In the cigarette paper industry, innovation remains key to staying competitive.
By Stefanie Rossel
The reinvention of nicotine consumption has created new opportunities not only for tobacco companies but also for their suppliers. The advent of tobacco heated products (THP), for example, has raised hopes for renewed growth in the paper segment, which over the past four years has been characterized by decline due to shrinking sales of combustible cigarettes.
According to Euromonitor International, global cigarette volumes excluding China contracted by 1.3 percent in 2016. The drop was accompanied by an unprecedented volume decline of almost 6 percent in China. For the first time in decades, the share of cigarettes as a proportion of total tobacco sales fell below 90 percent.
Following various waves of acquisitions, five players dominate the global cigarette paper market outside of China, as Schweitzer-Mauduit International (SWM) estimated in a recent investor report. According to the U.S.-based company, SWM in 2015 held 36 percent of the global cigarette paper market—without tipping and plug wrap paper, and excluding China—followed by Delfort of Austria (33 percent), BMJ of Indonesia (9 percent), Miquel y Costas of Spain (9 percent), and Julius Glatz of Germany (5 percent).
“The past five years have been characterized by a highly competitive business structure,” notes Martin Zahlbruckner, CEO of Delfort.
“China is still the biggest market as per cigarette consumption, and while continuously growing in the past, it now also decreases,” says Roman Reischl, managing director of Julius Glatz. “There are even countries with considerable increases in cigarette consumption, but in the majority of cases they either have a low consumption [to begin with] so that growth in total numbers is not significant, or they are countries with low incomes where people cannot spend much money on high-quality products.”
BMJ’s CEO, Omar Rahmanadi, forecasts further contraction in the sector. “In the next five years, inefficient cigarette paper factories will be forced out of the conventional cigarette paper market. At the same time, cigarette paper manufacturers will try to come up with more specialized paper, for instance for heat-not-burn (HNB) cigarettes,” he says. Competition has increased, especially in conventional cigarette paper, he adds. “For specialized cigarette paper, such as [low-ignition propensity] (LIP) paper, the market is also getting more competitive but at a lesser degree because it is still protected by patents.”
LIP stagnates
Driven by regulation, LIP paper has enjoyed steady growth over the past decade. The fire-safety product became mandatory in the United States in 2010 and throughout the European Union (EU) in 2011. It is also required in Australia, Canada, Iceland, South Africa and South Korea, and it covers roughly 20 percent of the global population and 20 percent of the world’s manufactured cigarettes, according to the World Health Organization.
“LIP has proven to be one of the most technologically challenging developments within cigarette paper products over the past several years,” says Alex Boone, business development director of global papers at SWM. “Meeting stringent regulatory requirements while not impacting the consumer experience was a major hurdle.” For SWM, LIP paper continues to be a key profit driver. The company says it holds the vast majority of the market in North America. In the EU, it has a 40 percent direct market share and another 40 percent share through a license agreement with a competitor.
Further opportunities in this category, however, are limited. LIP paper has become mandatory mostly in large, high-income nations, where cigarette consumption has declined further than it has globally, on average. As future adoption of LIP legislation in other countries is driven by governmental regulation, the timing remains uncertain. “Although LIP remains a critical product for our customers in many markets globally, new market development requiring such legislation has been stagnant since 2012,” says Boone. “Changing economies and legislative priorities have moved government focus elsewhere, including a strong emphasis on excise tax increases worldwide. Although several countries have discussed enacting [LIP] legislation over the past several years, none have presently.”
Driving innovation
In the conventional cigarette paper category, innovation remains key. Manufacturers observe a growing tendency among their clients toward greater individualization of products. “We perceive a very strong trend toward absolutely individualized, tailor-made solutions for each customer instead of ‘off the peg’ products,” observes Thomas Zoepfl, Delfort’s head of SBA thinprint papers. “Our innovation rate is well above 10 percent, and more than 300 patent applications speak for our innovative power.”
Reischl, who sees more innovation in the areas of tipping papers and filters than in cigarette papers, points out that many of Julius Glatz’s papers are made exclusively according to the requirements of its customers, and he expects more of this in the future: “More demand in specialty papers, many orders in smaller volumes, orders or switches in paper grade on a short-term basis, which results in the necessity of flexibility as per production planning, adjustment of machines and equipment, etc.,” he says. “During the past five years, there have been quite a number of innovations and ideas, but they were more or less specialties and nothing that generated big volumes.”
As far as compositions of cigarette paper are concerned, customer requirements remain very stringent, according to Boone. Regulations in the U.S. and the EU limit, and sometimes even exclude, ingredient changes and additions. “We have a dedicated group for product stewardship and compliance that supports our efforts to understand and comply with the most recent standards our customers are subject to,” says Boone. “They also remain an integral part of our adaptation to new and pending regulations, taking a scientific approach in our efforts to bring new and innovative ideas to market.”
