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December, 2006

Essentra

German Cigarette Exports
on the Rise


By John Parker

The world’s leading cigarette exporter experiences some dramatic increases in 2006.

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 faraway markets were dramatic, including the way sales to Japan soared. 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 increased at a rapid pace during 2002–04 and then the pace of growth slowed down by 2005. 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. The next area for amazing growth in German cigarette exports was the 10 new EU members joining in 2004, and sales to those countries continued to rise rapidly in 2005. Countries showing rapid gains for purchases of German cigarettes included a wider spectrum in 2005 and 2006, including some markets in the Far East and Middle East.

Germany has remained the leading supplier of imported cigarettes among the previous EU 15, although the German share of total imports by some markets has drifted downward. This stemmed from rising exports of other EU members to those countries. Once Germany tended to push out non-EU competitors, they did not come back as suppliers of significant quantities of cigarettes to EU countries, even when their export prices declined. Apparently German cigarettes have advantages of quicker delivery at lower transportation cost than U.S. suppliers.

The merger of Imperial and Reemstra apparently made their combined market research work very effective. It appears that their researchers have been able to identify potential new markets and explore prospects to increasing shipments to important importers in the Far East. The German share for cigarette imports into Japan, Hong Kong, and Singapore in 2006 was far above the 2003 level. New markets were opened in 2005 for German cigarette exports to some countries in Latin America, including Mexico, Argentina, Chile, and Bolivia.

Germany Is Located Favorably for Cigarette Exports to EU Members:
Potential importers of cigarettes in some EU countries can take advantage of inexpensive flights offered by Air Berlin to go visit the places where purchases can be arranged. For example, a flight from Helsinki to Berlin can be purchased for only $39. Berlin’s humming factory output of cigarettes is now at a convenient location for expanding shipments to customers in the EU and East Europe.

Total German exports increased from 122.4 bn pieces in 2004 to a peak of 146.7 bn pieces valued at $2.984 bn in 2005, after remaining relatively flat during 2001–03. German cigarette exports to other countries of the EU combined increased a tenth in 2005 to 109.55 bn.

Total imports by the New EU 10 nearly doubled in 2004, and the share of their imports coming from Germany was up. Some of the New EU 10 developed a greater two-way trade in cigarettes. While their imports from Germany were rising, they expanded exports to other countries, especially those in the Balkans still outside the EU, and to some developing countries.

Germany Was the Leading World Cigarette Exporter in the Last Two Years:
The value for German cigarette exports in 2004 increased about a fifth to $2.284 billion, compared with an average of about $1.7 billion annually during 2001–03. Germany moved ahead of the Netherlands as the world’s leading cigarette exporter in 2004 for the quantity shipped and was in first place in 2005 and 2006 for both quantity and value.

Competition from Dutch cigarettes has been mostly within the EU and to some extent in Russia. German cigarette exports to the new EU 10 and many markets beyond Europe have done very well, while exports to most of those markets from the Netherlands were not near the quantity coming out of Germany. Dutch cigarette exports averaged about $2.5 billion annually during 2001–03, and rose to a peak of $2.885 bn in 2004. German cigarette exports rose from $1.757 bn in 2003 to $2 bn in 2004 and then to $2.875 bn in 2005. Greater shipments of brands of long cigarettes meant the quantity of shipments from Germany in 2004 was 122 bn pieces — a substantial gain over the average of about 105 bn pieces annually during 2001–03.

Increased Focus upon Opportunities in East Europe Evident:
Germany’s cigarette manufacturers faced more competition for sales in France and Spain in the last two years. That may have contributed to the increased focus upon expanding sales in East Europe. The elimination of prior duties and barriers among new EU members opened appealing opportunities.

It is interesting to observe the trend for German cigarette exports to specific countries. Duty-free exports to other members of the European Union give Germany a great advantage for cigarette exports. Strong competitors like the Netherlands, UK, Denmark, and some other important exporters within the EU enjoy that same advantage. Germany’s location and convenient marketing facilities assist cigarette exports to most of the new EU 10.

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 bn annually a decade ago. The average export price for German cigarettes increased from 32.7 U.S. cents per pack of 20 in 2004 to about 39.2 cents in 2005.

Multinationals dominate the manufacture of cigarettes in Germany. Philip Morris accounts for about 40% of the production. BAT and Imperial Tobacco (through the purchase of Reemstra) each account for approximately a fourth of output. The share of output for Japan Tobacco International has declined to less than 4%. Marlboro is the leading brand with about a third of the sales.

German Cigarette Exports Bolstered by European Union Trade Setting:
Customers in the 24 other countries of the European Union have a number of reasons to buy German cigarettes. About 394 brands of cigarettes are manufactured in Germany, including 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 in most EU members adds to the appeal for buying cigarettes from Germany, thus avoiding currency exchange fees. The share of German cigarette exports going to the European Union declined from 81% in 2004 to 74.7% in 2005. The decline in market share for imported German cigarettes in France, the Netherlands, and Denmark contributed to the overall slide for the German share in the EU during 2005.

