UNIVERSITY OF LJUBLJANA, FACULTY OF ECONOMICS

TOBACCO INDUSTRY
An Overview of Global Market of Tobacco
Leaf and Manufactured Tobacco











Furkan FDAN, Eren Can GRGL
1/14/2014







Abstract
Tobacco industry is one of the most profitable industry in the world. Either
unmanufactured tobacco, or manufactured tobacco cover a considirable part of world market.
The purpose of this study, to identify shifting of world tobacco demand from developed
countries to developing countries and emerging markets. Statistical datas and expert reviews
are used to identify this purpose. Besides, world production of tobacco leaf and trade amounts
are analysed.

Keywords: tobacco, industry, production, emerging markets, developing countries, demand
shift, import, export






Table of Content

1. Introduction ..................................................................................................................................... 1
2. Market Description .......................................................................................................................... 1
2.1. Description and Analysis of Tobacco Market ......................................................................... 1
2.1.1. An Overview for Global and Regional Tobacco Market ................................................. 2
2.1.2. Largest Cigarette Markets: Tobacco Industry Targets .................................................... 5
2.1.3. Major Players of Tobacco Industry ................................................................................. 6
2.1.4. Sensitivity of Tobacco to Technological Changes .......................................................... 9
2.1.5. Natural Conditions......................................................................................................... 10
2.1.6. Substitutes of Tobacco .................................................................................................. 10
2.2. Specifics for Supply and Demand of Tobacco .................................................................. 11
2.2.1. Concentration of Major Players ..................................................................................... 12
2.2.2. Exports and Imports ...................................................................................................... 13
2.2.3. EUs Position on Tobacco Market ................................................................................ 16
2.3. Design and Price Trend ......................................................................................................... 18
2.3.1. Type of Competition...................................................................................................... 18
2.3.2. Price Elasticity ............................................................................................................... 18
2.3.3. Expected Trends in the Future ....................................................................................... 18
3. Conclusion ..................................................................................................................................... 20







1

1. Introduction
With reducing demand for tobacco in developed world, tobacco companies started to
focus on emerging markets and developing countries. Besides, the number of people who use
tobacco and tobacco substitutes, are raising developing countries, vice-versa developed
countries. This study examines causes and effects of this shift.
2. Market Description
Tobacco is a plant which constitutes genus Nicotiana of the Solanaceae family. Tobacco
plant of American origin has more or less 50 kinds, Australia and New Zealand origin has 5-6
type, and the other few is Asia originated. Although it is expressed that it has over 60 kinds,
pure species specified as a type of sub-types of the same species that have been identified.
1

All tobacco products, corresponding to NACE Rev 1.1 Division 16, which is part of the
food, beverages and tobacco sector. Tobacco products consist of cigarettes, cigarette tobacco,
cigars, pipe tobacco, chewing tobacco, snuff.
2
It is located in SITC (Rev. 4) section 1-
Beverages and Tobacco and its division code is 12, number of groups 2, number of subgroups
6 and number of basic headings 8. Tobacco is divided two division as unmanufactured
tobacco and manufactured tobacco. Unmanufactured tobacco consists that tobacco, not
stemmed/stripped; tobacco, wholly or partly stemmed/stripped; tobacco refuse. Manufactured
tobacco consists cigars, cheroots and cigarillos, containing tobacco; cigarettes containing
tobacco; other manufactured tobacco (including smoking and chewing tobacco, snuff);
tobacco extracts and essences.
3

2.1. Description and Analysis of Tobacco Market
Tobacco is mostly used for smoking and there are 1.22 billion tobacco users in the world.
4

1 billion of them live in developing or transitional economies. This number is expected to
increase to 1.6 billion over the next two decades. Furthermore, In Indonesia, the lowest
income group spends 15% of its total expenditures on tobacco, in Egypt, more than 10% of
households expenditure in low-income homes is on tobacco. The poorest 20% of households

