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Going Strong

| February 9, 2015

A pioneer in adhesive- and flavor-application systems, Kaymich continues innovating.

By George Gay

A lot of people working in the tobacco industry today have probably never seen cigarettes produced on a maker that uses a paste wheel to apply a starch-based adhesive to the side seam. This is not surprising because, in 1974, C. B. Kaymich Co., which was incorporated only the previous year, launched side-seam equipment designed to apply polyvinyl-acetate (PVA) adhesive through a nozzle. Today, 90 percent of cigarettes are manufactured on machines that use this Kaymich technology. The original unit relied on a gravity feed, but in 1992 the company launched a pump-based system that was to play a major role in allowing cigarette maker speeds to be increased significantly.

It is also not surprising—given Kaymich’s roots in the adhesive-application business, its engineering expertise and its acquired tobacco-industry knowledge base—that in 1990 it became the first company to offer equipment for on-line flavor application. This was the Flavor Dispensing Unit 3 (FDU3) , which comprised a heated system for pure menthol application proportional to machine speed. The FDU3 had a feedback system that could detect and eject out-of-spec products from the manufacturing process, so it offered improvements in product quality and consistency. It provided for a reduction in costs because the system used pure menthol and therefore eliminated the need for alcohol. There was also an increase in productivity because the FDU3 was designed as a mobile device that could be moved between making lines, and because it was possible to run menthol and non-menthol products on one line with a minimum of cleaning between the two operations.

The FDU3—which is no longer in Kaymich’s catalogue but examples of which can still be seen in tobacco factories—represented something of a revolution, but the system applied flavor only onto the paper or the tobacco when they were on the cigarette maker garniture, and then only in what were relatively small amounts. So when the number of flavors used by the tobacco industry started to expand and doses increased, it was necessary to find other application methods. Kaymich now offers a wide range of flavor equipment, including that for applying it to the tobacco in the suction chamber of a cigarette maker, to the filter tow on a filter maker or via the foil on a rewind unit.

Specifically, the company launched its Gemini flavor application system in 2010 and, in 2014, followed that up with the Gemini Baby, the Foil Mentholator and the Bulk Melt System.

Reinvesting turnover

Such a regular flow of innovations is not surprising given that, as Tim Williams, Kaymich’s business development manager, told Tobacco Reporter during an interview in December 2014, anywhere between 10 and 20 percent of the company’s turnover is reinvested in new product development. According to Williams, part of that investment was spent on the company’s own projects, part on working with cigarette manufacturers on bespoke developments and part on developing new systems for OEMs.

The interview, which also included sales and marketing executive Danielle Roxborough, took place at Kaymich’s headquarters, which is located on an industrial estate in the heart of the engineering district of Sheffield, England. All of the company’s employees are based at its Sheffield facility, which has already been expanded twice and provides room for further expansion, though the company also has 18–19 agents and distributors around the world.

Kaymich, which Williams described as a small- to medium-sized enterprise with a flat management structure that allowed it to quickly react to and instigate change, is a family business, though you have to be in the know to spot the family connection in the name. The company was launched in 1973 by Brian Bedford, who bequeathed his initial “B”  to C.B. Kaymich, and who was married to Christine, from whom came the C. The first syllable of Kaymich was their daughter’s name, Kay, while the second syllable was provided by their son, Michael, who now owns and runs the business as managing director.

Brian started Kaymich after developing his revolutionary side-seam system, but nowadays the company designs and manufactures both adhesive and flavor application equipment specifically for the tobacco industry, which accounts for about 90 percent of its turnover. Today, said Williams, the company could provide a system for applying adhesive or flavors to cigarettes at whatever stage of the manufacturing process was appropriate.

The Gemini system, for instance, offers seven different types of applicators, including those for the cigarette maker, filter maker and foil rewind unit. “For some manufacturers this is of particular benefit as they will change the type of applicator used, depending upon what brand they are producing,” said Williams.

“Using Gemini on different makers, for example on different filter and cigarette makers producing different brands, does not necessarily mean the user has to purchase more than one Gemini system. Once application kits bespoke to the host makers are installed to enable flavor to be applied, a Gemini can be wheeled between different making lines and even different making departments, as production requirements dictate. The Gemini is linked up to each maker quickly and easily thanks to self-sealing quick release couplings,” he said.

The Gemini was designed with two 50-liter tanks so that it would be capable of addressing the industry’s need for high-volume, high-speed application. When one tank is exhausted, supply is switched to the second seamlessly, without pausing production, and, at the same time, a warning is generated for the operator to refill the used tank.