Spain Remains the Leading Destination for German Cigarette Exports:
German cigarette exports to Spain rose 4.5% to nearly 37 bn pieces in 2005, valued at $925.6 mn, compared with 30.9 bn pieces in 2003 for $440 mn. 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, especially for some premium brands.

Italy Remained a Steady Customer:
Total imports of cigarettes into Italy remained strong in 2006, following the surge to 71.7 bn pieces in 2004 — up from about 58.9 bn in 2003. Italy is a competitive market where about half the cigarettes sold are imported. German cigarette exports to Italy reached 18.6 bn pieces in 2005, valued at $299 mn, compared with 16.8 bn pieces in 2003. German gains have been strong in Italy, despite rising competition from the Netherlands and France.

French Purchases Down:
German cigarette exports to France declined from 8.9 bn pieces in 2003 to 7.2 bn pieces in 2005, valued at $220 mn. Improved marketing activities of Altadis contributed to a decline for cigarette total imports into France from a peak of about 65 bn pieces in 2001 to about 47 bn pieces in 2005. Dutch and Belgian cigarette exports to France remained strong in recent years.

Sales to the Netherlands Down:
German cigarette exports to the Netherlands declined 21.4% from 7 bn pieces in 2004 to 5.51 bn pieces in 2005, as the average price rose 12% to 30 cents per pack. Cigarettes manufactured in the Netherlands are usually more costly than a number of brands delivered from Germany. The Netherlands imports from other EU countries as well. Most of the cigarettes are purchased by smokers at convenient markets in grocery stores, tobacco shops, and stores located at places where petroleum is sold.

Belgium’s Total Cigarette Imports Appear To Have Stabilized:
German exports of cigarettes to Belgium fell 3.6% in 2005 to 4.28 bn pieces. Belgium’s total cigarette imports remained steady at about 15 bn pieces annually. Most of the transit trade was not counted in Belgium’s official trade data. Belgium’s transit trade in imported cigarettes has dwindled to only a small fraction of what was happening in the 1990s, when large deliveries came from the United States. It is much easier for the multinational cigarette manufacturers to provide cigarettes for markets within the EU from factories located in Germany, the Netherlands, and some other EU members than to have imports from exterior suppliers like the United States or Brazil.

Austria Expands Two-Way Cigarette Trade:
Austria’s total cigarette imports nearly doubled between 2003 and 2006, rising to about 6 bn pieces. German cigarette exports to Austria increased from 2.1 bn pieces in 2003 to 2.57 bn pieces in 2005. A two-way trade in cigarettes has flourished in recent years, with the import of about 10 bn Austrian cigarettes into Germany annually.

Gains Underway for Shipments to Portugal:
German cigarette exports to Portugal soared from 759 mn pieces in 2003 to 1.15 bn pieces valued at $18.7 mn in 2005. Portugal has made significant progress in the quality of cigarettes produced by its factories in recent years.

Unusual Sales to Finland Apparently Influenced by Attractive Prices for Traveling Shoppers:
Finland’s fascinating business related to the inexpensive boat trips to Estonia and special rates for airfare to Germany appears to have contributed to gains for German cigarette sales in this market. German cigarette exports advanced to 3.59 bn pieces in 2005, after more than tripling to 3 bn pieces in 2004. Finland recently became a much busier center for transit traders and the distribution of goods on their way for Russia and the Baltic countries. The high level of shipments during 2004–06 indicated that most of the German cigarettes were being sold outside the borders of Finland, apparently in boats and the flourishing tourist centers of Estonia, Latvia, and some other countries bordering the Baltic Sea.

Danish Buying More German Cigarettes:
German cigarette exports to Denmark reached 1.05 bn pieces in 2005 — more than double the 496 mn pieces shipped in 2003. Prices for many German brands are less than those of certain brands in the Danish market. Denmark has excellent quality cigarettes containing a high proportion of U.S. leaf tobacco.

Sales to Sweden Increased in 2005:
German shipments of cigarettes to Sweden reached 399 mn pieces valued at $7.2 mn in 2005 — more than double the 2003 level. Cigarette prices went so high several years ago in Sweden that taxes were reduced to allow a drop in retail prices from levels once surpassing $7 per pack of 20.

Dramatic Gains Occurred for New EU Members in East Europe during 2004:
A combination of factors contributed to the surprisingly rapid increase for total cigarette imports into most countries entering the EU in 2004 to approximately 31 bn pieces, compared with about 20 bn in 2003. Total recorded cigarette imports by the Czech Republic, Poland, Hungary, and Slovenia more than doubled in 2004. Changes in the transit trade for cigarettes moving through Cyprus and Malta to other countries caused their cigarette imports to decline in 2004.