In the light of increasingly strict regulations affecting tobacco products packaging, cigarette paper is taking on a new role as a means of communication with the consumer. In tobacco markets with generic cigarette packaging, cigarette manufacturers are focusing on visual and sensual differentiation properties of cigarette paper, according to Boone. “Brand awareness in an increasingly difficult regulatory environment, as, for instance, plain packaging, is critical for our customers,” he says. “Cigarette paper can play a major role in providing alternatives to these traditional means, and SWM sees this in embossed and filigreed papers, for example. Whether a specific pattern or a brand logo, SWM has multiple technologies to meet these needs, depending on scale, and without compromising the functionality of the final product. With the uniqueness of this process and specific designs, our customers also have the assurance of brand security in the fight against illicit trade.” In January, SWM announced the expansion of its filigree paper capacity at its plant in Saint-Girons, in the south of France.
Hope on heated products
THPs pose the next big challenge in cigarette paper innovation. The paper used in the tobacco sticks employed in many such devices must meet different requirements than that used in traditional cigarettes. “Heat-not-burn products need to be designed in such a way that the papers can be exposed to high temperatures without starting pyrolysis,” explains Zahlbruckner. “These product specifications require the specialty papers to feature further properties, such as the ability to support the changed thermal management of the products or their further processing, especially with regard to their dimensional stability.” Owing to its comprehensive know-how in the specialty paper segment, Delfort has a range of technologies to develop solutions for these extended requirements in particular combinations, he says.
SWM, too, is actively engaged in this field, “Not only have we developed specific technologies and solutions, but we have also invested in development facilities that will assist our customers in specific approaches,” says Boone. “Our OneFiber application laboratory at our paper manufacturing facility in Quimperle, France, is one such example. It is dedicated to the next generation of products. From ideation, to concept, to prototyping and on through to market—with speed and efficiency—is the primary goal of our value proposition.”
THPs are expected to grow considerably over the next years. In a recent webinar, Euromonitor’s Shane MacGuill predicted that the top 10 markets for heated tobacco products by value and penetration, led by Japan, the U.S. and Turkey, would have a combined value of $15 billion in 2021. “As HNB products are still in the minority, they are of course growing,” cautions Reischl. “It’s pleasant if for these products cigarette papers are used, but there is a big gap between the growth of HNB and the decrease of cigarette paper, and so far HNB cannot absorb it.”
Closer to the client
So what does it take to remain competitive in such a complex business environment? Being close to your customer is one approach, says Rahmanadi. “Multinational cigarette companies have closed their less efficient factories and reallocated the production activities to a few large factories to cope with shrinking cigarette consumption,” he says. “This trend brings growth opportunities to cigarette paper manufacturers whose locations give better access to these large factories.”
It’s a strategy Delfort has been following closely for the past few years. In early January 2016, Delfort announced its acquisition of Mundet Group in the U.S. The deal gave the company manufacturing sites in Virginia and Tennessee in the U.S., as well as in Toluca, Mexico. In August of the same year, Delfort took over Shamrock Specialty Papers in Greensboro, North Carolina, USA.
“Being physically present in a growing market helps us increase both the reach and efficiency of Delfort’s global supply chain,” says Zahlbruckner. “Both companies offer design, printing and converting expertise for flexible packaging and the tobacco industry. With this strategic acquisition we underline our 100 percent commitment to the tobacco industry. We have made significant investments in technology and equipment in order to offer advanced production capabilities and world-class products for the industry.”
In December 2014, the company took over Glatz Finepapers Vietnam, which has been renamed Wattens Vietnam. “We are very excited about the capability of the enthused and young local staff who have done a tremendous job over the past two years,” explains Zoepfl. “Wattens Vietnam has integrated seamlessly into the group, standardizing systems and reporting standards while also sharing best practices and expertise to carry over into the new business structure. Close cooperation and coordination between mills, R&D centers and customers [has] been essential to the success of our investments and integration processes. Wattens Vietnam has initiated new investments into R&D and machinery in order to grow capacity and product range. The efforts and investments are paying off, with 20 percent sales growth. This has been significant and is encouraging for new investments, which we will inform the public about once they are due.”
SWM, too, has built a strong presence in Asia over the past decade. It is one of only a few Western companies to partner with the Chinese state tobacco monopoly, with which it has entered into two joint ventures—one for reconstituted tobacco leaf, established in 2014, and another one for cigarette paper, set up in 2008. The latter, China Tobacco Mauduit (CTM), has a leading share in many premium domestic brands and contributes several million dollars to SWM’s annual net income. “China is a large market for SWM, and CTM is a successful and mature investment dedicated to the production of cigarette paper,” says Boone. “SWM continuously evaluates global investment opportunities, including but not limited to investments in alternative tobacco products such as heat-not-burn solutions.”