1
http://www.ito.org.tr/Dokuman/Sektor/1-100.pdf retrieved 10.01.2014
2
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Tobacco_processing_statistics_-
_NACE_Rev._1.1 , retrieved 10.01.2014
3
http://unstats.un.org/unsd/trade/sitc%20rev%204%20final.pdf retrieved 10.01.2014
4
http://www.fao.org/english/newsroom/news/2003/26919-en.html retrieved 10.01.2014
2

in Mexico spend 11% of their income on tobacco. So, there is huge production of tobacco to
response these demands in the world.
2.1.1. An Overview of Global and Regional Tobacco Market
Production of tobacco leaf increased by 40% between 1971, during which 4.2 million tons
of leaf were produced, and 1997, during which 5.9 million tons of leaf were produced. World
tobacco production reached over 7.1 million tonnes of tobacco leaf in the year 2010, up from
5.9 million tonnes in 1997/99. This is lower than the record tobacco production of 1992 of 7.5
million tonnes. Chinas increase in tobacco production was the single biggest factor in the
increase in world production. Chinas share of the world market increased from 17% in 1971
to 47% in 1997. This growth can be partially explained by the existence of a high import tariff
on foreign tobacco entering China. While this tariff has been reduced from 64% in 1999 to
10% in 2004, it still has led to local, Chinese cigarettes being preferred over foreign cigarettes
because of their lower cost.
5

Country or Region Production (in thousands of tons)
China 2,298.8
India 595.4
Brazil 520.7
United States 408.2
European Union 314.5
Zimbabwe 204.9
Turkey 193.9
Indonesia 166.6
Russia 116.8
Malawi 108.0
Table 1: Production of unmanufactured tobacco (leaf) by countries

The global cigarette industry is one of the most profitable and deadliest industries in the
world. Cigarette retail values in 2012 were worth $697 billion and over 5.8 trillion cigarettes
were sold to more than one billion smokers worldwide. Between 2001 and 2012, global
cigarette volume sales increased by 9% while retail values increased 102% (Figure 1).
Industry analysts predict that over the next five years the global cigarette industry will
continue to grow: volumes are predicted to increase by 3% and value by 49%.

5
http://en.wikipedia.org/wiki/Tobacco#Early_developments retrieved 10.01.2014
3


Figure 1: Global Cigarette Market-Retail Value
6

Figure 2: Global Cigarette Market-Retail Volume
7

Globally, cigarette consumption is growing in low- and middle income countries and
decreasing in high-income countries. Sales are shifting from developed markets, like those in
Western Europe where smoking prevalence is declining and where tobacco company
operations are more restricted by government policies, to emerging markets like those in Asia

6
http://global.tobaccofreekids.org/files/pdfs/en/Global_Cigarette_Industry_pdf.pdf retrieved 10.01.2014
7
Euromonitor International, 2012 (data on the Internet)
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
01 02 03 04 05 06 07 08 09 10 11 12
m
i
l
l
i
o
n

$

Years
Retail Value
Retail Value (million $)
5,000,000
5,100,000
5,200,000
5,300,000
5,400,000
5,500,000
5,600,000
5,700,000
5,800,000
5,900,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Retail Volume(million sticks)
4

and Africa where tobacco companies take full advantage of lax regulatory environments,
growing populations and increasing incomes. Between 2005 and 2012, cigarette sales in the
Asian Pacific and in the Middle East and Africa region have increased while all other regions
have experienced declining sales.

Figure 3: Global Cigarrette Market by Region (2005)

Figure 4: Global Cigarette Market by Region (2012)
8






8
Figure 3 and Figure 4 is taken from
http://global.tobaccofreekids.org/files/pdfs/en/Global_Cigarette_Industry_pdf.pdf retrieved 10.01.2014
Asia Pacific
55%
Western Europe
11%
North America
8%
Middle East and
Africa
7%
Latin America
5%
Eastern Europe
13%
Australasia
1%
Sales(2005)
Asia Pacific
62%
Western Europe
9%
North America
5%
Middle East and
Africa
7%
Latin America
4%
Eastern
Europe
12%
Australasia
1%
Sales(2012)
5

2.1.2. Largest Cigarette Markets: Tobacco Industry Targets
The five largest cigarette consuming nations -China, Russia, U.S., Japan and Indonesia-
account for 60% of the volume of all cigarettes sold in 2012. Seven of the ten largest cigarette
markets in 2012 were emerging markets, four of which are Asian Pacific countries.
COUNTRY RETAIL VOLUME, 2012 (MN STICKS)
China 2,477,932.2
Russia 374,135.8
USA 287,120.6
Indonesia 203,116.4
Japan 197,484.5
India 102,127.2
Philippines 100,547.1
Vietnam 99,687.4
Turkey 95,332.3
South Korea 88,989.1
Table 2: Top 10 Cigarette Markets by Volume
9

1.1.2.a. China
China is the largest cigarette market in the world. The retail value of Chinas cigarette
market in 2012 was $182 billion. By comparison, the retail value of the next largest cigarette
market, Russia, was $25.5 billion in 2012. Volume growth in China drives global market
growth between 2011 and 2012, the global cigarette market increased by 0.2% but when
excluding Chinas volume gains, the global market declined 2%.
1.1.2.b. Russia
Cigarette sales by volume have been declining in Russia since 2008down 5%
between 2008 and 2012. However, over the same time period, and retail values have increased
50% from $17 billion to $25.5 billion. JTI is the market leader in Russia (36% share), but
PMI, BAT and Imperial also have a presence.