Czech Republic Expands Purchases:
The Czech Republic was a sensational market for German cigarettes in 2005 when shipments reached 4.85 bn pieces — about triple the 2003 level. Germany’s share of cigarette imports into the Czech Republic advanced to more than 70% in 2005 and remained high in 2006.

Slovakia Is an Expanding Market for German Cigarettes:
Slovakia has been a major destination for cigarette exports from the Czech Republic with the help of duty-free trade between the two members of Czechoslovakia before the friendly separation in 1993. Since 1994, other EU members can also send cigarettes to Slovakia through EU free-trade guidelines. German cigarettes to Slovakia zoomed from 163 mn pieces in 2003 to 2.5 bn pieces in 2005. This tended to displace some potential Czech exports to Slovakia.

Boom for Sales to Hungary Underway:
Total imports of cigarettes by Hungary rose to about 3 bn pieces in 2005 — up from 474 million pieces in 2003. German cigarettes accounted for most of the rise in the total quantity imported into Hungary. The closing of a cigarette factory in Hungary with over 350 employees apparently contributed to the big jump in imports during 2004 and 2005. Hungarian cigarette manufacturers have imported some U.S. tobacco for blending recently to provide premium brands from large factories.

Latvian Purchases Up Sharply:
German exports of cigarettes to Latvia nearly doubled in 2004, reaching 1.25 bn, and advanced another 4.8% in 2005 as the average price remained steady at 22.6 cents per pack of 20. Latvia’s total cigarette imports increased about 40% to approximately 4.8 bn pieces in 2004, and remained near that level in 2005.

Estonian Demand Bolstered by Tourist Business:
Direct exports of German cigarettes to Estonia increased from 122 mn pieces in 2003 to 298 mn pieces by 2005, valued at $4.1 mn. Yet this is only part of the story of the Estonian market. A large share of the unusual German cigarette exports to Finland in 2004 and again in 2005 apparently was destined for warehouse firms serving the thriving Estonian market. Some value-added taxes will eventually make the retail price for cigarettes in Estonia higher than recent levels. Retail prices for cigarettes in Estonia in recent years were usually less than half the retail price in Finland.

Lithuanian Purchases of German Cigarettes Nearly Tripled in Two Years:
German cigarette exports to Lithuania reached 743 mn pieces in 2005, compared with 280 mn pieces in 2003. German deliveries accounted for about a fourth of the 1.27 bn pieces imported into Lithuania during 2004, and about half of the imports in 2005. Lithuania has had a significant increase in deliveries of cigarettes from traders in Russia and Poland in recent years.

Dramatic Growth for German Exports to Slovenia Underway:
Slovenia’s purchases of 2.8 bn German cigarettes in 2005 were seven times the 2003 level, and further gains came forth in 2006. Total imports of cigarettes by Slovenia increased from 1.95 bn pieces in 2003 to about 4.9 bn pieces in 2005. Slovenia’s cigarette exports to markets outside the EU increased recently.

Poland’s Customs Reports Showing Significant Cigarette Imports:
The program to stop smuggling arranged by Philip Morris may contribute to greater reported imports of cigarettes by Poland’s customs in the future. Poland’s reported cigarette imports increased to about 1.5 bn pieces in 2005, with about 79% of the inflow coming from Germany. As more imported cigarettes arrived with help from EU free-trade guidelines, Poland’s cigarette exporters increased exports to newer markets, including large shipments to Iraq in 2004 and 2005.

Poland has been one of the unknown markets for an outcome when it joined the EU in 2004. At various times, Poland had been an important customer in the past for transit traders in Antwerp. As that distribution outlet nearly blinked out, Polish smokers searched more for cigarettes delivered from Denmark and Germany. Some of the German cigarettes smoked in Poland may come from suitcase traders and travelers to German cities near the border, especially Berlin.

Cyprus Builds New Cigarette Marketing Arrangements:
Cyprus gave up much of its lucrative transit trade in U.S. 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 U.S. tobacco to boost output of premium brands. German cigarette exports to Cyprus more than doubled in 2004 and rose 56.7% to 528 mn in 2005, accounting for slightly over half of total cigarette imports into Cyprus.

Malta May Expand Transit Trade Business:
Malta has been primarily an importer of cigarettes from the UK. German cigarette exports to Malta increased from a low base of 2 mn pieces in 2003 to 64 mn pieces during 2005, accounting for about a fifth of total cigarette imports by Cyprus.

Norway Bought More German Cigarettes in 2005:
German efforts to expand cigarette exports to non-EU members were successful in 2005 in markets both near and far away. Non-member Norway has high per-capita income and high cigarette prices, and is a growing market for imported German and Swiss cigarettes. German exports of cigarettes to Norway increased 26.6% in 2005 to 749 mn pieces, for an average of 44.2 cents per pack — nearly double the average price in 2004.

