A Tough Tobacco

The ‘threat’ of vaping

Currently, the threat to COT demand comes, mainly and not surprisingly, from the fall in consumption of combustible cigarettes that use COT in their blends, a decline that has a number of causes, including greater health awareness among consumers, increasing retail prices caused largely by tax rises and the availability of alternative, less risky tobacco and nicotine products.

But at this point, the risk posed to the industry becomes almost impossible to assess because of the complexities thrown up by the characteristics of particular markets. For instance, the biggest threat to COT would arise if vaping became acceptable to health advocates and, therefore, governments around the world and to smokers of all stripes. But this is highly unlikely to happen in short order, and, moreover, in certain markets, a switch to vaping would have little effect on demand for COT. You have only to look at the U.K. market to realize that this is true. Vaping is generally supported by the government there and, partly as a consequence of this support, it has had considerable success in switching smokers from combustible cigarettes to electronic cigarettes. But since the sale in the U.K.—a mainly Virginia blend market—of combustible cigarettes that use COT is low, the effect on COT demand has probably been so small as to be unmeasurable.

If you then turn your attention to the U.S., however, where sales of combustible cigarettes containing COT are high, a major, sustained switch to vaping would have a significant effect on COT demand. But in the U.S., health agencies have consistently delivered inconsistent messages about vaping with the result that the switch to vaping has almost certainly been restrained. In fact, this year has seen vaping take at least a couple steps back in the U.S. as misleading information about the causes of acute lung disease among people using vapor devices has been circulated by officialdom. At the time of writing in the middle of December, it seemed that the rate of switching back from vaping to smoking was falling, but much damage has been done to the vapor industry, and it is likely that the COT industry will have been one beneficiary of this. The likelihood is that this benefit will be short lived, but there is no knowing whether the skittish health agencies in the U.S. might latch on to future vaping scares that will reinvigorate demand for combustible cigarettes.

It is also possible that the imposition of vapor product taxes will slow the switch to vaping in the U.S. and other countries.

Around the world, the picture is mixed, with some countries banning or restricting vaping while others support it or at least tolerate it. But the only way to judge the impact of such policies on the consumption of COT is to know whether the market in question is a Virginia blend or an American blend market. I take it that the ban on vaping in India, a largely Virginia blend market, will have a minimal effect on the consumption of COT, but a ban on vaping in the Philippines, a largely American blend market, will help maintain demand for COT and even, in the short term, boost it slightly.

Another alternative to combustible cigarettes, the heat-not-burn (HnB) cigarette, does not pose the potential long-term existential risk to COT that is posed by e-cigarettes because, as I understand it, COT is a useful ingredient in HnB products—at least in their current iterations. But given the small amount of tobacco used in HnB products, any switch from American blend combustible cigarettes to HnB poses a risk.

This risk level must have been raised when the U.S. Food and Drug Administration issued one of its rare marketing orders in favor of Philip Morris International’s (PMI) HnB product IQOS. Although it is still to be seen how U.S. consumers will take to this new-to-them product, it must represent one of the issues raising anxiety levels within the COT industry. And the industry must already have been concerned since all the multinational tobacco manufacturers now offer HnB products and especially since PMI has been aggressive in making the point that it wants people to quit combustible cigarettes or, where they are unable to do so, switch to its HnB products. 

The threat of taxes

Combustible cigarette tax increases have always posed a threat to consumption that is more acute in respect of the generally more expensive combustible cigarettes that contain higher levels of relatively expensive COT, especially the higher grades of COT. But the industry has tried to ameliorate this situation by modernizing what were highly traditional farming and processing systems and thereby reducing costs. There are limits to what can be done in a short space of time, however. Trials have to be conducted if such changes are to be introduced because it is presumably important to ensure that the special characteristics of COT aren’t destroyed or drastically reduced by whatever changes are made.

One widely ignored consequence of tax increases is the boost they give to the illegal trade in illicit combustible cigarettes, and one of the experts I spoke with said that this trade was “growing substantially,” mainly in Africa, the Middle East and the Far East in countries where borders were not well controlled.

It is often said that such illicit cigarettes do not contain the finest ingredients, one of which is COT, so any increase in sales of illicit cigarettes on a world market in decline is likely to negatively affect demand for COT, though this effect is likely to not be as pronounced as it might have been given that the regions mentioned would have markets with substantial, perhaps in some cases majority, sales of Virginia blend cigarettes.

The question of taxes is further complicated by World Health Organization policies, which on the one hand encourage tax increases on combustible cigarettes, but on the other attempt to “eliminate” the illegal tobacco trade through the employment of track-and-trace systems and undermine the switch by consumers from smoking to vaping.