Although Kaymich, like other companies, has faced challenges in recent times, Williams said the business was doing well and that the Gemini had comprised a particular success story. In 2014, the company had installed three Gemini systems at one site operated by the Thailand Tobacco Monopoly, a project for which Kaymich representative P Prachume Co. had provided local project management and flawless communications between the customer and Kaymich to ensure that the Gemini systems were configured to meet precisely the needs of the customer. This year the challenge would be to meet the delivery schedule dictated by Kaymich’s general order book.

The key to the Gemini’s success was its ease of use, said Williams. Features such as the shift timer, which allowed for the automatic pre-heating of the device before the start of a shift, and the ability to clean and change in-line filters without stopping production, made the Gemini popular with users. In addition, the Gemini had undergone a number of updates as part of the company’s ongoing Continuous Improvement Program.

Meanwhile, there are a number of reasons why the Gemini Baby could share in this success, said Roxborough, one of which was that not all cigarette manufacturers required the versatility offered by the Gemini. “The Gemini Baby is a cold-flavoring system and therefore suitable for applying flavors in solution only,” she said. “Available options for applying this type of flavor are currently either into the tow on the filter maker—a Kaymich patented design—or into the tobacco on the garniture.”

However, the Baby, like the Gemini, was mobile and easy to use, she added. And the Baby shared many of the Gemini’s core components, so it was able to utilize what was tried and tested technology to provide an entry-level machine for the application of cold flavor without compromising speed or accuracy.

In fact, the Gemini Baby could be upgraded to provide all of the functionality and diversity of the Gemini system, said Roxborough, which meant that the user’s investment was protected since the flavor application technology could be evolved in line with the user’s brands.

The majority of Kaymich’s equipment is used on-line, but its Bulk Melt System is designed for the off-line melting of solids such as menthol crystals. “The system is designed to melt a large quantity of flavor, for example, menthol,” said Williams. “It may be configured for either ‘quick melt’ or ‘slow melt’ depending upon either the quantity of material or the production requirements at the time.

“Fifty kilograms of menthol can be melted from solid in around 45 minutes. Once melt point has been achieved for the entire tank, the system reduces power to the point where the flavor remains fluid, minimizing power consumption and preventing the menthol from degrading. Once melted, the liquid is available for dispensing, the method for which is optional depending upon whether the customer requires bulk dispensing or steady dispensing, said Williams.”

Meanwhile, Kaymich’s on-line equipment can be fitted to new machinery or retrofitted, so it is offered, along with services and training, to OEMs, appropriately-vetted secondhand machinery suppliers and cigarette manufacturers. These products and services are sold around the world and, asked what the company’s major markets were, Williams made the point that no one market was major all of the time, though he said that the expanding markets were generally in Africa, the Middle East and South East Asia.

Broadening interest

An obvious concern for a company such as Kaymich is raised by the bans and restrictions on the use of flavors in cigarettes that are being legislated for in various countries. But for the moment, this concern merely sits in the background because, despite the downturn in general cigarette consumption, the application of flavors—mainly menthol—to cigarettes is increasing. Certainly, Williams was confident enough to say that Kaymich had always been a tobacco-orientated company and that he expected this orientation to remain in place. “It is an area where we hold a lot of specialist knowledge,” he said. “We have good contacts throughout the industry, and we’re involved very closely with our customers, whether they are OEMs or manufacturers or small independents.”

But Williams said also that he could see Kaymich increasingly using its technologies and skills to expand into other industries. In fact, the company has already expanded, in part through diversification. About seven years ago, it bought the company that operated next door, C. A. Grant, which was then a small engineering company involved in general machining and engraving of, among other things, cigarette dies. The cigarette dies part of the business has continued, while the general engineering part has been built up, and Grant, though run independently, supplies Kaymich with some of its components, an arrangement that provides for better quality and improved delivery times.

Currently Kaymich is involved in two partnerships through which it is transferring adhesive application technology from the tobacco industry to the general packaging industry, projects that are, at the same time, providing good feedback. “I think this has proven to be a two-way street because we have also [learned] a little bit more about what is possible as we have had to face up to a different set of challenges,” said general manager Mark White, who stopped by toward the end of the interview. “I think it has helped moving away from the tobacco industry slightly and looking at what other problems are out there in other industries.”

Naturally, most of the opportunities for applying tobacco technology to general packaging are in the field of adhesives. There is not much room for technology transfers in respect of flavor application, though batch systems could have relevance in the food and pharmaceutical industries.

Back with the tobacco industry, Kaymich has been looking, too, at sensing the amount of adhesive being applied in a process, mainly to prevent too little adhesive being applied and sub-standard products being sent to market. There are a few challenges here, not the least of which is discovering just how much of a problem this is, given the sorts of sophisticated quality controls that have been introduced on modern making and packing machines. Nevertheless, Kaymich thinks that a sensing system could have potential providing it could be brought in at the right price.

