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Quarter 2, 2008

RYO Numbers Game:
Cigarette Taxes Rise, So Does RYO Demand

by John Parker

As more European governments raise prices on cigarettes, the demand for RYO always seems to follow. TPI correspondent John Parker examines several European markets for an in-depth look at the numbers to see exactly how RYO fares when cigarettes become more expensive.

The average price for cigarettes in the 27 countries of the European Union has shown a strong upward trend in the last three years. As the stats show, instead of simply paying the higher price or quitting, a large swathe of the market turns to RYO. And in some cases, with inter-European travel become more accessible, consumers in Western Europe are simply traveling to nearby countries to pick-up cheaper smokes. But overall, the demand for fine cut tobacco mixtures for roll-your-own cigarettes tends to rise as the retail prices of cigarettes move up.

Case Study, Norway: In Norway, the average price per pack of cigarettes is over US$10 per pack of 20. The high retail price caused cigarette output in Norway to drift downward to about 1.5 bn pieces by 2007. That was far below the level a decade earlier. Imports of cigarettes into Norway and purchases by smokers finding lower prices at the Swedish border were estimated at about 1 bn cigarettes in 2007. Estimated consumption of fine-cut tobacco in Norway was in the range of 2,600 tons in 2007 - a range similar to the weight for factory made cigarettes.

High per capita income in Norway contributes to the demand for fine cut tobacco from smokers. Places where cigarettes have an average retail price of less than $1.50 as can be found in Belarus are less likely to have the strong demand for fine cut tobacco as found in Norway. Per capita consumption of fine cut or smoking tobacco for roll-your-own cigarettes went up a fourth between 1996 and 2006 to 0.15 pounds. That is relatively low compared with some countries of northern Europe.

European Union Demand For Fine Cut Tobacco Is Strong: Germany, Netherlands, and Belgium account for about three-fourths of the sales of fine cut tobacco in the European Union, estimated in the range of 51,000 tons annually during 2005 - 07. Some of the demand for fine-cut tobacco mixtures in Belgium stems from the distribution to smokers in the United Kingdom. Sales of fine-cut tobacco in Belgium showed an upward trend in the 1990’s and were above 12,000 tons annually during 2002 - 07. Reported sales by retail establishments in the UK declined from 3,840 tons in 1992 to about half that level annually during 2004 - 07. Yet, actual sales may have been higher than reported because of the shoppers and traders finding more attractive prices for fine-cut tobacco in Belgium and Netherlands.

Dutch Shops Offer Various Brands For Smokers: Sales of fine-cut tobacco in Netherlands of nearly 1 kg per capita were in the range of 14,000 tons annually during 2005 - 07, and sales in Germany were near that level. Smokers can find some favorite brands of fine-cut tobacco in the shopping section of petrol stations and tobacco shops, along with displays of cigars and pipe tobacco.

German Demand Strong As Retail Prices For Cigarettes Rise: Fine-cut tobacco sales in Germany were in the range of 12,000 tons annually during 2001 - 07. Various versions of the Drum brand were popular among some roll-your-own smokers.

Some leading brands of fine-cut tobacco in Germany in recent years were Drum Halfzware, Shwarzer Kauser Number 1, and Samson Halfzware. Imperial has been an important manufacturer of fine cut tobacco for sale in EU countries in recent years. Competition for roll-your-own mixtures has increased recently from German imports of cigarettes from some of the new 12 EU members, especially Poland and the Czech Republic.

Some smokers in Germany have formed a kind of friendship group to combine tourism and obtaining fine cut tobacco for their own use by finding a place to grow tobacco. They travel to Azores and grow tobacco there while enjoying life by the beach. The tobacco is then shipped to Germany for use by the growers in roll-your-own mixtures. Germany has a law that a family can consume tobacco they grow without payment of taxes on the quantity they produce for personal use. That is a stark contrast to Egypt’s law forbidding any farmer from growing tobacco. Demand for smoking tobacco for use in water pipes is strong in Egypt and some other Middle East countries. That demand has helped to push farm prices for Kentucky-Tennessee dark tobacco above $2 per pound. Even Iraq was a market for US dark tobacco valued at $10,000 in 2006.

Fine-Cut Sales Show Upward Trend In France: Concern about the rise for cigarettes into France to $1.8 bn in 2007 apparently contributed to efforts to bolster output of improved brands. Some foreign workers in France are customers for fine cut tobacco for roll-your-own cigarettes and water pipes. Sales of fine-cut tobacco in France showed a spectacular upward trend in the 1990s, reaching 6,278 tons by 1999, and the upward trend continued afterwards. Higher retail prices for cigarettes contributed to further hikes in fine cut demand during 2005 - 07.

Danish Demand Remains Steady: Denmark has relatively high prices for the quality cigarette brands. Marlboro and various version of the House of Prince brands dominate cigarette sales in Denmark. Sales of fine-cut tobacco usually exceed 1,000 tons annually in Denmark.

Competition From Other Products Limits Gains For Fine-Cut Tobacco In Sweden: Strong demand for snus and more reasonable prices for cigarettes contributed to a decline for sales of fine-cut tobacco in Sweden in the late 1990s to an average of about 800 tons annually. Smokers in Sweden had traveled to Estonia and some other Baltic countries to buy cigarettes at much lower prices before taxes were sharply reduced. Sales of fine-cut tobacco in Sweden were higher when retail prices were very high in the mid 1990s, and then demand for fine-cut declined about a fourth in 1997 and remained below the 1992 level of 1,212 tons for the 2004 - 06 average.

Finnish Distributors Of Tobacco Products Added A Market In Estonia: Demand for fine cut tobacco in Finland showed an upward trend in recent years. Fine-cut tobacco distribution from Finland rose to over 1,000 tons annually during 1999 - 04, and then advanced further when sales to customers from other Baltic countries advanced. Distribution of consumer goods and tobacco products from Finnish traders to Estonia gained momentum after 1996, and then accelerated after 2004. The ease of movement for goods from Finland to Estonia is now similar to that for transporting cargo from New York to New Jersey. A large share of the snack foods distributed in Estonia are provided by Finnish firms. Estonia has a spectacular economic boom stemming from the arrival of hordes of foreign tourists and free trade arrangements.

Austria’s Plan For Higher Cigarette Prices Watched: Austria had sales of about 220 tons of fine-cut annually a decade ago, and gains were modest in recent years. A plan to have a minimum of 5 euros per pack of 20 cigarettes in Austria might spark even more interest in fine cut tobacco purchases. In addition to the idea of have a floor price of 5 euros per pack of 20 cigarettes in Austria, some anti-tobacco advocates may seek higher taxes to push prices higher in all EU countries. As prices for cigarettes move higher in Europe, prospects for fine-cut tobacco might improve.

Tobacco Products International - Quarter 2, 2008
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