Geographic spread

Another issue that arises in respect of any reduction in demand for COT concerns where the consequent fall in production will occur, assuming that the drop in demand is so big that it cannot be accommodated by the normal season to season volume and quality ups and downs that affect any agricultural product—meaning that contracted volumes have to be systematically reduced.

It is, of course, impossible to say whether any production cuts that might have to be made would be shared equally across all producing countries, fall more heavily on some countries than on others or affect some varieties more than others. However, looked at from the other direction, currently, the industry in North Macedonia appears to be the most stable production wise, partly because of the popularity among manufacturers of the Prilep variety that it grows but also because growers there receive, on top of the commercial prices paid for their leaf, national subsidies described by one expert as “considerable.”

Production levels in Turkey tend to be less stable than those in North Macedonia, but Turkey has the advantage of having a relatively big crop made up of a number of sought-after varieties, including the biggest COT crop produced anywhere, Izmir, and taking in the Izmir East variety, which, if I’m not mistaken, might be better described as a semi-oriental tobacco, though one whose price and characteristics make it attractive to some manufacturers.

Turkey, at the moment, has an advantage because the lira exchange rates against the dollar and euro are helping to make its production competitive. And it has a potential advantage in a proposed law that is apparently being worked on by the Ministry of Agriculture and that is due to be announced soon. The new law would oblige Turkey’s tobacco manufacturers—British American Tobacco, Imperial, Japan Tobacco International, KT&G and PMI—to reach within three to four years a 30 percent inclusion rate of locally produced tobacco within their local market cigarettes. Assuming such inclusion rates are currently below that level, this move would have a positive effect on Turkey’s tobacco industry, which includes COT, flue-cured Virginia and sun-cured Virginia.

Meanwhile, production levels in Greece tend to go up and down while production levels in Bulgaria seem to be on a generally downward trajectory.

The 2019 crop of COT was grown under good weather conditions and did not suffer any significant diseases or losses. As a result, the volume was close to the contracted quantities, and qualities are thought to be above average. The one exception seems to have been Turkey’s Samsun crop, which suffered untimely rains and is thought to be of below average quality.

Overall, however, the 2019 crop of COT is bigger and of better quality than that of 2018, which was badly affected by untimely heavy rain and which one expert described as “disastrous.” For this reason, grade yields were low in respect of 2018 crop tobaccos, which meant reduced profitability for merchants, who will be hoping for, and should be rewarded with, better things from the 2019 crop. Merchants will be hoping too that since the 2019 crop is close to contracted volumes, there will be no or little leftover stock when marketing is completed. In fact, one expert mentioned that it would be an “unpleasant surprise” if significant amounts of 2019 crop COT remained unsold.

Nevertheless, according to one estimate, the 2019 crop of COT (including Izmir East tobacco) produced in Turkey, North Macedonia, Greece and Bulgaria stands at 117,000 tons, and three years ago, back-of-the-envelope figures had it that a stable COT crop was about 100,000 tons. Crops of 120,000 tons were said to threaten a buildup of stocks while crops below 100,000 tons were reckoned to threaten scarcity.

Broken down, the 2019 estimate had it that Turkey had produced about 70,000 tons made up of 50,000 tons of Izmir, 9,000 tons of Izmir East, 5,000 tons of Samsun, 5,000 tons of Basma and 1,000 tons of Prilep. North Macedonia is estimated to have produced a total of 26,000 tons made up entirely of Prilep while Greece is estimated to have grown 16,000 tons made up of 11,000 tons of Basma and 5,000 tons of Katerini, and Bulgaria is estimated to have grown about 5,400 tons comprising 4,600 tons of Krumovgrad, 600 tons of Katerini and 200 tons of Basma.

From the supply side, production of COT seems assured at the levels now in demand. It would be wrong, as always, to describe growers as happy because, in their eyes at least, input costs will usually be too high, leaf prices too low and labor issues too difficult. But then again, in Turkey, growers are said to be receiving cash advances worth up to 50 percent of the value of their contracted volumes—in essence, interest-free loans at a time when inflation is above 20 percent, loans that can also be used to support the production of other crops. Certainly, there was no suggestion that growers in any of the producing countries were about to down tools.

The author would like to thank the following, listed in alphabetical order, for their help in preparing this story: Nikos Allamanis, president of the board of directors of the Hellenic Association of Tobacco Processing and Trading Industries; Frederick De Cramer, coordinator of Sunel; Dora Gleoudis, managing director of Nicos Gleoudis Kavex; and Nikos Tzoumas, managing director of Missirian and president of the Hellenic Inter-professional Organization.