But it is probably once again in the field of menthol application that the next big breakthrough is likely to come. The mentholator project was probably the single biggest on the table at the moment, said White. Kaymich had given a lot of thought to equipment design so as to cover all bases and make sure that this was not just another me-too product. The idea was that the company would be able to offer a base flavor application system that could replicate what users currently have and also provide a few patentable and clever ideas that could be turned on and off as required by the customer. Most of these additions would carry cost premiums, but they would also carry some quite large benefits for the end-user as well. So at the moment, said White, Kaymich was trying to discover what interest there was in such equipment.

The next generation

| May 29, 2014

Hauni’s new filter maker prepares cigarette manufacturers for the demands of tomorrow.

TR Staff Report

Hauni Maschinenbau has launched a new generation of basic filter makers, the KDF 5, featuring future-oriented functions and “intelligent flexibility.”

“With the KDF 5, we have developed a maker for acetate filter production that offers unprecedented performance even in its basic version,” says Klaus Masuch, Hauni’s group manager, product consulting.

Since discontinuing its KDF 2E a few years ago, Hauni has been serving the 500 meter-per-minute segment with rebuild machinery. “The KDF 5 now allows us to offer a future-proof machine with a highly attractive price-performance ratio, which can be adapted flexibly to the specific manufacturing needs of the customer,” says Masuch. “The wide range of optional extras available means it is already well-prepared to meet the future challenges associated with a rapidly expanding number of filter types.”

During the development phase, Hauni drew heavily on the innovations and know-how it has accumulated over 40 years of working on filter makers (see sidebar) as well as the extensive input of technicians, customers and trainers. These insights and technologies are reflected in new technical features that, when combined with components already used successfully in other machines, ensure the KDF 5 achieves new levels of performance, efficiency and operating comfort.

Filters of the future

The many adjustments Hauni made during the development phase to optimize its new product include the first-ever use of a directly driven knife carrier, easily adjustable glue guns and improved accessibility through a new, wide-opening door design.

“Above all, it is the many incremental improvements that have made the KDF 5 a standard machine capable of rising to the ever-greater challenges of future filter production,” says Arne Klisch, product consultant, engineering, at Hauni.

“Starting with the principle that less is more, we decided to focus on the core functions and make the machine design as operator-friendly as possible.” Thus far, the reaction from Hauni’s customers has been positive. A recent test, conducted at Japan Tobacco International’s (JTI) factory in Trier, Germany, suggests that Hauni has done its homework. The Trier factory field-tested the KDF 5 from September to November 2012. For JTI, flexibility was one of the key investment considerations. Changing the filter length in the basic version of the KDF 5 takes just 70 minutes, including the subsequent production approval. By comparison, this format change takes 120 minutes using the standard version of the KDF 4. “The whole production line can be converted in record time when combined with the corresponding Hauni tray logistics,” reports Klisch.

Flexport: one platform for every solution

Today, economically optimized filter production offers more than high machine availability and consistent quality in the manufactured products. “Naturally, the KDF 5 from Hauni meets these requirements just as effectively as all the machines we have brought to market over recent decades,” says Masuch. “But filter production is in a state of change. More and more variants are already required to satisfy the need for product differentiation, which in turn demands new manufacturing technologies.”

To ensure that its customers have a platform for this and all future solutions, Hauni’s development team has spent the past few years developing the Flexport concept. The name says it all: The machine concept consists of a basic and a functional module and aims to achieve the maximum degree of flexibility—particularly in relation to the special filters of the future. The basic module is placed between the tow processor and the rod maker, and the various functional modules are then integrated into this base module. Integrable modules are, for example, granule application, thread application or channel ventilation modules. The available interfaces have a universal design that offers scope for integrating existing and future developments.

At the same time, Flexport optimizes the convertibility of filter makers by permitting quick function changes. Gunnar Tons, head of product management, filters, at Hauni, has a clear answer when asked about the future direction of customer requirements in filter production: “They are looking for flexible solutions for use in the filter-rod manufacturing process. Flexport is our response to this challenge.”

The concept of an open portal, which has been realized through the development of Flexport, also reduces the time to market for new products. “During the development process, we focused very clearly on increasing the flexibility of the means of production,” explains Klaus Masuch. The time required for changes between a special and a mono filter specification has been cut dramatically compared to standard processes.

First modules in the starting blocks

The first functional modules for Flexport will be in operation in customer production lines this year. The Flexport modules enable the customer to give the cigarette a unique design and thus support brand identity. According to Klisch, the three modules completed so far are just the beginning. “With Flexport, we have created an open portal that offers many possibilities for the future. It reduces the time required for format changes while the machine is operating as well as the total investment costs compared to previous individual solutions. We will continue to consult closely with our customers in order to extend and tailor our range of modules to their needs.”