9
Euromonitor International, 2012 (data on the Internet)
6

1.1.2.c. Indonesia
The Indonesia cigarette market is unique because sales are dominated by clove
flavored kreteks. Between 2011 and 2012, the Indonesian cigarette market grew nearly 6%.19
Leading tobacco company, Sampoerna, (acquired by PMI in 2005) has steadily been gaining
market share in Indonesia, outperforming domestically owned companies and other TTCs
trying to make a profit in Indonesia.
1.1.2.d. India
Indias tobacco market is dominated by smokeless tobacco sales (75%). 20% of
tobacco users smoke hand-rolled bidis and only 5% of the market is made up of cigarettes.21
The cigarette market is, however, growing (2% volume growth between 2007 and 2012) and
given Indias large population, the country continues to be a target of tobacco companies.
1.1.2.e. Turkey
Almost one-third (31 percent) of the population in Turkey smoke, and rates of tobacco
use are rising. Turkish tobacco market is dominated by international tobacco companies,
holding over 92 percent of the cigarette market share in Turkey. In 2012, Philip Morris
International led with 40 percent of market share, followed by British American Tobacco (35
percent), Japan Tobacco (14 percent), and Imperial Tobacco (3 percent). In Turkey, more than
107 billion cigarettes were sold in 2012.
10

2.1.3. Major Players of Tobacco Industry
While cigarette sales are expanding to new markets, industry market shares are
consolidating, and the market is increasingly controlled by a few international companies. In
2001, a little more than 50% of global market sales were controlled by transnational tobacco
companies. By in 2012, 79% of the market was controlled by transnational tobacco
companies. Over the last decade, the international cigarette market has been dominated by
five companies, China National Tobacco Corporation(CNTC), Philip Morris
International(PMI), British American Tobacco(BAT), Japan Tobacco International(JTI) and
Imperial Tobacco(IT).


10
https://www.tobaccofreekids.org/facts_issues/toll_global/turkey retrieved 10.01.2014
7


Figure 5: Tobacco Company Shares of Global Cigarette Market, 2012
11


Figure 6: Tobacco Companies Profits 2012
1.1.3.a. China National Tobacco Corporation (CNTC)
China National Tobacco Corporation was founded in 1982 which is owned and
operated by the Chinese government. It enjoys a virtual monopoly in China, which accounts
for roughly 41% of the worlds total consumption of cigarettes, and is the world's largest

11
Euromonitor International, 2012 (data on the Internet)
42%
15%
11%
8%
4%
20%
Market Share
CNTC PMI BAT JTI IT Others
0
20
40
60
80
100
120
CNTC PMI BAT JTI Imperial
Tobacco Company Profits 2012 (bn $)
Total Revenue Total Profit
8

manufacturer of tobacco products measured by revenues
12
. CNTC caters to its customer base
of 350 million smokers, who consume 1.7 trillion cigarettes every year. It sells the majority of
its product in China; just over 1% of cigarettes produced are exported to other countries.
CNTC is increasing efforts to sell brands such as RGD, Dubliss and Harmony internationally.
1.1.3.b. Philip Morris International (PMI)
Philip Morris International (PMI) is a U.S. company with headquarters in Lausanne,
Switzerland. PMI controls an estimated 15% of the international cigarette market behind
CNTC and is the most profitable tobacco company in the world. PMI only sells its tobacco
products outside the U.S. after separating from parent company, Altria, in 2008. The company
operates in over 180 countries, and sells 7 of the top 15 brands, including Marlboro, the
worlds best-selling cigarette brand
13
. Cigarette sales in Asia drive PMIs growth and the
company will continue to focus on growing sales in countries like Indonesia and the
Philippines while also expanding their market shares in Bandladesh, China, India and
Vietnam.
1.1.3.c. British American Tobacco (BAT)
British American Tobacco (BAT), is a UK company based in London. The company
operates in 180 countries, is the third largest in the global tobacco market and controls 11% of
the international cigarette market. Top selling brands include Pall Mall, Kent, Lucky Strike
and Dunhill. 75% of BATs volumes are distributed in emerging markets, and the company is
currently focusing on how to increase sales in Asian markets. In 2012, BAT and its
subsidiaries sold 694 billion cigarettes by region was Asia-Pacific 191 billion; Americas 143
billion; Western Europe 135 billion; and Eastern Europe, Middle East and Africa 225
billion
14
.
1.1.3.d. J apan Tobacco International (J TI)
Japan Tobacco International (JTI) is the international division of Japan Tobacco (JT)
and is headquartered in Geneva, Switzerland. The Japanese government holds 33% stake in
JT operates in 120 countries, is the fourth largest tobacco company in the world and controls
8% of the global cigarette market. Top brands include Winston, Mild Seven (brand name

