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April, 2009
Renegade-Auction

German Cigarette Trade Influenced by Strong Competition

by John Parker

Price competition within the European Union changes the outlook for the German cigarette market.

Competition within the European Union 27 among cigarette exporters intensified in the last several years. Greater exports from France and Poland to customers in other EU contributed to a slowdown for German cigarette exports to Europe. The days of dramatic growth for German cigarette exports to European countries may be over. After scoring spectacular growth of cigarette exports to Eastern Europe from 2003 through 2005, it now appears that German cigarette exports to Europe may decline slightly in 2009. Competition from other EU countries has gained momentum. Exports of cigarettes from Poland and France made astonishing gains in 2008. Poland has already surpassed the UK as a cigarette exporter, and may eventually have exports in the range shown for the United States.

Germany was the leading world exporter of cigarettes in 2007 with shipments of 159.2 bn pieces, valued at $3.478 bn. The average price for German cigarette exports rose from 39 cents per pack of 20 in 2006 to 43.7 cents per pack in 2007. After rising by 46% between 2003 and 2006, the pace of growth for German cigarette exports slowed down to a 3.2% rise for 2007 over 2006. More competition from other exporting countries within the EU has made further expansion of German cigarette exports more difficult. The high value of the euro in comparison to the US dollar and some other currencies tended to make German cigarettes more costly to buyers in some countries, while the change had little impact on shipments to 14 other EU countries using the euro as their official currency.

Competition Rising For Cigarette Exports Among European Countries:
Competition with an evaluation of quality and average price for cigarette brands exported by European countries has intensified in recent years. The 2007 average German cigarette export price of 43.7 cents per pack of 20. Cigarettes exported from Poland averaged about 22.5 cents pack. Yet, the German export price was a third below the 64 cents per pack of Dutch cigarettes. The 43% reduction for the average French cigarette export price to 19.8 cents per pack of 20 contributed to the 63% jump in cigarette exports from France to 30.3 bn pieces in 2007. Booming Polish and French cigarette exports tended to cut into some of the promising market opportunities factory managers in Germany had earlier found extra sales.

Some special connections apparently helped German cigarette exports to Japan to double in 2007, reaching 21.2 bn pieces, compared with 10.2 bn pieces in 2006. The average price for German cigarette exports to Japan declined from 44.3 cents per pack of 20 to 27.8 cents per pack by 2006 and remained in that range during 2007. The price for German cigarettes exported to Japan remained attractive, and the share of Japan's cigarette imports coming from Germany rose, while the US share fell sharply in 2008.

The same multinationals accounting for most German cigarette output also operate in a number of other EU countries. Labor cost for cigarette manufacturing in Poland and Czech Republic is considerably below that found in Germany. Often the new facilities for factories in those countries produce improved quality cigarette. Higher taxes imposed on cigarettes marketed in Germany tended to recently push retail prices higher and domestic sales were either flat of down from the previous year.

Greater German Cigarette Imports Coming From East European Suppliers:

German trade data reported imports of about 29.2 bn cigarettes in 2007, compared with about 34 bn pieces in 2003. The share of German cigarette imports coming from the Netherlands in 2007 was down to about 6%, compared with over a fifth of the arrivals during some of the 1990's. Lithuania, Poland, and Czech Republic were much larger suppliers of reported German cigarette purchases in 2007. Some observers of the German cigarette situation indicated that higher retail prices in Germany tended to encourage greater purchases of cigarettes by German shoppers visiting bordering countries. They were able to use the relaxed EU travel arrangements to go buy cigarettes at lower prices in Poland or Czech Republic. The situation for movement of cigarettes from other EU countries became more important after ten new countries entered the EU in 2004. Lithuania shipped about 5 bn cigarettes to Germany in 2007, ranking second after the 10 bn delivered from Austria among suppliers of reported German cigarette imports. Czech Republic reported exports of about 3 bn cigarettes to Germany in 2007, compared with 1.8 bn shipped from Netherlands. Greece, France, Belgium, and Denmark were other significant suppliers.