Sidebar 1
Hauni and filter manufacturing—a rich history

Hauni has a long tradition in the design, production and supply of filter-manufacturing equipment. Approximately 75 percent of all the filters used in cigarettes around the world are now manufactured using machines from Hauni. Below are some of the highlights.

1967: Hauni presents its first filter making line: the AF-KDF.

1974: Hauni develops the AC, a charcoal feeder for filters.

1975: Hauni presents its first multifilter maker.

1980s–1990s: Hauni continues to develop its machines, increasing production speed to a maximum of 600 m/min.

1990: Hauni offers the CU20, a machine for the production of crepe filters, through its subsidiary Decouflé.

2003: Hauni launches its Merlin multifilter maker, which can produce filters with between two and four segments plus recess.

2009: Market launch of the KDF-M double track filter rod production line with a speed of 1,000 m/min.

Sidebar 2

Basic model KDF 5: the functions at a glance

  • Extended-length format
  • Low format height
  • Glue-gun spraying (optional)
  • Above-garniture gluing/seam glue
  • Quick length change
  • Extended tow characteristic curve through U-style tow opener
  • Oil-free
  • <77 dB(A) noise emission
  • Thermoelectric sealer section chilling
  • Single cooling circle
  • ODM (optional)

 

Counterproductive

| May 29, 2014

Anti-tobacco activists campaigning against tobacco companies’ social responsibility initiatives in India may do more harm than good.

By George Gay

For people such as I, who live in the U.K., where you vote in a general election on one day and wake up the next morning to hear the result, India’s election process gives pause for thought. Look at it this way: Whereas I am beginning this story just after the start of India’s national elections, you will possibly be reading it before they are through. It apparently takes more than six weeks to complete the process.

And little wonder: More than 800 million eligible voters have to cast their ballots at about 930,000 polling stations before it’s all over. So while in the U.K. you will often find yourself outnumbered at the polling station by officials and exit pollsters, in India, you are more than likely to be standing in a long queue.

And whereas election campaigns in the U.K. are mostly calm, almost staid at times, in India they can be boisterous—to the point where, this year, the election commission chief was quoted in The Guardian as saying his biggest anxiety was ensuring six weeks of rolling elections passed off with no disasters, “man-made or natural.”

The dynamic democracy that India has is a huge source of pride, and it is often used as a reason for explaining away aspects of what goes on in the country that outsiders find difficult to fathom. One example of this from the tobacco industry concerns the fact that flue-cured production, though officially the subject of Tobacco Board of India targets, is usually boosted by over-target leaf that is sold officially through the board’s auction system, albeit these days, subject to some sort of penalty. In the past, when I questioned why this happened, I was told that it was not possible to stop people from growing flue-cured because India was a democracy.

Some might see such a situation as more anarchy than democracy, but I have to say I admire the Indian way. A good helping of flexibility and its poor cousin, muddling through, must be needed in such a huge, populous and diverse society.

Excluding the industry

Of course, in such a society, there will always be times when the individual will feel frustrated by democracy, as anybody who has driven on some of the country’s motorways will appreciate. And I would imagine that, right now, some tobacco people will be ruing the day that public interest litigation (PIL) was introduced to India some 35 years ago. PILs, on the surface at least, are democracy squared. They provide a way for individuals and organizations that might not otherwise have the resources to air in court issues that they believe the government has failed to address in the interests of the public.

And so it is that, as I write this piece, a PIL is being heard that seeks to have tobacco manufacturers excluded from corporate social responsibility (CSR) initiatives. According to a story in The Times of India, this PIL, which was foreshadowed some time ago, was filed by S. Cyril Alexander, the state convenor of the Tamil Nadu People’s Forum for Tobacco Control. In it, he points out that, since April 1, companies in India have been required to spend 5 percent of their after-tax profit on various welfare, development and relief activities. And in return, the companies are allowed to use their brand names and company logos as part of these activities in order to create brand recognition and goodwill.

While welcoming in general the requirement that companies take part in CSR activities, the PIL adds that allowing the tobacco industry to be included would result in the promotion of its brands and thereby run counter to the purpose of the scheme because government expenditure on health, the environment and social welfare would be increased.

In the case of the tobacco industry, the PIL says, companies should instead pay the 5 percent levy to state and central governments for meeting the medical costs of people affected by tobacco products, and for furthering the National Tobacco Control Programme (NTCP) initiatives.

I am not sure how such a PIL, if accepted by the courts, would play out. I would have thought that current tobacco control legislation would have prevented tobacco companies from promoting tobacco brands anyway, though I would concede that some—but by no means all—corporate branding might prove to be more of a problem.

And I wonder which companies might be affected by such legislation, given that the PIL apparently talks about the tobacco industry. Would filter and tobacco-product packaging material companies, for instance, be excluded from the CSR scheme?

