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May, 2009
U.S. Tobacco Cooperative

European Union Cigarette Trade
Becoming More Competitive

by John Parker

A snapshot of a complex European market where competition has become fierce
and the market, more unpredictable.

Major cigarette manufacturers and exporters located in the earlier 15 European Union countries had expected to find new customers among smokers in the newer East European members as they entered the common market in 2004. In early 2009, the EU market was more competitive than some had earlier imagined. The rise of Poland as a major cigarette exporter in the last several years has been a kind of surprise to some analysts. Another country with a very different agenda since joining the EU is Romania. A shift from large imports to much smaller imports, and even rising exports were reported for Romania after joining the EU on January 1, 2007 further added to the competitive setting.

Some of the major trade flows for cigarettes among the intra-EU trade remained strong during 2004 - 08. German and Dutch cigarette exports to other EU members were maintained while a large share of the gains for French exports came from greater sales to Middle East customers. Poland's advance in exports captured a large share of the imports moving into Slovakia, Slovenia, and Hungary. Poland also made strong gains for new sales to importers in Italy, Germany, and the UK. Exports of cigarettes from the UK in 2007 were only about a fourth the 2001 - 03 average after severe setbacks in sales to the Far East and Middle East.

Rapid Gains For Cigarette Exports From EU 15 To East Europe May Have Already Happened: Cigarette manufacturers in the EU 15 had some help with demand as sales to customers in the EU 12 advanced through 2007, but it appears that this activity has already seen its most rapid pace of growth. Problems with domestic demand for cigarettes are being further aggravated by the array of problems concerning more bans of where people could smoke, extra labeling rules, and a louder anti-smoking drumbeat. The fixed costs of new factory facilities mean that managers tend to seek ways to sell more cigarettes beyond the usual marketing area.

Innovations Contribute To Strong German Cigarette Exports Despite Decline In Domestic Demand: Germany has been the leading cigarette manufacturer and exporter among the EU 15. Total German cigarette exports rose 3% to a peak of 159.2 bn pieces in 2007, including shipments of 112.9 bn pieces to other EU members. Some countries where manufacturers had a focus on increasing output of quality brands for export sharply reduced imports of German cigarettes in 2007. The doubling of German cigarette exports to Japan with the shipment of 21 bn pieces in 2007 helped to more than offset smaller sales to some EU customers.

Exports of cigarettes from Germany to Luxembourg declined 83% to 212 mn pieces, and shipments to Portugal declined 56% to 984 mn pieces. Total German cigarette exports to the other members of the EU 15 dropped 4% in 2007 to 92.4 bn pieces, mostly because of declining deliveries to Spain, France, UK, Luxembourg, and Portugal.

Innovations in finding new export markets helped to keep total demand for cigarettes made in Germany high. Exports to Japan advanced further in 2008, after making dramatic gains to 21 bn pieces in 2007.. That helped to provide prospects for some gain in total German cigarette exports, despite some flatness in exports to major EU customers. The decline for reported sales of cigarettes to German smokers may not have been as severe in 2008 as some numbers on tax collections would indicate. The chance for Germans to travel for part of a day to Poland, Czech Republic, Netherlands, or Luxembourg for shopping apparently meant more shopping by smokers in bordering countries. The removal of customs checkpoints among EU countries resulted in more shopping by people in neighboring countries for consumer goods.

Spain Becoming A More Competitive Cigarette Import Market: The rise for German cigarette exports to 159.2 bn pieces in 2007 may have been the last strong growth to get reported for a while. It appears that German cigarette exports to Italy and Spain have kind of reached a plateau. Shipments of cigarettes from Germany to Spain peaked at nearly 37 bn pieces in 2005, but declined 12.5% in 2007 to 31.6 bn pieces. Increased competition from Netherlands and Portugal and rising output of quality brands in Spain increased competition for sales of German cigarettes in their top export market in the last two years.

