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May, 2007

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European Union:
Cigarette Trade Responds To Free Trade Opportunities

By John Parker

Dramatic changes have occurred in the cigarette trade for most countries of the European Union in recent years as the setting of free trade and economic integration opened opportunities. The adoption of the euro as the currency of 11 members of the EU in 2002 tended to spur intra-EU cigarette trade. This tended to lower transaction and banking cost for trade among the 11 members using the euro. A rise in the value of the euro from an equivalent of about 82 US cents in 2002 to a range of $1.35 by the spring of 2007 had some influence on the significant growth in the value for both cigarette exports and imports by EU members. While the UK, Denmark, and Sweden retained their traditional currencies, their good showing from trade and financial flows helped the value of their currencies to rise against the US dollar.

So much has been happening in the 27 countries belonging to the EU by January 2007, that is feasible to first provide an analysis of the cigarette trade of the earlier 15 EU members. A following article will analyze the exciting trade trends for the newer 12 EU members. German cigarette exporters had remarkable gains in cigarette exports to other EU countries during the last two years. Total cigarette exports from countries of the earlier EU 15 combined increased 22.6 % in 2005 to 491.8 bn pieces, and the value was up 19 % to $9.17 bn. Intra-EU trade accounts for much of this tabulation. Exports from the established multinationals with large factories in some of the earlier EU 15 countries to traders in the newer 12 EU members have responded markedly to the new free trade setting. The cigarette trade flow has been mostly from the earlier 15 EU members to importers in the newer member countries. It has been difficult for cigarette manufacturers in most of the newer 12 EU countries to make significant inroads into the very competitive setting found in most of the EU 15 markets. This caused manufacturers in some newer EU members to make extra efforts to find new customers for their cigarette exports beyond the EU. The way Poland expanded cigarette exports to the Middle East while arrivals from Germany in Poland soared provides and example of the new trade flows.

In 2005, Portugal and Austria were the fastest growing cigarette exporters among the earlier EU 15 members. This was partly because of the low base for earlier exports. Germany had by far the greatest gain for quantity and value of cigarette exports found anywhere in the world in 2005, with an increase of 51 bn pieces and a rise in value of $1.3 bn in 2005. In contrast, cigarette exports from France increased only $1.5 mn in 2005 to $379.6 mn.

In 2005 and '06, three of the four leading world cigarette exporters are members of the EU: Germany, The Netherlands, and the UK, along with the US rounding out the four top four. The EU also has three of the leading world cigarette importers. Japan had imports of about 93 bn cigarettes in 2005. This was followed by the import of 74 bn pieces into Italy, 57 bn by Spain, and 50 bn by France.

Cigarette Exports from Some EU Members Declined in 2005:
In contrast to the remarkable gains for cigarette exports by Germany, Austria, and Portugal recently, exports from the UK declined. With possibly the highest world retail price for cigarettes and a loss of previously important Far East customers. UK cigarette exports fell 21.6 % in value during 2005 to a low of $913 mn, despite a 15 % reduction in the average export price equivalent to about 47 US cents per pack of 20. Sweden's cigarette exports declined 22.5 % in 2005 to $8.8 mn.

Luxembourg had a reduction for exports to $84.8 mn in 2005-down by 11.4 % from 2004, as the average price for cigarette exports rose 17 % to about 33 cents per pack of 20. This indicates that a hike in cigarette export prices in the competitive EU scene during 2005 tended to mean lower exports.

Belgium's cigarette exports drifted down by 22 % to 55 bn pieces in 2005, valued at $368.8 mn, although the average price fell 14 % to 59.5 cents per pack. The average export price for Belgian cigarettes was 70 % higher in 2005 than price reported for German exports, and nearly five times greater than the average price for cigarette exports from Greece. Traders and smokers in the EU apparently made a close watch on prices and quality of cigarettes marketed in the last three years.

German Cigarette Exports Advancing to Much Higher Levels:
German cigarette exports reached a peak of $3.587 bn in 2005-about double the 2003 level. Dramatic gains were made for exports to Spain and much of East Europe. It appears that the value for German cigarette exports in 2007 may be approaching $5 bn, a value even higher that the $4.7 bn peak for US cigarette exports back in 1998. By 2006, US cigarette exports had declined to about $1.2 bn. US cigarette exports to the EU had been in the range of $2 bn annually a decade ago, but loss of the Antwerp transit trade pushed the value for exports to the EU to a low of $9.2 mn in 2005, followed by a rebound to $11.3 mn in 2006.

