Smoking growth supports acetate

Despite the wishes of health care advocates, worldwide cigarette consumption is growing, and with it, the cellulose acetate tow used to make its filters

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Roughly 80% of the acetate tow produced is used in the manufacture of filters for cigarettes – a product nowadays severely demonized in developed and westernized nations. But global growth for cigarettes, and thus acetate tow, is steady. And because cigarettes are essentially inexpensive luxury items, demand has decoupled from recent downward economic trends.

“If you only looked at North American cigarette trends, you would have a decidedly negative view of the acetate [tow] business,” said Richard Johnson, senior vice president for the US-based Eastman Chemical’s fiber business, which includes the company’s acetate tow segment, at an investor day conference in November 2009.

However, the Eastman executive pointed out that global trends are much more positive as disposable incomes continue to rise in developing economies and the number of smokers in the world actually increases.

According to international market intelligence provider Euromonitor International, the number of global smokers increased by 7% from 2003 to 2008.

While the trend of shrinking tobacco consumption in developed markets such as North America and Western Europe will continue, the importance of the regional market will shift in favor of Eastern Europe – especially Russia, where smoking has doubled in the past 10 years, according to Eastman, as well as the Middle East, Latin America and especially Asia-Pacific.

About 80% of Eastman’s acetate tow ­business comes from outside North America, with over 50% of revenues from Asia-Pacific, said Johnson.

China is “the fastest-growing market [in] the world for acetate tow,” said Steven Sterin, chief financial officer of US-based chemical firm Celanese, speaking at a press conference in May.

According to Todd Elliot, general manager of Celanese Acetate, speaking at the same May conference, “global demand for tow [was] about 720,000 tonnes last year [and] worldwide about 6.1 trillion cigarettes were produced last year.”

STEADY GROWTH
The global market will grow at 1-2%/year to reach 840,000-850,000 tonnes by 2015 from 2010’s estimated 760,000 tonnes, which is valued at $3.80bn (€2.98bn) based on an average price of $5/kg in 2009, according to a March report by international ratings agency Fitch Ratings.

Elliott projects that China will continue to be “the engine that drives global growth” with a growth rate of around 3-4% until 2013. China represented 37% of global smokers in 2008, according to Euromonitor – up from 33% in 2004.

Chinese cigarette firms have become major players in this market compared with the old Western key accounts, such as US-based Philip Morris and British American Tobacco, said Gerard Collette, president of the Acetow business unit of France-based chemical company Rhodia, at an investors’ teleconference in November 2009.

“China represents one smoked cigarette of three,” he said. “In the whole Asian region, one cigarette of two [globally] is smoked there.”

Assuming constant growth rates, notes Fitch, China will increase its share of the global market for acetate tow by about 3%, to 36% by 2015. Asia-Pacific including China will account for about 60% of the global market, up from 53% now.

According to Eastman, North and South America have shown a compounded annual growth rate (CAGR) from 2003-2009 of -5%, which is “not surpising with the smoking trends we’ve seen,” said Johnson. Europe overall had a CAGR for that period of 0.5%, with declines in Western Europe offset by growth in Eastern Europe.

Because the market for unfiltered cigarettes is decreasing and filter lengths are projected to grow and become more complicated, Collette added: “The tow market will grow by two times faster than the cigarette market.”

Fitch estimates that 97% of all consumed cigarettes are filtered, of which more than 80% use acetate tow as filter material.

MAKING TOW
According to Rhodia, after the cellulose acetate tow is produced, it is stretched, and then “you will get this wonderful form, which is folded, compressed, and wrapped with paper, to become a filter rod,” said Collette. “So this rod is cut in small parts and is used as filter tips in cigarettes.”

The primary raw material for acetate tow is wood pulp that has been reacted with acetic acid and anhydride. The result is then turned into acetate flakes and acetate plastics.

While acetate plastics are used as material for photographic films, sheets and surface coatings and inks, acetate flakes are used to make acetate yarn, used for fibers in the textile markets, and acetate tow.

Acetic acid represents 12% of methanol consumption, and methanol pricing has been “relatively volatile” over the past few years, says Neil Tyler, analyst at global investment bank J.P. Morgan.

Despite that volatility, and recent methanol prices see-sawing, acetic acid prices in the US and Europe have been stable in recent months. Prices in Asia-Pacific have also been steady. Local producers in China continued to raise acetic acid prices because of firming feedstock methanol costs, but buyers were in no hurry to restock and the deal volumes remained at previous levels.

The acetate tow industry is highly disciplined, increasing or decreasing capacity depending on regional projections. Reflecting an attitude that the other manufacturers also have, Johnson said: “We’re adding capacity in the regions where the market for acetate tow is growing, and where our customers are growing.”

Thus, while Eastman opened a new 27,000 tonne/year acetate tow plant in Ulsan, Korea, a joint venture (JV) with South Korea-based SK Chemicals – increasing the company’s capacity to 200,000 tonnes/year – Celanese and Rhodia are shuttering, or planning to shut down facilities in Spondon, UK, and Valencia, Venezuela, respectively.

Because of this discipline, says Fitch, the industry has had historically high operating rates of 90-100% for all major players, even through the recessionary environment of the recent economic downturn.

The high capacity utilization also provided the industry with substantial pricing power, despite an equally concentrated customer base, notes Fitch. The cost for a filter represents only 10% of the total variable production cost of a cigarette, but tobacco accounts for over 50% of the cost.

Because tobacco products tend to be high-margin items – and given the small cost base of a cigarette filter in relation to the total costs of a cigarette – the cigarette makers are less likely to focus primarily on the filter costs, which have enabled acetate tow producers to increase prices, says Fitch. Acetate tow prices increased from an estimated average of $4/kg in 2005 to an average of $5/kg in 2009.

MARKET DOMINANCE
The top three acetate tow producers, including their JVs, have more than 80% of the global market. The largest producer is Celanese with a total market share of 42% globally, comprising Celanese’s 24% share outside China and its 18% share in China through its JVs with China National Tobacco, which is considered the largest cigarette maker in the world. Celanese holds an approximate stake of 30% in these JVs. Celanese formed its first JV with China National Tobacco in 1986.

The next-largest competitor is Eastman, which holds a market share of roughly 26%, including its JV with SK Chemicals. Eastman’s stake in that JV is 80%.

The third-largest player is Rhodia with a 17% global market share as of 2008, says Fitch.

Celanese, Eastman and Rhodia have produced cellulose acetate since the 1920s, and started the commercial production of acetate tow in the 1950s, when filter cigarettes began increasing in popularity. Eastman introduced acetate tow to the cigarette filter industry in 1952. “We have a deep customer connect with [this] business,” says Johnson. “Customer relationships do make a difference.”

It is extremely doubtful there will be any more entries into the global acetate tow market. In addition to being highly concentrated, the industry requires substantial investments in facilities and integration into production streams, discouraging newcomers.

Meanwhile, the established players have long-term supply contracts with the cigarette manufacturers, of whom there are really only a handful.

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