Italy Is The Second Major World Cigarette Importer: Italy imported about 75 bn cigarettes in 2007 and again in 2008. Japan was the top world cigarette importer during 2003 - 08, but as imports of US cigarettes into Japan decline, the numbers for cigarette imports by Japan and Italy for 2009 may be close. German shipments to Italy edged up 5% in 2007 to 20.9 bn pieces and remained strong in 2008. Increased competition from Poland and Portugal may limit prospects for further German gains in cigarette exports to Italy. Over half of the cigarettes smoked in Italy are imported. Despite efforts to improve quality very few Italian cigarettes are exported.

Greece Was Third Major Destination For German Cigarette Exports Recently: Tourists account for some of the cigarette demand in Greece and more smokers are seeking quality blended brands. About half of the 16 bn cigarettes imported annually into Greece during 2006 - 08 came from Germany. German cigarette exports to Greece increased 3% to 8.17 bn pieces in 2007.

French Cigarette Imports Come Mostly From The Netherlands, More Exports Go Outside EU: France had average imports of about 49 bn annually during 2004 - 08, with about 75% of the arrivals coming from Netherlands. German cigarette exports to France peaked at 7.6 bn in 2006 and declined 3.4% to 7.3 bn in 2007. French cigarette factories have produced more blended brands recently called blondes, in addition to the traditional dark brands

French cigarette exports rose 53% in 2007 to 30 bn pieces, mostly with greater sales to UAE, Turkey (free trade zones), Egypt, and Lebanon. Part of the 9.1 bn cigarettes shipped from France to United Arab Emirates in 2007 went to Iran and markets in the Arabian Peninsula. In addition to direct exports from France to Iraq of 2.9 bn pieces in 2007, some of the 5.2 bn pieces shipped to Turkey and 1.2 billion sent to Syria eventually went to Iraq.

Austria Maintains Steady Cigarette Trade With EU Members: Austria was the destination for the shipment of 5.4 bn German cigarettes in 2007, a gain of 76% over 2006. Exports from other EU countries to Austria were not that busy in recent years and German deliveries accounted for over 70% of total cigarette imports. Germany was the destination for about 35% of Austrian exports of 28.5 bn cigarettes in 2008. Czech Republic was a customer for 2.2 bn Austrian cigarettes in 2007. Hungary, Bulgaria, Bosnia-Hercegovina, and Kosovo were other important markets in the last several years for cigarettes exported from Austria.

Belgium's Cigarette Trade Rebounding Slightly: Most of the large deliveries of U.S and Brazilian cigarettes delivered to Antwerp in the 1990's were for transit traders and few entered the Belgian market. Imports of cigarettes into Belgium from outside the EU have blinked out. Belgium was a steady market for German cigarette exports during 2003 - 06, and shipments were up 3.6% in 2007 to 5 bn pieces. Dutch cigarette shipments to Belgium reached 8.27 bn pieces in 2007 and arrivals from France were 929 mn pieces. Polish shipments to Belgium rose to 929 mn pieces in 2007. Some of the cigarettes delivered to Antwerp traders are distributed to other countries.

Finnish Transit Trade Becoming More Competitive: Finnish purchases of German cigarettes declined 44% to 1.7 bn pieces in 2007, as imports into Finland from Poland rose to 1.5 bn pieces. Many of the cigarettes imported by Finnish traders are distributed to traders in Estonia, where many sales are made to tourists.

Sweden's Cigarette Imports Fluctuate: Sweden is a unique market for imported cigarettes because free trade with other EU members tends to calm down the earlier push for much higher retail prices. German cigarette exports to Sweden nearly doubled in 2007, reaching 959 mn pieces. Competition was greater among foreign suppliers recently. Dutch cigarette shipments to Sweden reached 1.2 bn pieces in 2007, and Austria deliveries were up to 1.8 bn pieces. Poland has become a larger supplier with the help of low prices and its shipments to Sweden were up to 410 mn pieces in 2007.