Delinked

And the big question is, perhaps, would ITC be excluded? Although the company is now highly diversified, and while its name no longer mentions tobacco, nor, I suppose, implies a tobacco connection (the 1910-incorporated Imperial Tobacco Co. of India became, in 1970, India Tobacco Co., then, in 1974, I.T.C., and, finally, in 2001, ITC), it is the biggest cigarette manufacturer in the country by a long way.

Not that some of India’s younger generations—a big slab of the country’s population—would necessarily link ITC with tobacco. The company has gone some way—whether by design or not—to expunge tobacco from its image, though not from its revenue and profits. If you take a look at its brands booklet, you could be forgiven for thinking that the company doesn’t make cigarettes. The booklet doesn’t mention tobacco or cigarettes, nor are there any images of tobacco products. In fact, the only tobacco vestiges are the brand names appropriated from cigarettes to boost the company’s apparel and personal care businesses.

Meanwhile, in March, a press note appeared on ITC’s website that said the company had been voted among the top two “Buzziest Brands in the Corporate category by ‘afaqs’, one of the world’s largest marketing and advertising portals.” And it took the opportunity of the Annual Buzziest Brands Awards to talk about its corporate brand and its consumer brands. “ITC is one of India’s most trusted and valuable corporates,” it stated. “Its world-class brands delight millions of Indian households. With quality and trust as its trademarks, ITC’s FMCG portfolio consists of over 50 vibrant brands. ITC’s brands like Aashirvaad, Sunfeast, Dark Fantasy, Delishus, Bingo!, Yippee!, Candyman, Mint-o and Kitchens of India in the Branded Foods space, Fiama Di Wills, Vivel and Engage in Personal Care, Classmate and Paperkraft in Education & Stationery; Wills Lifestyle and John Players in apparel, Mangaldeep in Agarbattis and Aim in Matches are popular across the country.”

Again, not a word about tobacco products, though they come under the FMCG portfolio. And if you look at the press release issued by ITC on Jan. 17, in respect of its financial results for the three months to Dec. 31, 2013, again it would be easy to miss the fact that ITC makes cigarettes. Cigarettes rate only one mention, and that has to do with the fact that taxes/duties on them were increased. It is only when you click on the bottom of the release and go to the figures that you see, in the final table, that cigarettes are the mainstay of the company.

Of course, while some of the younger members of the general public might be surprised to find out that ITC is a tobacco company, the fact that its diversifications have been built on tobacco wealth is not going to get by the Tamil Nadu People’s Forum for Tobacco Control.

Good business sense

So does this mean that ITC would be made to give up its CSR programs if the PIL were successful? I would hope not. A lot of the extensive CSR activities that ITC is involved in simply make good business sense in the environment in which the company operates, and they make good environmental sense, as has been recognized by organizations better placed than I am to judge such matters.

In March of last year, ITC stated in a press note that it was ranked No. 1 for the second consecutive year in the CSR category of the Nielsen Corporate Image Monitor 2012–2013.

ITC’s top position in the category Most Active in CSR was “an acknowledgement of the scale and impact of its sustainability initiatives which had created large scale livelihoods and augmented natural resources,” the company said. ITC’s businesses had created sustainable livelihoods for 5 million people, many of whom belonged to the poorest sections of society. The company’s performance on augmenting scarce natural resources, as well as combating climate change, had been globally recognized. ITC was the only company in the world to have been carbon positive for seven years in a row, water positive for 10 years consecutively and solid-waste recycling positive for five years consecutively. All of its luxury hotels were LEED Platinum Certified by the U.S. Green Building Council. Renewable energy constituted nearly 40 percent of its total energy consumption.

As part of its 360 degree interventions in rural agricultural communities, ITC had constantly endeavored to strengthen and diversify livelihood options through both farm and off-farm activities. Its e-Choupal, the world’s largest rural digital infrastructure, had empowered more than 4 million farmers. And its integrated Watershed Development Programme had provided soil and moisture conservation to farmers in water-stressed areas and helped promote sustainable agriculture, apart from contributing to the company’s water-positive status. This program covered more than 100,000 ha of water-stressed areas in rural India.

Meanwhile, ITC’s Social and Farm Forestry Programme, which helped rural wasteland owners convert their land into pulpwood plantations, had greened more than 140,000 ha while creating livelihood opportunities for poor tribal members and marginal farmers. The plantations had also sequestered more than 4,380 tons of carbon dioxide and played a major role in maintaining ITC’s carbon-positive status during the past seven years.

ITC said its business linked sustainability initiatives together with its social investment programs and had had a transformational impact on rural India. Its Livestock Development Programme had provided animal husbandry services to over 800,000 milch animals, thereby providing additional income avenues for farmers. And its Women’s Empowerment Programme had created sustainable livelihoods for more than 40,000 rural women, while its Primary Education Programme had benefited more than 300,000 children.