12
http://en.wikipedia.org/wiki/China_Tobacco retrieved 10.01.2014
13
http://www.pmi.com/eng/about_us/company_overview/pages/company_overview.aspx retrieved 11.10.2014
14
http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52ADCY?opendocument&SKN=1
retrieved 11.10.2014
9

changed to Mevius in 2012) and Camel. International tobacco sales account for 50% of JT
profits, and JTI continues to expand its presence in emerging markets including the recent
acquisition of a tobacco company in Sudan.
15

1.1.3.e. Imperial Tobacco Group
Imperial Tobacco Group is a UK company. The company is the fifth largest in the
global tobacco market and controls 4% of the international cigarette market. Imperial operates
in over 160 markets, with 56% of its products sold in emerging markets in Africa, the Middle
East, Eastern Europe and Asia. Top brands include Davidoff West, Gauloises Blondes,
Montecristo, Golden Virginia (the world's largest-selling hand rolling tobacco), Drum (the
world's second-largest-selling fine-cut tobacco) and Rizla (the worlds best-selling rolling
paper). Imperial is targeting emerging markets in Asia and Africa and the Middle East to
further company growth internationally.
16

2.1.4. Sensitivity of Tobacco to Technological Changes
Tobacco had already long been used in the Americas when European settlers arrived and
introduced the practice to Europe, where it became popular. Many Native American tribes
have traditionally grown and used tobacco with some cultivation sites in Mexico dating back
to 1400-1000 B.C. Tobacco had been consumed by people for centuries. Billions of people,
numerous nationality used tobacco for smoking. In that time, a lot of technological changes
were happened, but the rate of using tobacco did not decrease, nevertheless it increased. It is
hard to say that tobacco industry is vulnerable across to technological changes. On the other
hand, in last two decades, the rate of addictiveness of tobacco is decreasing especially in
developed countries thanks to easiness of reaching the information with technological
changes. For instance, Smoking rates in the United States have dropped by half from 1965 to
2006, falling from 42% to 20.8% in adults.
17
People can understand to harm of smoking more
effectively in this way. Furthermore, a lot of anti-smoking organizations such as World Health
Organization(WHO) try to reduce consumption of tobacco and find new solution by using
technology such as electronic cigarette.



15
http://global.tobaccofreekids.org/files/pdfs/en/Global_Cigarette_Industry_pdf.pdf retrieved 11.01.2014
16
http://www.imperial-tobacco.com/index.asp?page=2 retrieved 11.01.2014
17
http://en.wikipedia.org/wiki/Tobacco retrieved 11.01.2014
10

2.1.5. Natural Conditions
Tobacco production requires the use of a large amount of pesticides. Tobacco companies
recommend up to 16 separate applications of pesticides just in the period between planting the
seeds in greenhouses and transplanting the young plants to the field. Pesticide use has been
worsened by the desire to produce larger crops in less time because of the decreasing market
value of tobacco. Pesticides often harm tobacco farmers because they are unaware of the
health effects and the proper safety protocol for working with pesticides. These pesticides, as
well as fertilizers, end up in the soil, waterways, and the food chain. Coupled with child labor,
pesticides pose an even greater threat. Early exposure to pesticides may increase a child's
lifelong cancer risk as well as harm his or her nervous and immune systems. Tobacco is a
crop that extracts nutrients, such as phosphorus, nitrogen and potassium, from the soil more
quickly than any other major crop. This leads to dependence on fertilizers. Furthermore, the
wood used to cure tobacco in some places leads to deforestation. While some big tobacco
producers such as China and the United States have access to petroleum, coal and natural gas,
which can be used as alternatives to wood, most developing countries still rely on wood in the
curing process. Brazil alone uses the wood of 60 million trees per year for curing, packaging
and rolling cigarettes.
18