United Kingdom Cigarette Trade Shifts More To EU Countries: In contrast to the way Germany and France had much of their growth in cigarette exports in the last two years to markets outside the EU, The UK has lost most of the business in the Far East and Middle East while gaining greater sales to some EU markets. Spain accounted for 5.6 bn of total UK exports of 28.5 bn cigarettes in 2007. France, Germany, Italy, and Czech Republic were other important markets.

The United Kingdom has become more competitive for commercial cigarette imports recently, although the volume for smuggling is a problem. The Netherlands and Poland each shipped 2 bn cigarettes to the UK in 2007, when German deliveries were 1.4 bn pieces.

Hungary Recently Imported A Greater Share Of Its Cigarette Supply: Hungary opened up as larger importer of German cigarettes with the delivery of 2 bn pieces in 2005, but shipments tumbled to a third that level in 2006, and fell another fourth in 2007. Greater deliveries from Poland kept German sales to Hungary at a level in 2008 far below the 2005 peak.

Czech Republic Was A Growth Market For German Cigarette Exports In Recent Years: German exports had done very well to some new EU 12 markets through 2007, especially to bordering Czech Republic. Exports of German cigarettes to Czech Republic increased a third to 5.3 bn pieces in 2007, compared with 1.7 bn pieces in 2003. By 2007, Poland moved into the lead in the Czech market with the shipment of 6.5 bn pieces.

Bulgaria was the customer for 1 bn German cigarettes in 2007, despite the delivery of 1.8 bn pieces from Poland and 614 mn pieces from Netherlands. Most of Bulgaria's exports of 4.2 bn cigarettes in 2007 and 2008 went to markets outside the EU, including Turkey, Iraq, Syria, and Lebanon.

Netherlands Is The Second Major World Cigarette Exporter: Exports of cigarettes from the Netherlands were down 1% in 207 to 111.3 bn pieces. Dutch cigarette exports are relatively concentrated to traditional markets in some other EU countries, especially Italy, France, Spain, and Belgium. The average export price of 64 cents per pack in 2007 probably limited prospects for the opening of new sales in markets outside the EU. Because of the tax system in most EU markets, smokers seek high quality brands.

The Netherlands was in the lead among suppliers of Italy's cigarettes with the delivery of 37 bn pieces. Nearby France was a customer for 30.7 bn Dutch cigarettes in 2007. Shipments to Spain of 16.4 bn pieces were only about half the sales by German exporters. Bordering Belgium was a customer for 8.3 bn Dutch cigarettes in 2007. The large Philip Morris factory at Berg Op Zoom, Netherlands is near the border with Belgium. Germany was the destination for Dutch exports of nearly 1.9 bn cigarettes in 2007, and Greece was a market for 1.4 bn pieces. Czech Republic was a market for 1.1 bn Dutch cigarettes in 2007 and shipments to Bulgaria rose to 614 mn pieces.

UK Cigarette Exports Down: UK cigarette exports to the Far East and Middle East have declined steeply from the much higher levels recorded a decade ago. Total UK cigarette exports fell to 28.5 bn pieces in 2007. High prices for some leading brands made from predominantly flue-cured tobacco have not been great export items for shipments to some EU countries. Yet, UK cigarette exports to Ireland were 3.3 bn pieces in 2007. Spain was the leading destination for UK cigarettes in 2007 with the shipment of 5.67 bn pieces.

Portugal Expands Cigarette Exports: Cigarette exports from Portugal increased to 14.8 bn pieces in 2007, including the shipment of 8.3 bn pieces to Italy. Shipments to France rose to 768 mn pieces in 2007, and 4.2 bn pieces went to Spain. German cigarette deliveries to Portugal dropped 56% to 984 mn pieces in 2007.

Spain Expanding Exports To Some Mediterranean Ports: Exports of cigarettes from Spain rose to 10.4 bn pieces, including the shipment of 5.77 bn pieces to France, nearly 1 bn pieces to Italy, 1.2 bn to Algeria, and 408 mn pieces to Iraq. Morocco and the free port of Melilla were nearby markets.