Quality Of German Cigarettes Influenced By Use of Imported Tobacco In Blending:
About 95% of the leaf tobacco used for preparing tobacco products in Germany is imported. Brazil and Argentina have made greater deliveries of flue-cured tobacco in recent years as the US share of German tobacco imports declined. The idea that using US tobacco for a certain proportion of the blend for certain quality brands varies by country and according to the attitude of managers in different factories. German leaf tobacco imports were about 212,000 tons in 2007, but the US share of arrivals was down to about a tenth of the total, compared with about a fifth of German leaf tobacco imports during the 1990's. Brazil has gained a larger share of German leaf tobacco imports, as the US share declined. Imports of flue-cured tobacco from Zimbabwe have declined sharply, but imports of burley from Malawi and Mozambique increased.

Multinationals account for most of the cigarette output in Germany. Philip Morris is a leading producer and Marlboro is their top brand in Germany. Imperial and BAT are the other major cigarette manufacturers in Germany. A large share of the output from JTI factories is exported, and especially to Asia. New regulations concerning warnings on packages and where people can smoke appear to have pushed per capita cigarette consumption down. The higher prices caused some smokers to shift to roll-your-own mixtures.

Modernization Of Factories In Some Countries Causes Imports Of German Cigarettes To Decline:
More efforts by various EU countries to modernize their cigarette factories and to improve quality made it more difficult for major exporters to make further gains in certain markets. An example of a new EU member with sharp reduction for cigarette imports as the domestic industry modernized is Romania. Total cigarette imports into Romania averaged about 10 bn pieces annually during 200204, compared with about a tenth that volume by 2008.

Germany was the leading world exporter of cigarettes in 2006 when the value for shipments rose to a range of $3 bn. The upward thrust continued with remarkably higher sales to a number of countries. Gains for exports to some far away markets were dramatic, including the way sales to Japan nearly doubled. The upward trend for German cigarette exports has had various stages in different market areas. First, exports to some major markets in the European Union (EU) increased at a rapid pace during 200204 and then the pace of growth slowed down by 2005. German cigarette exports to Romania fell from 2.45 bn in 2006 to 533 mn in 2007.

EU Import Duty Tends To Limit Competition From Non EU Suppliers:
A small share of German cigarette imports come from outside the EU, partly because of the high import duty for exterior suppliers. That means that Switzerland has shifted to exports of more cigarettes to the Middle East as sales to EU customers became limited. The EU 57.6% ad valorem import duty for cigarettes coming from outside the EU gave Germany an advantage over previously significant suppliers like the United States and Switzerland.

Growth For German Cigarette Exports To Selected Markets Occurred In Various Stages:

Countries belonging to the EU prior to 2004 were a focus for German cigarette exporters for more than a decade before ten new members joined. Gains for German cigarette exports to some of the earlier 15 members of the EU were significant in the 1990's and through 2006, before the 4.1% setback to those countries in 2007. Spain was the leading destination for German cigarette exports in the last six years, although competition contributed to a decline from the peak of nearly 37 bn pieces in 2005 to 31.6 bn pieces by 2007. Germany provided about half of Spanish cigarette imports during 200307. Competition from Dutch and French cigarette suppliers contributed to the recent decline for German cigarette exports to Spain

Italy was the second major destination for German cigarette exports during 200306, but the shipment of 20.9 bn cigarettes to Italy in 2007 was slightly below the 21.2 bn exported from Germany to Japan. Total Italian cigarette imports rose to 75 bn pieces in 2007, including substantial deliveries from France, the Netherlands, and some other EU countries.

German cigarette exports to France held up well during 2007 when improvement in the quality of domestic output contributed to a sharp rise in exports to other EU countries. Exports of cigarettes from Germany to France declined 3.4% in 2007 to 7.3 bn pieces. Greater exports of some dark brands from France to Germany in 2007 meant a greater two-way trade among the two countries cigarettes.

Reported German cigarette exports to the United Kingdom tumbled 61.6% to 1.4 bn pieces in 2007, compared with .7 bn pieces in 2006. Concern about the movement of cigarettes from a combination of other EU countries to the UK in ways to elude very high taxes has been reported in the last several years.

Belgium has been a steady market for German cigarette exports, and reports shipments to this neighboring country rose 3.6% in 2007 to 5.45 bn pieces. While the once busy transit trade in US and Brazilian cigarettes in Antwerp blinked out nearly a decade ago, Belgium still has some activities for the distribution of imported leaf tobacco.