The average price for German cigarette exports rose 17.8 % to 35 cents per pack in 2005. The 57.4 % ad valorem tariff for cigarettes entering the EU from external suppliers tends to block out US cigarette exports to EU markets, with the exception of some duty-free areas of airports and seaports. However, the search for better quality in the competitive setting contributed to a 12.6 % rise in EU purchases of US leaf tobacco to 92,222 tons valued at $563.8 mn in 2006. The proportion of US tobacco in most cigarettes manufactured in Germany is relatively high. US leaf tobacco exports to Germany increased 46.6 % in 2006 to 36,812 tons, valued at $222.2 mn. Smaller arrivals of flue-cured tobacco from Zimbabwe contributed to gains for US tobacco exports to the EU in 2006.

In addition to the interesting opportunities found by German cigarette manufacturers in other EU markets and beyond, concern about the downward drift in domestic cigarette sales tends to add to the focus on expanding exports. German cigarette consumption fell to about 152 bn pieces in 2006, in contrast to about 156 bn pieces in 2005. Imports of cigarettes into Germany where taxes were paid declined 13% to about 27 bn pieces in 2005, but illegal imports gained

German Cigarette Exports in 2005 were Double the 2001-03 Average:
German cigarette exports reached 204 bn pieces in 2005-nearly double the quantity exported annually during 2001-03. It is interesting to observe the trend for German cigarette exports to specific countries. Duty-free exports to other members of the EU give Germany a great advantage for cigarette exports. However, competitors like The Netherlands, UK, Denmark, Belgium and some other important exporters within the EU enjoy that same advantage. Germany's location and convenient marketing facilities assist cigarette exports.

The 57.6% import duty for suppliers from outside the EU tends to limit competition from cigarettes made in the US, which were a trade worth about $1 bn annually a decade ago. The average export price for German cigarettes is about 33 US cents per pack of 20. As the value of the euro has advanced against the US dollar, it is obvious that the export price for German cigarettes in euros has declined enough to remain very competitive.

Multinationals dominate the manufacture of cigarettes in Germany. Philip Morris accounts for about 40% of the production, and BAT, 24%. Imperial Tobacco through the purchase of Reemstra accounts for about 23% of output. The share of output for Japan Tobacco International had declined to less than 4 % in 2006.

Customers in the other 24 EU countries have a number of reasons to buy German cigarettes. About 394 brands of cigarettes are manufactured in Germany, included most of the leading American-blend brands produced by multinationals. Avoiding the 57.4 % import duty for cigarettes imported from suppliers outside the EU tends to cause importers in many of these countries to buy from German manufacturers. Also, use of the euro as the valued currency of most EU members adds to the appeal for buying cigarettes from Germany. This lessens banking costs and allows convenient payments.

The addition of ten new members in 2004 pushed the share of German cigarette exports going to the EU to about 90 % by 2005. German cigarette exports to other countries of the EU increased sharply in 2005, compared with a gain of only 1.27 % to 87.7 bn pieces in 2003. Spain accounts for over a third of German cigarette exports to the EU, and Italy for nearly a fifth.

Location of modern cigarette factories of multinationals in the Berlin area tends to make efforts for expanding cigarette exports to East Europe convenient in the new free trade setting. Another factor tending to influence export efforts is the way sales in the domestic market in Germany have drifted lower as prices increased and a shift to roll-your-own occurred. About two-thirds of total output of cigarettes in Germany during 2005 was destined for export.

Cigarette Exports From The Netherlands Increased in 2005 After Remaining Relatively Flat During 2001-04:
Exports of cigarettes from The Netherlands increased to 124 bn pieces in 2005, compared with an average of 106 bn annually during 2001-04. The average price for Dutch cigarette exports declined about a tenth in 2005 to 43.5 cents per pack of 20, and the total value for exports increased 2% to $2.987 bn. Apparently managers of cigarette factories at Bergen Op Zoom and Amsterdam sought to get greater sales from exports and the also explored ways to bolster domestic sales. France and Italy combined accounted for over two-thirds of Dutch cigarettes in the recent decade. Belgium, Germany, and the UK were other significant markets.

Dutch cigarette imports declined about a tenth to 19 bn pieces in 2005. Most of the cigarettes sold in petrol stations and supermarkets in The Netherlands are imported. The average price for Dutch cigarettes of 55 cents per pack of 20 was apparently a barrier to export expansion in 2004, but the 15 % reduction in price apparently contributed to the upward movement for 2005 exports.

Competition from German exports of cigarettes for markets within the EU has been intense for Dutch cigarette exporters. Lower prices and availability of major brands from multinationals contributed to gains for German exports. It appears that excellent research and use of advantageous travel opportunities helped export sales representatives from Germany to obtain many new customers in Europe. For example, Air Berlin had a round trip fare from Helsinki to Berlin for only $29 in 2006. A spectacular rise of German cigarette exports to Finland was partly for markets other than stores in Finland. Passengers on boats frequently transporting customers from Finland to Estonia often bought cigarettes from Germany.