Swiss Purchases Up:
Most of the previous flow of Swiss cigarettes to EU members faded in recent years, but other customers were found in the Middle East and Africa. German cigarette exports to Switzerland increased 67.5% to 350 mn pieces in 2005.

Dramatic Growth Reported for Exports to Romania:
Romania is scheduled to join the EU in 2007, an importer of about 10 bn cigarettes annually. German cigarette exports to Romania reached 1.98 bn pieces in 2005, compared with 723 mn pieces in 2004.

Bulgaria Was a Boom Market in 2005:
German exports of cigarettes to Bulgaria zoomed upward to 1.33 bn pieces in 2005, compared with 723 mn pieces in 2004. Some of those deliveries may have been for the transit trade to customers in the Middle East

Sales to Russia Declining:
The tremendous increase in cigarette output by multinationals in recent years in Russia has tended to cause a sharp decline for imports. German cigarette exports to Russia declined from 1.16 bn pieces in 2003 to 239 mn pieces in 2005.

Exports to Belarus More than Doubled in 2005:
Belarus was a market for 568 mn German cigarettes in 2005 — more than double the 2004 quantity. Belarus is also an important customer for cigarettes from Russia and Ukraine.

Sharp Rise for Exports to Azerbaijan:
German cigarette exports to Azerbaijan increased 87.8% in 2005 to 2.4 bn pieces, compared with 1.3 bn pieces in 2004. Higher world petroleum prices contributed to higher income in Azerbaijan, and the average price for German cigarette exports to this market nearly tripled in 2005 — reaching 27.4 cents per pack.

Transit Trade for Middle East Markets Includes More Imports from Germany:
Exports of German cigarettes to Turkey soared to 3.18 bn pieces in 2005, compared with 783 mn pieces in 2004. Since official trade data for Turkey reports small imports of cigarettes, it appears that most of the German deliveries were for the transit trade for shipments to Iraq and Iran.

Jordan was another market with a sharp rise in demand for German cigarettes, reaching 2.1 bn pieces in 2005, compared with 791 mn pieces in 2004. Jordan recently became a much larger supplier of consumer goods for Iraq because of its reliable banking system, in contrast to a lack of efficient banking for foreign-exchange transactions in Iraq.

German Cigarette Exports to Hong Kong Rising:
Hong Kong has traditionally imported most of the cigarettes purchased by consumers from the United States and UK. German cigarette exports to Hong Kong increased sharply to 887 mn pieces in 2005, valued at $21.5 mn, compared with $18.5 mn in 2004.

Singapore Up in 2004:
German cigarette exports to Singapore rose 28.2% in 2005 to 751 mn pieces, accounting for about 6% of total cigarette imports into the island country. UK exports of cigarette exports to Singapore declined sharply between 2000 and 2005.

Taiwan’s Purchases Rebound:
Taiwan has had arrangements to buy a substantial quantity of German cigarettes during the recent decade. German cigarette exports to Taiwan were up in the first nine months of 2004 at a pace that would indicate an annual rate of about 4.6 bn pieces, which was more than a fifth above the 2003 level.

Steady Market Maintained in Japan:
Japan is the world’s largest cigarette importer and they enter duty-free from most countries. German cigarette exports to Japan reached 7.5 bn pieces in 2005 — five times the 2003 level. The average price for German shipments of cigarettes to Japan declined a third in 2005 to 29.3 U.S. cents per pack of 20. The German share of Japan’s total cigarette imports rose from 2.1% in 2004 to about a tenth of the 81 bn pieces imported in 2005. During 2000–04, the U.S. share for Japan’s cigarette imports was more than 94%, but by 2005 it declined to less than 87%.

German Cigarette Imports Declining:
Higher excise taxes on cigarettes contributed to increased retail prices recently. This depressed domestic demand. To keep factories busy a greater focus of expanding exports became evident. Also, cigarette imports declined in 2005 to one-fourth below the 2001 level.

Total German cigarette imports declined about 4.2% in 2004 to approximately 31.2 bn pieces, but the value rose 8.6% to $541 million. This was a continuation of the downward trend from imports of 40.4 bn pieces in 2001. Increased imports of luxury premium brands apparently contributed to a rise in the average price. Taxes were increased significantly for cut tobacco to limit the switch to roll-your-own mixtures to elude higher retail prices for cigarettes. Germany still has reasonable cigarette prices compared with some Scandinavian countries, despite recent hikes putting the price of some popular brands in the range of about $4 per pack of 20. More brands with 24 or 25 cigarettes per pack are sold in Germany than in East Europe.


Tobacco International - December, 2006

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