German cigarette exports to Austria increased 76% to 5.55 bn pieces in 2007. Increased distribution of cigarettes to Balkan countries through Austria may have been part of the reason for the rise. Arrangements to allow the annual import of about 10 bn cigarettes into Germany from Austria have remained intact despite the implementation of various barriers for cigarette sales in both countries.

Philip Morris factory efficiency improved in recent years in Portugal, and that helped to boost cigarette exports from Portugal to other EU markets and to North Africa. German cigarette exports to Portugal nearly doubled in 2006, reaching 2.2 bn pieces, and then they tumbled by about half in 2007.

Scandinavian Cigarette Trade Flows Provide Opportunity For German Exporters:
Finnish purchases of cigarettes from Germany reached a peak of about 3.6 bn pieces in 2005, before declining 42.8% to 1.7 bn pieces in 2007. Firms in Finland have become important wholesale distributors to traders in Estonia, where the boom in tourism has added to the demand for cigarettes and a number of agricultural commodities. Manufacturers of cigarettes in Poland, Latvia, and Lithuania made greater sales of cigarettes to customers in Estonia in the last several years.

Denmark has high quality cigarettes with different version of the House of Prince brands, and retail prices are relatively high. German cigarette exports to Denmark declined a fifth in 2007 to 610 mn pieces. Denmark advanced exports of the Prince brands recently to countries with Baltic ports.

Sweden revised taxes on cigarette downward several years ago when it appeared that so many smokers were traveling to other European countries to find lower prices. That move helped to boost tax revenue collections, but retail prices are still high compared to those visitors can find in Estonia. German cigarette exports to Sweden were up 82% in 2007 to 959 mn pieces.

German Cigarette Exports To New EU 12 Down In 2007:

Exports of cigarettes to twelve new members as of early 2007 dropped to 13.3 bn pieces in 2007, compared with about 19.6 bn pieces to the same countries in 2005. (This includes Romania and Bulgaria althouhg they joined the EU on January 1, 2007). Czech Republic was a boom market for German cigarette exports soon after the country entered the EU in 2004. German cigarette exports to Czech Republic moved up from 1.76 bn pieces in 2003 to 2.9 bn in 2004 and a peak of about 4.85 bn pieces in 2005. Then competition from other EU members strengthened, and German shipments dropped to about 4 bn pieces in 2006, before rebounding to about 5.3 bn in 2007. The flourishing tourist trade and prosperous business atmosphere around Prague apparently added to demand for imported cigarettes.

Slovakia has been an important producer of tobacco about a decade ago, but recently the tobacco industry was in decline. German cigarette exports to Slovakia more than tripled in 2007, reaching 2.1 bn pieces. For a while Slovenia was a boom market for German cigarettes, but competition from other EU suppliers caused shipments to decline to less than 1 mn pieces annually in the last three years.

After entering the EU in 2004, Hungary was a rapid growth market for imported cigarettes, and shipments from Germany rose to about 1.5 bn pieces in 2004, compared with 299 mn pieces in 2003. Then German cigarette exports to Hungary peaked at about 2 bn pieces in 2005, before dropping to about a third that level in 2006, and declining about a fourth in 2007.

German cigarette exports to Latvia nearly doubled in 2004, reaching 1.25 bn pieces, and then they advanced slightly to a peak of 1.3 bn pieces in 2005. Cigarette manufacturers in Latvia expanded output after entry into the EU, and especially to serve the flourishing market in Estonia. Since Estonian cigarette factories were closed, Latvia had a new opportunity available. Latvia's cigarette exports increased during 200507 to a number of other EU markets in addition to Estonia. German cigarette exports to Latvia declined a fourth in 2007 to about 491 mn pieces.

Lithuanian cigarette output increased sharply after 2004, and exports to Germany and Estonia provided extra demand for exports from Lithuania. German cigarette exports to Lithuania peaked at about 2.8 bn pieces in 2005 - a level about 7 times the 2004 quantity. Then German cigarette shipments to Lithuania increased 6.8% in 2007 to 979 mn pieces.