Winners and losers

That is quite a record, and you have to ask yourself who, given that ITC apparently goes to some length to apply a light touch to its tobacco brands, would benefit from a requirement that it could no longer involve itself in CSR projects. Or perhaps that question should be asked in a slightly different way. Given the morality test often used: How many people would benefit from taking such action against ITC and how many would lose? I don’t know—and nobody else knows—how many would benefit, because to benefit somebody who would have been drawn to tobacco use if ITC had been allowed to continue its CSR programs using its ITC logo would have had to have remained tobacco free because those programs were curtailed—a difficult number even to guess at.

The number of people who might lose is easier to quantify roughly. Some of them are hinted at above, though, clearly, even if ITC were no longer able to carry out CSR activities, at least some of its programs would continue, though not under a CSR banner.

And, as I wrote in 2010, the number of people who require the sort of leg up that ITC provides is huge. India is creating an additional 20 million people each year, so, just to stand still it needs to create more, lots more, of everything. “Feeding this growth is a major issue, but the biggest question of all is how can such growth be achieved and maintained in a sustainable way—a question to which ITC has been applying its creative resources for some years,” I wrote four years ago.

“This is a bold and, at times, frustrating mission to pursue. Bold, because ITC is a group that is not interested simply in changing over to low-energy light bulbs, commendable as such an effort would be; this is a group dedicated to what it terms the Triple Bottom Line philosophy of social, economic and environmental well-being—one of the only groups in the world, if not the only group, to be water positive, carbon positive and 100 percent solid-waste-recycling positive.

“But it must be frustrating at times because the size of the company and some of its 13 businesses tend to attract negative publicity in respect of social and environmental issues—the very areas where they excel. Take the group as a whole: It is still headlined by its tobacco division and therefore still burdened with all of the negative publicity that that entails.”

As the last sentence from 2010 indicates, opposition is nothing new. It blows hot and cold and, for all I know, the PIL might prove to have been a storm in a teacup. But the PIL does provide, I think, a good example of the dangers of unintended consequences.

Hedging their bets

| May 29, 2014

As the tobacco market becomes more challenging, some leaf traders are diversifying into other lines of business.

By George Gay

In announcing in February Universal Corp.’s financial results for the third quarter to the end of December, George C. Freeman III, the chairman, president and CEO, said in part that a very preliminary look ahead at 2014 crops indicated there would be increased production in some origins. “At the same time, there are possible reductions in cigarette manufacturers’ needs due to lower cigarette sales in Europe and the United States,” he added.

Now, as I sit down to write a story about leaf supply, it’s not possible to draw too many conclusions from these remarks, but I get the idea that, right now, I’d be better off as a buyer of leaf tobacco than as a seller. But nothing is certain because, as Freeman said also, Universal operates in “uncertain global markets.”

The whole business of growing leaf tobacco and getting it to tobacco-product manufacturers is fraught with uncertainties that start with the weather and that might end up with weather’s bigger, meaner brother: climate change. But taking a slightly wider view, there are the issues—some leaf-industry positive, some neutral but mostly negative—of urban migration, tobacco-grower aging, the World Health Organization’s Framework Convention on Tobacco Control, crop financing, environmental responsibilities, health and safety regulations, NTRM, vertical integration, controlled air fumigation, tobacco expansion, anti-tobacco regulation, population growth and female emancipation. And no doubt there is any number of other factors unknown to me.

I would imagine that it would be easy to drive yourself mad trying to factor all of the above variables into estimations of how much leaf of what types and varieties need to be grown where, and I have no intention of messing with my sanity. In any case, it is sometimes much easier and much more informative to sit back and watch what people in the business are doing. For instance, just as I was finishing the first draft of this story, Universal announced that it had entered the fruit and vegetable food ingredients market through its new subsidiary, Carolina Innovative Food Ingredients (CIFI). Initially the business is set to focus upon value-added ingredients derived from sweet potatoes.

“Universal continues to seek out growth opportunities that enhance our company’s value and help to sustain tobacco growers,” Freeman was quoted as saying. “With this new business, we will be able to offer high-quality food ingredients to the food and pet food manufacturing industries while providing tobacco growers with a new market for sweet potatoes. Nearly half of U.S. sweet potato production comes from North Carolina and they are often grown in rotation with tobacco.”

This surely is a great initiative that potentially edges Universal and some of its growers in the direction of a more sustainable future. After all, governments are nagging people to eat more and more helpings of vegetables and fruit each day while making it increasingly difficult to obtain and enjoy tobacco.