Declining Per Capita Sales Add To Competitive Setting: Per capita consumption of cigarettes in the EU appears to be drifting downward. Higher retail prices spurred by rising taxes are causing sales to decline. Some smokers are shifting to roll-your-own mixtures. The idea that 5 euros ($6.50) should be the minimum price for a quality pack of 20 cigarettes is not good news for most smokers. Retail prices for cigarettes are up to about $10 per pack in the UK, and above $5 per pack in Germany, France, and Netherlands. The example of Sweden's problems with a decline for tax revenue when taxes went too high and fear of more smuggling has tended to cause some caution for pushing cigarette taxes higher.

A Rising Share Of EU Cigarette Exports Going To Exterior Markets: More cigarettes are likely to be exported by EU countries to Asia, the Middle East and Africa in 2009. At the same time the 57.6% ad valorem duty will severely limit imports of cigarettes from countries outside the EU 27. US cigarette exports to this group of countries had reached $3 bn annually during 1994-96, but shipments in 2009 may be at token levels. Recent US cigarette exports to the EU were mostly for duty-free port areas. Swiss cigarette gains have been mostly to the Middle East. The EU is becoming a larger net exporter of cigarettes as competition within the EU 27 intensifies. The share of cigarette imports provided by the EU is rising for Japan, Saudi Arabia, Iraq, and North Africa. This trend has contributed to the steep downturn for US cigarette exports.

Total cigarette exports (including intra EU trade) from the combined 27 countries of the European Union increased 7.6% in calendar 2007 to a peak of 510 bn pieces. Higher retail prices tended to cause a slowdown in sales in some countries. Most countries have placed more restrictions on where people may smoke. These restrictions and the rising left a different setting from that found several years ago.

German Cigarette Exports Remain Strong With Expanding Sales Beyond The EU: Germany remained the leading EU cigarette exporter in 2007, but the 3% rise to 159.2 bn

b was relatively small compared with the galloping pace in several previous years. The EU accounted for 99 bn of German cigarette exports in 2007, or 62% of the total in 2007.

Spain was the top destination for German cigarettes in 2007 with the shipment of 31.6 bn pieces and 2008 deliveries were in the same range. Italy was a market for 20.9 bn German cigarettes in 2007, despite rising competition from other suppliers. German shipments to Greece rose to 8.17 bn pieces in 2007, when tourists added to the demand. German cigarette exports to Netherlands rose to nearly 8 bn pieces in 2007.

Belgium was the destination for exports of 5 bn German cigarettes in 2007 and demand from traders in Brussels and Antwerp was similar in 2008. Bordering Luxembourg was a customer for 202 German cigarettes in 2007, a comparatively small volume compared with the 5 bn cigarettes shipped from Luxembourg to Germany.

Trade arrangements between cigarette manufacturers in Germany and Austria have existed for years for delivery of certain brands smokers in each country prefer. German cigarette exports to Austria rose to 5.4 bn pieces in 2007. Slovakia was the destination for 2.1 bn German cigarettes in 2007.

Netherlands Was Leading Supplier Of Imported Cigarettes For EU 15 Countries: Exports from the Netherlands declined 1% to 111.3 bn pieces in 2007 as high prices apparently caused more importers to seek less costly cigarettes. Dutch exports to the 14 other countries of the earlier EU 15 were 99 bn pieces in 2007, compared with 92 bn pieces shipped to 14 other EU countries by Germany. The average price for Dutch cigarette exports was 64 cents per pack of 20 in 2007. Over 80% of Dutch cigarette exports go to other EU members, and over 60% to two markets - France and Spain. France was the top export market for Dutch cigarette exports with the delivery of 34 bn pieces in 2007. Spain was the second largest market for Dutch cigarette exports in 2007 with the shipment of 30.7 bn pieces.

Poland Was The Third Major EU Cigarette Exporter Recently: Poland had a 41.6% rise in 2007 cigarette exports to 56.7 mn pieces. Poland's cigarette exports to Middle East markets expanded. Attractive prices for the same brands manufactured in a number of other EU countries contributed to the boom for Polish exports. It appears that Poland's share of cigarettes sold in Hungary was a challenge to domestic manufacturers there.