2.1.6. Substitutes of Tobacco
It is hard to say that tobacco has so many substitutes or alternatives. Because, most of
people who use tobacco are addicted to tobacco. Smoking is an indispensable requirement for
them. However, there are several products which can be called as substitute such as e-
cigarette, nicotine patches, nicotine gum, nicotine inhalers, herbal cigarettes.
E-Cigarette Statistics Data
Total number of smoker 45 million
Total number of e-cigarette smokers 2.5 million
E-Cigarette Sales by Year Sales
2008 $20 million
2009 $39 million
2010 $82 million
2011 $195 million
2012 $500 million
2013 (Projected) $1 billion
Table 3: Sales volume of e-cigarette by year, in U.S

18
http://wwf.panda.org/about_our_earth/agriculture_impacts/tobacco/environmental_impacts/deforestation/
retrieved 11.01.2014
11

2.2. Specifics for Supply and Demand of Tobacco
Despite the overall increase of tobacco use, FAO expects consumption per adult to decline
by around 10 percent by 2013, and individual consumption will probably be around 1.4 kg per
year. Cigarette smoking is the most prevalent type of tobacco consumption; manufactured and
hand rolled cigarettes account for about 85 percent of all tobacco consumed worldwide. With
around 320 million smokers, China is the world's major cigarette consumer.
By 2013, the share of developed countries in world tobacco consumption is projected to
be only 29 percent (1998: 34 percent), the share of developing countries will be 71 percent.
Tobacco demand in developed countries is declining slowly and will reach about 2.05 million
tonnes in 2013. This is 10 percent lower than the 2.23 million tonnes consumed in 1998. This
can be attributed to a slower population and income growth. In addition, in developed
countries an increasing awareness of the damaging health effects of smoking, together with
the anti-smoking measures of governments including intensified anti-smoking campaigns, the
banning of advertising and increased taxation, have had a strong negative effect on
consumption of tobacco products. But more tobacco will be smoked in developing countries,
where tobacco consumption is expected to grow to 5.09 million tonnes by 2013 (from 4.2
million 1998). This is an average annual growth rate of 1.7 percent between 1998 and 2013,
significantly lower than the 2.8 percent rate observed in developing countries between 1971
and 1998.
A major part of the projected increase in demand is expected to be in the Far East,
particularly in China. The share of China in total world tobacco demand is likely to remain
around 37 percent in 2013.
In India, the second most important tobacco consumer, smoking of conventional cigarettes
accounts for only 25 percent. Most people consume tobacco in the form of non-cigarette items
such as hand-rolled bidis, chewing etc. Total demand for tobacco in India is likely to continue
to increase, but more slowly than in the previous decades.
In Latin America, tobacco use in 1998 was about 0.48 million tonnes, of which just over
half was in Brazil. Demand in the region is expected to increase modestly until 2013, and
most of the increase will occur in Brazil.
In Africa, total tobacco demand increased in the 1990s with record growth of 3.5 percent
per year. Growth for the period to 2013 is expected to continue at a similar rate.
12

In the Near East, the demand for tobacco is expected to grow at 0.42%, a growth rate a
little lower than experienced in the 1990s
About 100 countries produce tobacco. The major producers are China, India, Brazil, the
US, Turkey, Zimbabwe and Malawi, which together produce over 80 percent of the world's
tobacco. China alone accounts for over 35 percent of world production. The developing
countries are expected to further increase their share in world tobacco production. Production
policies supporting tobacco in developed countries are under constant pressure and tobacco
profitability at farm level is expected to decline further. Supply is expected to increase in
countries where production costs are low, there are no production restrictions, and good
transportation systems and access to international markets are available. With that in mind, it
is expected to see some further shift of cigarette manufacturing, also, towards developing
countries. Cigarette production in developing countries is already surpassing the production
level of developed countries.
2.2.1. Concentration of Major Players
The tobacco and cigarette industries are some of the biggest in the world. While there is
no exact figure as to the industrys revenue, it is probably safe to estimate that it reaches an
amount of close to half a trillion dollars every year. If the industry were a country, its gross
domestic product, or GDP, would be equivalent to that of oil giants Saudi Arabia and
Venezuela, or of the European countries of Sweden and Poland.
19

Privatization, mergers and acquisitions have resulted into the consolidation of the
industry. Although production of unmanufactured tobacco(leaf) is made by developing
countries, there are now only five major private players which is established in developed
countries, are benefit from the manufactured tobacco market namely Altria/Philip Morris
USA, Philip Morris International, Japan Tobacco International, Imperial Tobacco and British
American Tobacco. Additionally, there are 16 state-owned companies from different
countries, the largest of which is the China National Tobacco Corporation. Cigarette factories
are located in every corner of the world, concentrated in Europe and China, and new ones are
still being built.