Poland had remarkable investments in new facilities to manufacture quality cigarettes, and by 2007 exports of cigarettes from Poland were up to 63 bn pieces. The earlier debates over smuggling of cigarettes from Germany or through German roads to Poland faded recently. German cigarette exports to Poland more than doubled in 2005, moving up to about 1.2 bn pieces, and after declining about a third in 2006, rose to a peak of about 2.1 bn pieces in 2007.

German cigarette exports to Bulgaria peaked at 1.3 bn pieces in 2004, compared with 224 mn pieces in 2004. Entry into the EU in 2007 for Bulgaria meant more for cigarette trade with neighboring Greece than for Germany. Exports of German cigarettes to Bulgaria declined about 56% in 2007 to about 398 mn pieces.

Cyprus was an important location for transit traders distributing US cigarettes to Middle East countries before joining the EU in 2004. German cigarette exports to Cyprus rose from 133 mn pieces in 2003 to 544 mn pieces in 2006, before tumbling to about a fourth that level in 2007. German cigarette exports to Malta declined about a fourth in 2007 to 41 mn pieces. Other EU countries, including Greece and Italy, provide cigarettes for transit traders in Malta. Libya is a major market for wholesale traders in Malta.

Expanding Export Markets Found In 2007 To Help Offset Some Losses In EU Sales:
After gains for German cigarette exports to Eastern Europe faded during 2006, a search for other markets with some potential increased. It was not easy for German cigarette exporters to make big new sales in most countries of Commonwealth of Independent States (CIS), where Russia and Ukraine were competing to export more of their surplus cigarette output. German cigarette exports to Azerbaijan rose to 5.3 bn pieces in 2007 - a level more than double the 200406 average. Rising petroleum export revenues contributed to the larger 2007 sales to Azerbaijan.

German cigarette exports to Russia declined from about 1.16 bn pieces in 2003 to a low of 239 mn pieces in 2005, but they were back up to about 336 mn pieces in 2007, with the help of more sales of some premium brands. Exports of cigarettes from Germany to Ukraine advanced 18.9% in 2007 to 784 mn pieces.

German Cigarette Exports To Middle East Increased In 2007:
German cigarette exports to United Arab Emirates rose from 4.6 bn pieces in 2006 to about 5.98 bn pieces in 2007. Distribution of cigarettes from Dubai free trade areas helped to propel the UAE into a major status as an importer of over 35 bn cigarettes annually. Most of the cigarettes unloaded in UAR eventually are smoked in Iran.

German cigarette exports to Saudi Arabia increased 51% in 2007 to nearly 1.8 bn pieces. German cigarette exports to Turkey were about 3.5 bn pieces in 2005, compared with about 784 mn pieces in 2004, but shipments were down to about 2.8 bn pieces in 2007. Some of the shipments to Turkey go to Mersin duty-free zone for distribution to other markets, especially to Iraq. Direct German cigarette exports to Iraq rose 46.8% to 69 mn pieces in 2007. As more refugees from Iraq temporarily settled in Jordan, that may have added to demand for imported cigarettes there. German cigarette exports to Jordan increased from 792 mn pieces in 2004 to about 2.1 bn pieces in 2005, but shipments to Jordan were down to 539 mn pieces in 2007.

German Cigarette Exports To US Importers Declined In 2007:
Some German cigarette exports to the United States go to duty-free ports and traders serving the Caribbean tourist trade. Exports of cigarettes from Germany to the United States declined a fifth to 311 mn pieces in 2007. The average price for German cigarette exports to US importers of over 50 cents per pack of 20 indicates that premium brands are and important part of the business.

Taiwan Has Been A Steady Market:
A business arrangement contributed to German exports of about 4.2 bn cigarettes annually to Taiwan. Japan provides over a third of Taiwan's total cigarette imports, and Germany is one of the four major sources of Taiwan's cigarette imports.

Competition Limits Prospects For Expanding German Cigarette Exports In Most Asian Markets:
Cyprus gave up much of its lucrative transit trade in US cigarettes to Middle East markets in order to look good for those evaluating its situation as a country to enter the EU. Recently, Cyprus sharply increased imports of US tobacco to boost output of premium brands. German cigarette exports to Cyprus more than doubled in 2004, rising to over 350 mn pieces. Yet, total cigarette imports into Cyprus fell from 1.6 bn pieces in 2003 to 893 mn pieces in 2004.


Tobacco International - April, 2009

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