After the Embargo

With recent traveling restrictions relaxed with Cuba, it appears that the 47 year old trade embargo agaunst Cuba is nearing its end. The House Ways and Means Committee Chairmain Rep. Charles Rangel (D-NY) has even gone so far as to say that he believes all trade restrictions (mean the embargo) and travel restrictions against Cuba will be lifted by December 2010. I personally have my doubts that the embargo will end in a years time, my guess is that the people in charge of running Cuba (Raul Castro, and other party leaders) will not submit to any US conditions or demands since they will likely force them out of power. Anyways, there is a strong possibility that the embargo can end. So if it does end, what does it mean for the cigar industry?

As far as Cuban cigars go, a simple knowledge of economics will tell you that price and demand will sky-rocket. In order to meet this demand the Cuban cigar monopoly will have to significantly increase their output. The last time Cuba significantly increased their cigar output was in the late 1990's and early 2000's, particularly from 1998-2001. In the early 90's Cuba was exporting around 80-90 million cigars annually, from 1998-2001 they exported 160 million cigars annually. As a result, the quality of the tobacco greatly suffered. Many seasoned Cuban cigar smokers will tell you that the cigars bought from 1998-2001 have only started to become decent/smokable in the last year or two because they were rushed into production where the tobacco leaves were not properly cured, fermented, and aged.

Currently about 150 million Cuban cigars are consumed annually worldwide, while the largest cigar market in the world, the United States, consumes 300 million non-cuban cigars annually. It doesn't take a genius to grasp the consequences if the embargo was lifted. Habanos SA, the Cuban cigar monopoly, says that they have a sufficient reserve of raw materials, land, labor, and infrstructure to handle any forseeable increase in production. My take is that this is a bunch of bull crap. I doubt they have sufficient infrastructure on hand to meet the increase in demand. I believe Cuban cigars will be much more expensive and of much lower quality when they become legal in the United States.

Oviously not all smokers are going to switch over to Cuban cigars exclusively once the embargo is lifted. In fact, even when the embargo is lifted Cuban cigars might not be available in the United States for years to come due to legal battles. A lot of the legal issues stem from the fact that after the revolution, Cuba nationalized the entire cigar industry and the families that had been manufacturing Cuban cigars for decades found themselves as expatriots around the Carribean and the US founding cigar grands with the same names. For example, there are Cuban and non-Cuban varieties of Montecristo, Punch, Partagas, Cohiba, H Upmann, Romeo y Julieta, and Hoyo de Monterrey.

One of the main companies to watch is Swedish Match AB, which recently bought a controlling share of General Cigar, which makes the non Cuban Partagas, Cohiba, Punch, Bolivar, and Hoyo de Monterrey brands among others.

The Imperial Tobacco Group PLC of England recenlty bought Altadis and its subsidiary Altadis USA. This case is more interesting because Altadis actually bought a 50% share in the Cuban cigar monopoly Habanos SA in 2000 and jointly oversees Cuban cigar manufacturing with the Cuban government. Altadis USA produces non Cuban versions of Romeo y Julieta, Montecristo, and H Upmann as well as other brands.

These two companies are currently fighting over distribution rights of Cuban cigars in the United States after the embargo. As a result of legal battles, CUban cigars may not be available in the US after the embargo for quite some time.

For a Brief History of Cuban Cigar Production:
http://www.cigaraficionado.com/Cigar/CA_Features/CA_Feature_Basic_Template/0,2344,2686,00.html