19
http://www.therichest.com/expensive-lifestyle/lifestyle/the-top-cigarette-companies-in-the-world/ retrieved
12.01.2014
13

Despite all the negative publicity and the banning in the advertising of cigarette products,
these companies continue to flourish as they have learned to diversify into other areas of
tobacco technology. As a result, these companies remain to be among the most profitable in
the world today.
2.2.2. Exports and Imports
Tobacco trade is big business, for both the raw material (tobacco leaves) and the finished
product (manufactured cigarettes). Some countries that grow tobacco, such as the USA, also
import foreign tobacco as well as exporting their own tobacco leaves. However, some
countries that grow their own tobacco such as China, and they keep on the their countries to
sell mostly.

Figures 7: World Exports of Unmanufactured Tobacco (by 000 tonnes)
20







20
Source: FAO stats (data on Internet) http://faostat3.fao.org/faostat-gateway/go/to/browse/T/TP/E retrieved
12.10.2014
0
500000
1000000
1500000
2000000
2500000
3000000
2006 2007 2008 2009 2010 2011
0
0
0
,

t
o
n
n
e
s

World Exports of Unmanufactured Tobacco
14

When exporters of tobacco are analyzed, it can be seen that Brazil is the biggest
unmanufactured tobacco exporter on the world tobacco market. It exported 533579000 tonnes
of tobacco leaves in 2011.

Figure 8: Brazils unmanufactured tobacco exports by years
21

Figure 9: World export tobacco and manufactured tobacco substitutes among countries
22


21
Source: FAO stats (data on Internet) http://faostat3.fao.org/faostat-gateway/go/to/browse/T/TP/E retrieved
12.10.2014
0
100000
200000
300000
400000
500000
600000
700000
800000
2006 2007 2008 2009 2010 2011
0
0
0
,

t
o
n
n
e
s

Years
Brazil's Unmanufactured Tobacco Exports
15

Countries 2010 2011 2012
Germany 6,163,562,257 7,049,989,281 6,749,458,073
Netherlands 5,720,002,823 6,807,392,746 6,461,174,173
Brazil 2,698,613,964 3,266,802,143 3,457,709,030
Poland 1,876,363,973 2,459,821,221 2,572,990,186
United States 2,061,923,173 2,475,172,531 2,382,931,688
China 942,447,865 1,131,599,228 1,185,510,584
Belgium 1,088,380,402 1,185,356,552 1,078,993,525
Switzerland 681,450,557 1,042,906,058 1,040,242,094
Portugal 861,906,178 958,559,392 1,026,349,448
Czech Republic 573,171,892 841,812,208 952,130,745
Others 12,176,893,647 13,432,382,651 14,401,920,782
Total 34,844,716,732 40,651,794,012 41,309,410,328
Table 4: Worldwide export tobacco and manufactured tobacco substitutes - Anual FOB USD
Countries 2010 2011 2012
Italy 2,803,464,765 3,102,910,739 2,782,165,394
Germany 1,814,225,469 2,577,911,474 2,467,286,619
Netherlands 1,341,561,932 1,369,793,155 2,376,763,058
France 2,330,195,097 2,398,430,154 2,351,434,509
Japan 1,545,725,960 2,146,600,314 1,955,066,042
Belgium 1,937,120,611 1,755,192,263 1,700,804,169
United States 984,848,733 1,076,974,414 1,576,473,426
Spain 1,587,905,174 1,429,394,626 1,408,398,475
China 755,863,224 927,080,118 1,077,477,396
Russia 906,999,016 983,963,951 1,001,623,795
Others 14,249,249,138 16,393,209,337 17,103,613,466
Total 30,257,159,120 34,161,460,546 35,801,106,349
Table 5: Worldwide import tobacco and manufactured tobacco substitutes Annual FOB USD
According to datas, top exporter of tobacco and manufactured tobacco substitutes is
Germany. On the other hand, it is in second place on the list of worldwide importers of
tobacco and manufactured tobacco substitutes, by following Italy which is the first importer.
Although China is the leader of producers of tobacco industry, it exports only 1% of its
production.