More Convenient Banking And Currency Systems Encourage Trade: Dramatic changes have occurred in the cigarette trade of most countries of the European Union in recent years. The adoption of the euro as the currency for many 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 eleven members using the euro. The conversion value of the euro changed from about 82 US cents in 2002 to $1.59 in early 2008, and then a back to about $1.31 by early 2009. While the UK, Denmark, and Sweden retained their traditional currencies, their good showing from trade and financial flows helped to maintain the value of their currencies.

Cigarette Exports From Some EU Members Declined: In contrast to the remarkable gains for cigarette exports by Germany, France, and Poland recently, exports from the UK have 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 were down to only 174 mn pieces in 2007. Cigarette exports from Hungary, Slovenia, and Slovakia during 2006 - 08 were far below the 2003 - 05 level.

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.

Exporters of cigarettes from Germany and the Netherlands may seek to keep traditional customers among smokers in the EU by using more quality tobacco in the blend of certain brands.The proportion of US tobacco in most cigarettes manufactured in Germany is relatively high. US leaf tobacco exports to Germany increased to a peak in 2007, but declined in 2008 as arrivals from Brazil were well into the lead. Competition from less costly brands provided by Poland is a concern. Cigarettes made in Poland contain very little US leaf tobacco.

In addition to the interesting opportunities found by German cigarette manufacturers in other EU markets and beyond, concern about the downward drift in domestic sales tends to add to the focus on expanding exports. Domestic sales of cigarettes in Germany declined to about 93 bn pieces in 2006, compared with about 96 bn pieces in 2005. German cigarette consumption fell to about 152 bn pieces in 2006, in contrast to about 156 bn pieces in 2005. Illegal imports increased about 36% about 25 bn pieces in 2006. BAT sold 23 bn cigarettes in Germany in 2006 and increased its market share to 24.6%, and roll-your-own mixture sales were up a fifth.

The 57.6% import duty for suppliers from outside the European Union tends to limit competition from cigarettes made in the United States, which were a trade worth about $1 billion annually a decade ago. The average export price for German cigarettes is about 33 US cents per pack of 20.

Rising Share Of Cigarette Output Exported By Some EU Countries During 2005 - 08: Over 70% of the cigarettes produced in Germany during 2006 - 08 were exported, compared with about half of the production during 2003 - 05.. Multinationals dominate the manufacture of cigarettes in Germany. Philip Morris accounts for about 40% of the production, and BAT about a fourth. Imperial Tobacco through the merger with Reemstra accounts for nearly a fourth of the of output. The share of output for Japan Tobacco International has declined to less than 5% of total output, but it has a higher share of the export trade.

Nearly half of Poland’s cigarette output was exported during 2007 and 2008. A rising share of the cigarettes made in Lithuania and Latvia moved out as exports recently to other EU members. Over half of Dutch cigarette output is exported, mostly to other EU markets. Premium brands with long cigarettes from the Netherlands were significant exports recently. Portugal exported a rising share of total cigarette output in the last two years.

Danish Cigarette Trade Remains Steady: Denmark’s cigarette trade was relatively steady in recent years as quality brands dominated sales. Denmark’s cigarette exports were steady at 5.3 bn pieces in 2007. The various versions of the Prince brand from Denmark have a place in the German market, despite higher prices. Germany and Sweden were leading markets for Danish cigarette exports and imports recently.

Smokers In Some EU Countries Rely Heavily On Imports For Cigarettes: Estonia quit producing cigarettes when it had ultra free trade policies before joining the EU. Estonian traders supply all the supply of cigarettes sold in Tallinn with its booming tourist business. In the last several year imported cigarettes dominated the trade in Slovakia and Slovenia as their domestic output dwindled. Finland maintains imports of smoking tobacco for use in cigarette factories rather than making imports of leaf tobacco in need of further processing. Most of the 2 bn cigarettes imported into Malta in 2007 were sold to smokers from Libya.

Tobacco International - May, 2009

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