbabwe, contributed R12bn in gross added value to South Africa’s GDP in 2022, R3.2bn to the Lesedi GDP and R12.6bn in taxes to the fiscus.

Impact of job losses

The ripple effect of the jobs on the line will be enormous. The Oxford survey of workers at the Heidelberg plant, who have been served with retrenchment notices, shows employees at the plant each have three dependants, on average.

The survey also shows about 18% of workers reported their salaries supported more than five people, while 45% of the factory’s supply chain comprises micro and small enterprises.

Last year BAT called on South African authorities to place customs officials at cigarette factories as part of measures to clamp down on the proliferation of illegal cigarettes, which it said is costing the fiscus R100m a day in revenue, amounting to R28bn a year.

A study by Ipsos, commissioned and paid for by BAT, found the availability of illegal cigarettes in South Africa has become endemic, with nearly eight in 10 South African retailers selling such products, triple the number reported three years ago.

The study, which surveyed more than 4,000 outlets countrywide, found about 69% of retailers were selling cigarettes at less than R20 a pack and nearly 80% were selling them below the R26.22 minimum price.

BAT’s 2023 results were hit by a goodwill impairment of £291m regarding South Africa due to the continued “negative effect of the illicit cigarette trade”.

BAT South Africa goes back to 1904 with the establishment of the United Tobacco Company. In 1999 the group merged with Rothmans International, in which the Rupert family had a stake, giving birth to BAT South Africa.

The Rupert family, led by its patriarch and South Africa’s richest person Johann Rupert, ended its 80-year association with the tobacco industry a year ago, selling its more than 43-million shares for £1.22bn in cash.

Business Day