22
http://trade.nosis.com/en/Comex/Import-Export/Worldwide/Tobacco-and-manufactured-tobacco-
substitutes/WD/24 retrieved 12.10.2014

16

2.2.3. EUs Position on Tobacco Market
This section provides an overview of the market size and market value, including
forecasts, of tobacco and nicotine products in the EU27.0
2.2.3.1. Sales
The overall market value of tobacco products was 136.5 billion in 2010, of which 88%
consisted of cigarettes.
Tobacco / Nicotine Product Market Value in billion EUR, 2010
Cigarettes 121.3
RYO Tobacco 9.3
Pipe Tobacco 0.48
Cigars 2.98
Cigarillos 1.67
Smokeless Tobacco 0.83
Total 136.5
Nicotine Replacement Therapy 0.56
Electronic Cigarettes 0.50
Table 6: Overview of relative market value of tobacco and nicotine containing products in 2010
23

The volume of the EU cigarettes market in 2010 was 608.8 billion sticks. This
represents avolume sales decline of 23.3% in comparison to 2000, when 793.7 billion sticks
were sold across the EU. The overall market value of cigarettes across the EU, measured in
current (nominal) prices, was 121.3 billion in 2010. This represents an increase of 33.8%
from the 90.7 billion market value recorded in 2000. This increase could be explained by the
increase in taxes, annual inflation, and/or a shift to premium brands.
On the other hand, Producing and consuming smokeless tobacco has a long tradition in
Denmark, whilst smokeless tobacco was introduced in Slovenia in the late 1970s. In June
2003, a ban was introduced on snus in Slovenia, in compliance with EU Directive
2001/37/EC, which however did not apply to chewing tobacco. The consumption and
distribution of dry snuff and chewing tobacco are legal in Germany. In Slovenia, the market
size of chewing tobacco in 2010 was as low as 600 kg. Despite a short-lived increase in sales
between 2000 and 2002, the market size of chewing tobacco has been declining. Sales fell
from 1.5 tonnes in 2000 to 600kg (0.6 tonnes) in 2010, which is a total fall of 60%. This trend
is likely to continue and sales are expected to reach 0.2 tonnes in 2015.

23
Euromonitor, http://ec.europa.eu/health/tobacco/docs/tobacco_matrix_report_eu_market_en.pdf retrieved
12.10.2014
17

2.2.3.2. Growing
The 27-member EU currently produces around 300 thousand tonnes of raw tobacco
annually, according to the FAO. EU production represents 4.1% of worldwide production.
Twelve EU Member States produce tobacco. The main producers within the EU are Italy
(1.4% worldwide share), Bulgaria (0.7% share), Poland (0.6% share), Spain (0.4%) and
Greece (0.4% share). These countries, together with France, produce over 90% of the total EU
production of unmanufactured tobacco. Italy alone grew 119 thousand tonnes of tobacco in
2009.

2.2.3.3. Manufacturing
There are a number of players providing cigarettes for the European market including:105
companies with an EU27 market share above 2% (British American Tobacco (BAT),
Imperial Tobacco (IT), Japan Tobacco (JT) and Philip Morris International (PMI)) companies
with an EU27 market share between 0.5% and 2%, and companies with an EU27 market share
below 0.5%.
2.2.3.4. Trade
Eurostat figures show that the overall value of cigarettes traded within the EU between
2000 and 2010 was 65 billion. The trend over this time period was upward-sloping: from
reported intra-EU export values of 5 billion in 2000, it raised to 6.5 billion in 2010. This
corresponds to a 30.78% increase over this period.
Extra-EU exports in RYO tobacco have also been increasing, but at a more volatile pace-
indeed, in 2008, RYO tobacco extra-EU exports. From an initial level of 16,129 tonnes in
2000, extra-EU exports in smoking tobacco stood at 26,503 tonnes in 2010.
Over the same time period, imports into the EU27 countries from outside the EU27
countries fell from 7,428 tonnes in 2000 to 2,370 tonnes in 2010. Overall trade (exports and
imports) of RYO tobacco thus increased from 23,557 tonnes in 2000 to 28,872 tonnes in
2010.