Alliance One International (AOI) has also been busy edging in new directions that seem to give pointers to the future. On March 12, an AOI press note described how the company’s Turkish subsidiary, Alliance One Tütün (AOT), and Öz-Ege Tütün Sanayi Ve Ticaret (Öz-Ege) had entered into a joint venture, Oryantal Tütün Paketleme Sanayi (OTP) located in Torbali, Izmir, Turkey. Under the joint venture, AOT and Öz-Ege will contract with OTP for oriental tobacco processing and storage, while continuing to maintain separate farmer contracting, agronomy, buying and selling operations.

In announcing the joint venture, Mahmut Özgener, the chairman of Öz-Ege’s board of directors, said that Turkey was the world leader for high-quality, aromatic oriental tobacco, a key ingredient in many cigarette blends around the globe. “To drive improved value for our customers, we have developed this processing and storage joint venture in our modern, efficient facility,” he said. “We look forward to the mutual benefits with AOT that this joint venture solidifies.”

This venture seems to underline the importance and potential further importance being attached to classical oriental tobacco production. Classical oriental will become an increasingly vital ingredient of American-blend cigarettes should regulators introduce more cigarette ingredient restrictions.

And the venture perhaps hints at the fact that, even given a slight hiccup in 2013, the demand/supply situation for classical oriental is pretty much in balance without much room for production increases. Indeed, classical oriental farming, perhaps even more than the farming of other types of tobacco, well illustrates the drift of people from the countryside to the cities and the reluctance of young people to become involved in farming.

Then, on March 31, in another press note, AOI described how its Brazilian subsidiary, Alliance One Brasil Exportadora de Tabacos, and China Tabaco Internacional do Brasil, the Brazilian subsidiary of China Tobacco, had formed a new joint-venture company, China Brasil Tobacos Exportadora, in Brazil. The importance of this joint venture is not difficult to spot. China has the world’s biggest cigarette market and is one of the few markets to be growing, partly because of the country’s growing population and an increase in smoking prevalence among women.

I understand also that sales of cigars in China are booming, though from a very low base. Currently, I am told, this boom is mainly being met by local leaf tobacco, though with limited amounts of imports being used for higher-quality local products. If the boom continues, there will be increased demand from China also for cigar tobaccos.

Finally, on April 7, AOI said that one of its subsidiaries and an affiliate of IOTO International had completed the formation of a U.S.-based joint venture, IOTO E-Liquids America, located in Greenville, North Carolina, USA. The joint venture is owned equally by the partners and produces a variety of flavored liquids that are sold to the growing customer base that markets and distributes e-vapor products. Again, no prizes for guessing the significance of this announcement. Given that e-cigarettes are improved, and given that regulators don’t destroy them, they, and therefore e-liquids, have the potential to sell in huge numbers. But the shift from tobacco cigarettes to e-cigarettes is going to have an effect on leaf-tobacco demand that will go beyond mere volumes, and it will have to be managed.

Cost control

When I mentioned above some of the factors that affect leaf-tobacco demand and supply, I missed one very important factor: price—or cost, depending on which side of the transaction you sit. This is clearly a significant oversight, because when I asked a medium-sized leaf dealer in March what, in general, were the factors currently affecting the global market for leaf-tobacco demand and supply, he had no hesitation in saying the biggest factor was the price pressure from all manufacturers. “They just keep driving down prices on leaf to keep profits up,” he said. “The margins for growers and dealers are thin to a breaking point. How long this can continue before the supply chain collapses is the big question.”

This raises another question too. Why is it deemed acceptable that a tobacco grower sometimes ends up earning less for his tobacco than he did the year before? How efficient would any of the big cigarette manufacturers be if their employees never knew from year to year whether they were going to earn more or less than they did the previous year, whether their head of marketing could afford the childcare that allowed her to turn up at the office?

And this is no idle question. In the U.K. these days, a lot of big corporations (I have no idea whether tobacco groups are included) “employ” people on zero-hours contracts so that those people don’t know from day to day how much they are going to earn, or if they are going to earn anything.

What happens, though, if one raises the issue of tobacco growers being paid less one year than they were paid the previous year? Well, Zimbabwe’s growers found out this year. During question time at the National Assembly, Deputy Agriculture Minister Paddy Zhanda apparently said that the international market determined the price of tobacco. “Tobacco is unlike maize, where government announces prices,” Zhanda added. “The price of a commodity which is not controlled is set by supply and demand.”

Of course, Zhanda’s statement makes it clear that the “market” does not have to rule. And it invited the question of whether tobacco should be treated like maize: whether price controls should be set. But his answer was less than encouraging as, according to one report, he insisted it would not be “prudent” for government to set a minimum price for tobacco. I wonder what he meant by that.

But surely, price controls of some type would be just as appropriate in the case of keeping tobacco prices up as they are in the case of keeping maize prices down. Maize is a staple food in that part of the world, while tobacco, we are constantly told, is internationally a staple killer.