Spain Remains the Leading Destination for German Cigarette Exports:
Cigarette imports into Spain increased nearly a fourth in 2005 to 57.7 bn pieces, valued at $1.7 bn, when arrivals from Spain rose nearly a fifth to about 37 bn pieces. The share of Spain's cigarette imports coming from Germany was up by nearly a fifth in 2005 to 64 %. Spanish smokers greatly increased purchases of imported German cigarettes in the late 1990s. Despite progress with arrangements to improve the quality of cigarettes manufactured in Spain, demand for German cigarettes remained strong. During 2003, German cigarette exports to Spain increased slightly to nearly 31 bn pieces. Then came the dramatic ride for cigarette exports by Germany to Spain to about 36 bn pieces in 2005. France, Belgium, and The Netherlands are significant suppliers of cigarette imports into Spain.

Spain's cigarette exports increased 12.7% to $147 mn in 2005. In addition to shipments to France and some other EU members, Spain has considerable cigarette exports to Morocco, Tunisia, and Algeria. Both export and retail prices for cigarettes are comparatively low. Spain and Portugal had the lowest retail prices for cigarettes during 2001-05.

Italy Importing More Cigarettes: Imports of cigarettes into Italy increased 3.4% to 74 bn pieces in 2005, as the arrival of cigarettes from Germany rose to 18.6 bn pieces-a tenth above 2004. The value for cigarette imports into Italy increased 17.5 % in 2005 to $2.18 bn. The Netherlands is usually the leading source of cigarettes imported into Italy. Smokers can find cigarettes at reasonable prices from a wide range of outlets, including special tobacco shops, supermarkets, neighborhood grocers, kiosks, and petrol stations. Retail prices for cigarettes in Italy are only about half those found in Denmark.

Italy is a competitive market where about a fourth of the cigarettes imported are from Germany. Austria and France have also had interesting gains in exports of cigarettes to Italy. Increased output of quality cigarettes by manufacturers in Italy has not stemmed the tide of imports as more EU countries seek to get a share of the large Italian market.

French Cigarette Imports Rebounded in 2005:
After showing a downward trend between 2001 and 2004, imports of cigarettes legally entering France rebounded nearly 6 % in 2005 to almost 50 bn pieces. Dutch traders provide most of the cigarettes imported into France. Belgium, and Luxembourg are important suppliers. France was the fifth leading customer for German cigarette exports in 2005, with the delivery of 18.6 bn pieces-double the 2003 level. France has a steady cigarette export trade with shipments of about 18.6 bn pieces annually to foreign markets. Germany, Belgium, Spain, and North Africa are important markets.

Cigarette Trade of Belgium Below Earlier Peaks:
Total exports of cigarettes from Belgium declined in recent years and the value for shipments fell from $71 mn in 2004 to $55.3 mn in 2005. Imports of cigarettes into Belgium rose about a tenth in 2005 to 16.5 bn and the value was up to $368.8 mn. Belgium's transit trade in imported cigarettes has dwindled to only a small part of what was happening in the 1990s, when large deliveries came from the US. It is much easier for the multinational cigarette manufacturers to provide cigarettes for traders within the EU from factories located in Germany, The Netherlands, and some other EU members.

Portugal's Cigarette Exports Doubled in 2005:
Portugal has made significant progress in the quality of cigarettes produced by its factories in recent years. Exports of cigarettes from Portugal reached $283.3 mn in 2005-up from $115 mn in 2004. Much of the rise in value stemmed from the 118 % hike in the average export price to 52.3 cents per pack of 20. The quantity of cigarettes exported from Portugal rose 41 % to 10.8 bn in 2005. Imports of cigarettes into Portugal increased nearly a fifth 2.9 bn pieces in 2005, valued at $49.6 mn.

Unusual Sales to Finland Apparently Influenced by Attractive Prices for Traveling Shoppers:
Finland's fascinating business related to the inexpensive boat trips to Estonia appears to have contributed to a rise for German cigarette sales in this market in the last three years. German cigarette exports to Finland more than quadrupled in 2005, rising to about 3.6 bn pieces. The high level of shipments during 2004 indicated that most of the German cigarettes were being sold outside the border of Finland, apparently in boats and the flourishing tourist centers of Estonia, Latvia, and some other countries bordering the Baltic Sea. Another exogenous demand factor evolved for cigarette sales in Finland in the last several years. Russia's rising imports of consumer goods caused many traders to use Finnish ports to unload cargo for transportation by truck to various Russian cities. The increased distribution of goods passing the cumbersome border into Russia contributed to a long traffic jam for trucks waiting on Finnish roads. This provided a new market niche for sales of cigarettes in Finland.