18

2.3. Design and Price Trend
2.3.1. Type of Competition
There are four types competition on economy which are perfect(pure) competition,
oligopoly, monopoly, monopolistic competition. Competition in economy is the battle
between businesses and consumers in winning of each others acceptance as well as loyalty.
An oligopoly is a market form in which a market or industry is dominated by a small
number of sellers (oligopolists). Oligopolies can result from various forms of collusion which
reduce competition and lead to higher costs for consumers. Tobacco industry is accepted on
the oligopoly market. Since, It has all features of oligopoly market such as few sellers, large
number of buyers, price setters, perfect knowledge, homogeneous products.
2.3.2. Price Elasticity
When we analyze the price elasticity of tobacco industry, we have to determine that using
tobacco-especially smoking- is a luxury or necessity. Most of people can think that smoking is
a necessity because of they are smokers. However, smoking is a luxury on economy.
Price elasticity of demand measures how much demand would change as percent
following to price changes. If final absolute value is between 0-1,this means inelastic demand.
If the final absolute value is equal to 1,this means unit-elastic demand.If the final absolute
value is higher than 1,this means elastic-demand. For customers, using tobacco has an elastic-
demand curve that absolute value is higher than 1. These reasons mean that when price is
increased, demand of tobacco will decrease.
2.3.3. Expected Trends in the Future
Future predictions are by their nature speculative but some things are certain: the tobacco
epidemic, with its attendant health and economic burden, is both increasing and also shifting
from developed to developing nations nations; and more women are smoking. The industry is
consolidating, and also shifting from the west to developing regions, where there may be less
government control and public debate about the role of transnational tobacco companies.
Number of smokers, assuming constant prevalence and medium variant projected
population, will be 2,2 billion in 2050 according to WHOs researchs. In addition to this,
number of smokers, if assuming reduced prevalence of -1.0& p.a. medium variant projected
population, can be standed about 1.5 billion in 2050.
19


Figure 10: Expected number of smokers trend in future
24

2.3.3.1. Economics
Global annual economic costs of tobacco is $500 billion a year by 2010. Between 2010-
2020, tobacco-related illnesses rise to top health expenditure in many countries. Many
governments conclude the economic costs of tobacco outweigh any benefit. A severe
economic depression and/or a major international security crisis cause tobacco issues to
temporarily diminish in importance. Between 2020-2030, the gap between rich and poor
countries grows as health services in poor countries collapse under the strain of tobacco
disease and deaths. Between 2030-2040, global annual economic costs of tobacco will be over
$ 1 trillion a year.
2.3.3.2. Tobacco Industry
In last decade between 2000-2010, tobacco companies attempted to produce genetically
modified tobacco with lower nicotine. Some tobacco companies bought pharmaceutical
companies. The industry tried to re-position its public image as a responsible corporation. The
industry sought regulation on its own terms. Between 2010-2020, industry consolidation leads
to 2 or 3 huge conglomerates accounting for the bulk of global sales. Continued privatisation
sees end of state-run tobacco companies. Niche markets still exist for smaller players.

24
WHO data on Internet
1.40
1.60
1.80
2.00
2.20
1.30
1.40 1.40
1.60
1.50
2000-2010 2010-2020 2020-2030 2030-2040 2040-2050
Expected number of smokers trend
# of smokers # of smokers*
*assuming reduced prevelence of -1.0% p.a.. medium variant projected population

20

Liberalisation of global trade rules welcomed by the industry. Smuggled cigarettes overtake
legal sales. Between 2020-2030, Much of the developed world moves to a managed tobacco
industry, with tobacco-attributable health care costs reimbursed and compensation paid to
individual smokers and non-smokers harmed by tobacco. Cigarettes only available on
prescription in rich countries. Between 2030-2040, the tobacco industry is fully regulated,
with licensing of nicotine as an addictive drug, and manufacture, promotion and sale under
strict regulatory control by government agencies. Huge advances are made in genetics. The
tobacco plant becomes key to producing vaccines and other beneficial medical products.
Worlds top tobacco companies now based in Asia. Almost no tobacco is grown in the USA.
3. Conclusion
Tobacco is a plant which is used for centuries and has high market value. The demand for
tobacco has almost no decrease for centuries. Although tobacco companies are the one of the
most profitable companies around the world, there is only a few major players which are
dividing to benefit that getting from tobacco. In recent years, these firms started to focus on
developing countries because most of tobacco users are living these countries. The demand
for tobacco has been shifting from developed countries to developing countries. The emerging
markets and developing countries have came to the forefront on either consumption or
production. For instance, China is the biggest producer and also consumer of the
manufactured tobacco. Besides, Brazil is the biggest exporter of the unmanufactured tobacco.
With all these informations and datas, it can be easiliy understood that the demand shifting
from developed countries to developing countries, will continue in future.


21

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