Philip Morris Closes Australian Plant - Analyst Blog

Per media reports, Philip Morris International Inc. PM will shut down its six decade old manufacturing plant in Moorabbin, Melbourne, Australia and shift its production to South Korea instead. The plant closure is expected to lead to more than 180 job cuts representing about 25% of the nation's workforce.

The New York-based tobacco manufacturer has blamed the stringent fire safety regulations for cigarettes of the Australian government for its decision to shift base. The rules, introduced in 2010 required tobacco makers to make reduced fire-risk cigarettes, which burn out if they are not being smoked. However, Philip Morris claims that such cigarettes have very low demand in the international markets.

Australia has some of the strictest anti-smoking rules to curb the growing smoking population of the country. The ruling by the Australian Federal Government requires cigarette manufacturers to sell their products in plain packages with warning labels covering at least three fourth of the front side. Moreover, it requires brand names to be written in a standard font against a drab dark-brown background.

Philip Morris feels that these stern rules are lowering sales and thereby profits in Australia. Moreover, the fire safety rules are hindering exports from the production facility in Australia. Management also noted that the Moorabbin plant is significantly under utilized, operating at less than half of its currently installed capacity. We are thus encouraged by the company's decision to shut down the underutilized capacity.

Phillip Morris carrying a Zacks Rank #4 (Sell) has been facing dwindling volumes due to declining demand resulting from the ongoing anti-tobacco campaigns. Governments around the world are hiking excise tax on cigarettes and imposing packaging and advertising restrictions on cigarette makers.

In order to combat these difficulties, Philip Morris along with other tobacco majors like Reynolds American Inc. RAI, Lorillard Inc. LO and Altria Group Inc. MO is putting greater focus on the growing alternative tobacco product category. As part of the strategy, in Jan 2014, Philip Morris constructed a $679.5 million manufacturing facility in the European Union which will exclusively produce reduced risk tobacco products called the 'Next Generation Products.'