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What Is The New Tobacco Data Telling Us?

6/20/2016
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Like the ebbing of a fading tradition, the world’s largest and heretofore one of the last remaining growth markets, China delivered cigarettes volume decline in 2015 and with it, the defining narrative of the year in global tobacco.

For once, perhaps in a generation, total worldwide cigarette volumes look more, not less, robust on the exclusion of the Chinese market, recording an improved 1.8% drop, as the loss of some 60 billion sticks in China means total global volumes declined 2.1% to 5.5 trillion sticks, the biggest year-on-year decline in more than two decades.

Global Cigarette market

The fix is in in China

Driven by a wholesale excise rise (from 5% to 11%), increased government control on production and greater health awareness in some regions, the Chinese market saw a decline of more than 2% in consumer sales 2015. And from this juncture it appears the fix may be in China for cigarettes. We do not see 2015 as a one off with the Chinese market now projected to lose about 5% of its volumes between 2015 and 2020.

Of course, given the size of the Chinese market (even with contraction it accounted for 45% of global cigarette volumes in 2015) this decline exerted a huge impact on total volumes with the world picture worsening by more than 2% to reach around 5.5 trillion sticks, a significant deterioration set against a virtually flat performance in 2014.

Regional reversals

While previously cigarettes growth in China had been as sure a bet as declines in developed markets, in fact 2015 was largely a tale of regions switching established roles. Asia Pacific, dragged down by China’s stagger reversed 2014’s volume growth of just under 1.6% to record a decline of 2.7% while Western Europe - for the first time in several years - saw positive volume growth of just under 1% as economies there recovered and outswitching to illicit, OTP and vapour products lessened.

The only other region to record cigarettes volume growth in 2015 was Middle East and Africa with its emerging and developing markets which again grew by around 2.5%. Australasia, Latin America and Eastern Europe all saw volumes dissipate by close to 5%, each driven largely by a single market’s issues with excise, regulation and illicit trade (Australia, Brazil and Russia respectively). The world’s second largest market, Russia, again had a very challenging year, losing more than 6% of its volumes and we now expect it to be a full 100 billion sticks smaller in 2020 than it was in 2001.

Mixed performances in OTP

The positive performance of Western Europe in 2015 is an especially interesting one in the context of a gathering regulatory storm for the industry worldwide. While there is reason to expect stability (or even further growth) in the short term in regions such as Western Europe, the Tobacco Products Directive, implemented in Europe in May of this year is archetypal of the kind of enhanced legislative restrictions which are becoming increasingly common and may ensure that even modest expansion of the kind witnessed there in 2015 is a firmly historical phenomenon.

Across the OTP categories, performance was mixed in 2015. Cigars and cigarillos declined by some 4% in volume terms, particularly driven by major restructuring in the German market caused by the ending of the eco-cigarillos exemption. RYO tobacco returned to growth of sorts in 2015 (though still nowhere near the elevated levels of the late 2000s) as market expansion in Eastern Europe combined with an essentially flat showing in its major Western European markets to deliver a 1.3% increase. Finally, declines in smokeless tobacco continued to slow in 2015 as growth in moist snuff in the US and Scandinavia of about 1.5% was set against much more moderate losses in Indian chewing tobacco.

Growth, albeit slower, sustains in vapour products

Perhaps unsurprisingly, growth in global vapour products slowed substantially in 2015 but the market still recorded an increase of 21% to reach US$8 billion. We estimate that there were around 30 million regular sole or dual users of vapour products in 2015 and while triple digit growth rates may have evaporated, more than half of the markets we cover grew by more than 20% in value terms. As is by now common knowledge, the US and the UK are the world’s biggest markets and the Western European region alone is larger than all other regions (aside from North America of course) combined.

In category terms, the well-documented shift from cig-a-likes to tank systems continued in 2015. Excluding the US market - where the split is much closer to 50/50 largely due to the stronger involvement of tobacco companies - 85% of e-cigarette use was in tank systems against just 15% of world vapers consuming cig-a-like products.

Regulatory uncertainty will dampen rather than drag

As with cigarettes, regulation is a real looming issue for vapour products with the TPD in Europe and the US FDA’s deeming regulations likely to dampen growth in these key markets. It remains to be seen precisely what impact there will be on the market but further contraction in the pace of expansion and consolidation is likely. Ultimately, we continue to see solid, if not spectacular growth in vapour products with constant value set to rise to about US$20 billion by 2020.

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