Danish Buying More German Cigarettes:
The average price for Danish cigarette exports fell 8.6 % in 2005 to 43.5 cents per pack and the quantity exported rose 4 % to 5.78 bn pieces in 2005, valued at $125.7 mn. Imports of cigarettes entering Denmark climbed 105 % to 3.5 bn in 2005. Danish purchases of cigarettes made in Germany doubled in 2004 rising to $1 bn pieces, followed by small gains in 2005. Denmark has excellent quality cigarettes containing a high proportion of US leaf tobacco.

Sweden's Cigarette Imports Rebounded in 2005:
Sweden's cigarette imports were steady in 2005 at 11.2 mn pieces, but lower prices caused the value to decline 6.3 % to $217.9 mn. Sweden has a substantial border trade with Norway, where retail prices for cigarettes are much higher than those found in Sweden. Exports of Sweden's cigarettes to the Baltic countries have been hampered by rising competition from Germany and Poland. Sweden was an interesting example of how pushing taxes on cigarettes to astronomical levels can apparently reduce actual tax collections. A change in policy with a reduction in taxes reportedly resulted in a lift for tax collections.

Austria's Location Contributed to Recent Cigarette Export Boom:
Austria's cigarette exports showed a dramatic rise of 64 % to $435.8 mn in value during 2005. Exports to the newer 12 EU members had sensational gains in the last two years, especially to Hungary and Slovakia. If growth in Austria's cigarette exports maintains the dizzying pace recently recorded, the value for its shipments to foreign markets may climb to a range of $1 bn annually, and rival those of the US.

Austria Tobacco Monopoly has a special arrangement to distribute cigarettes in Germany, although only about 23 people are employed to arrange the wholesale marketing of Austrian cigarettes to German business firms. About a fifth of the 47 bn cigarettes exported from Austria in 2005 went to Germany. Most of the cigarettes imported into Austria come from Germany and Czech Republic.

UK Cigarette Business Suffers From High Retail Prices:
Exports of cigarettes from the UK to Far East markets declined sharply in the recent decade, especially to Singapore and Hong Kong. Those losses were not made up with gains in other markets, although efforts to expand sales to new customers did result in increased shipments at times to some markets in the Middle East and Africa. Total UK cigarette exports during 2004-06 were only about half the 2001-03 average of approximately 100 bn annually. Finding new export markets for UK cigarette manufacturers in the EU has been hampered by strong competition from Germany, The Netherlands, and recently from Austria. The UK has found some new markets at various times. UK cigarette exports to Iraq rose to 1.5 bn pieces in 2004 and remained strong in the two following years.

It has been difficult for the UK to have very high retail prices for cigarettes in the range of $7 per pack of 20 and be part of the EU with free trade flourishing at the same time. The high prices tend to contribute to efforts by smokers to find cigarettes where the high taxes have been eluded. An estimated 20 bn cigarettes smoked in the UK annually somehow eluded the expected taxes. This includes trips by smokers to nearby countries and smuggling. Taxes account for over 80 % of the retail price for cigarettes distributed through appropriate channels.

The difficult setting in the UK has caused Imperial and Gallaher to focus on investments in other countries to offset sagging sales at home. Imperial had about 45.5 % of the UK market for cigarettes in 2006, about 2 % greater than its 2005 share. Lambert & Butler manufactured by Imperial accounted for 15.5 % of UK cigarette sales during both 2005 and 2006, and Richmond was the second leading brand with 14.9 % of sales in 2006. Imperial's profit rose to about $1 bn in 2006.

Gallaher had about 38.6 % of the market where taxes were paid in 2006. Gallaher was able to bolster sales of Mayfair to 13.6 % of the market in 2006, and Benson and Hedges rose about 5 % to account for about 9.5 % of the market.

Ireland's Cigarette Imports Rise as Exports Decline:
Cigarette exports from Ireland declined by more than half in value to $1 mn in 2005. Imports of cigarettes into Ireland increased 237 % in 2005 to two bn pieces as the value increased 161 % to $45 mn. The UK is a leading supplier of Irish cigarette imports. About 3 % of Ireland's cigarettes in 2005 came from Germany. Ireland's cigarette manufacturers face strong competition from deliveries from other EU countries while their economy of scale in operations is at a disadvantage in comparison with output in the UK, The Netherlands, and Germany.

Tobacco International - May, 2007

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