Something needs to be done. It seems unfair to the point of immorality for poor tobacco growers in Zimbabwe to be paid lower prices for a material that is going to go into a product that will be sold at higher prices and deliver higher profits to tobacco manufacturers, and higher dividends to their shareholders.

Oh, and of course, don’t forget the question of the supply chain.

 

The right direction

| May 1, 2014

BAT moves ahead with less risky tobacco and nicotine products, even as regulators remain ambivalent.

By George Gay

In its Sustainability Summary report published earlier this year, British American Tobacco (BAT) says that, despite the known risks, many people choose to continue to smoke. “But some want alternatives, and as a leading tobacco company we are well placed to provide them,” the report states. “We invest over £160 million [$268 million] each year in R&D, including extensive scientific tests and trials into new less risky products.”

This is all true. BAT has been researching less risky products for a long time—certainly since well before e-cigarettes were widely marketed—and has spent a huge amount of money on this quest. It has been as open about its research as it could have been expected to be, given that it is a commercial enterprise operating in a competitive market. It has engaged in discussions on harm reduction whenever and wherever it has been allowed to do so. And it is upfront about the quest for less risky products being about good business, as well as good health. “And, while tobacco remains at the core of our business, we see emerging opportunities in nicotine products—as an area for business growth, as well as benefiting public health through offering smokers less risky alternatives,” said CEO Nicandro Durante, in a Q&A included in the summary report.

I assume that what Durante is saying here is that the new nicotine products are going to be more profitable than are the products that BAT has traditionally sold; otherwise, he would seem to be suggesting that these new products might be initiation products, which would probably be unwise at the moment.

But then again, maybe he is suggesting that there will be some initiation with these products, and, if he is, I think he deserves a round of applause. We do at some stage have to be grown up about what adults get up to, because at the moment things seem to be heading the other way. In an interview published in New Scientist magazine, Sally Davies, the chief medical officer for England, was asked: What is the biggest health challenge that we face in the U.K.? And she replied that it was the normalization of unhealthy behaviors, in which she included eating to the point of obesity, drinking too much and vaping.

Do you notice the slippage here? In the days when all the artillery was pointed at tobacco, smoking and smokers were normal and had to be denormalized. Now, denormal is the default setting for certain government-identified adult behaviors and those who take part in them, and so to indulge in them with a reasonably clear conscience, consumers have apparently had to normalize them. This is fiction. Drinking too much, almost by definition alone, is not normal.

Having said that, I have some sympathy for Davies’ position. Clearly, it’s not good for a country’s productivity if a large part of what should be its workforce is too fat and/or too drunk to stagger out of bed in the morning. But the trouble is that there is a tendency for the government to set the bar too low, if you know what I mean. The government’s advice is that I should drink no more than 3–4 units of alcohol a day, which is the equivalent, I’m told, of a pint and a half of beer with an alcohol content of 4 percent. Now I have just gone to my cupboard and pulled out a bottle of fine Theakston’s Old Peculier, and I see from the label that it is 500 mL of 5.6 percent alcohol beer. Does anybody have a calculator? May I drink the whole bottle tonight, or must I keep some for tomorrow?

The bar for overeating also would seem to be set too low. I have a colleague who delights in referring to me as “scrawny,” but, in fact, if I test myself on the government’s body mass index scale, I’m on the cusp of being fat.

But the worst and most damaging bit of Davies’ reply was that to do with vaping e-cigarettes. Finally, we have a product, the use of which, as far as can be known at this stage, is hugely less harmful than traditional cigarettes, that works for many people as a substitute for smoking. And yet the aim of the U.K. government, apparently, is to denormalize the product, or, rather, in its world, to reverse the normalization process that has occurred.

Such a policy might make sense if it were the case that doing away with e-cigarettes would lead people into a fresh dawn of abstemiousness from where they would forsake all indulgent behaviors, but from where I’m sitting that isn’t going to happen. And yet it would seem that the U.K. government, which, in some ways, has taken a relatively enlightened view of e-cigarettes so far, seems to be joining the ranks of those who want to take decisions out of the hands of people who are proving perfectly rational in respect of whether they stay with traditional cigarettes or move on to e-cigarettes.

Rational choices

And this makes me wonder about the first sentence of the quote used at the start of this piece: Despite the known risks, many people choose to continue to smoke. How much longer, I wonder, will it be before somebody starts looking at how such choices ever became normal?

I suppose the obvious answer is “when the government finds a revenue source to replace that of traditional cigarettes, so it would be best not to hold your breath.” Nevertheless, there are already signs in some countries, including the U.K., that this particular choice is being looked at. At the end of March, leading U.K. doctors called for a ban on cigarette sales to people born after 2000. In part, this suggestion has merit because it would allow cigarettes to be faded away. And while it is difficult to see how the idea might work in practice, the suggestion is out there, and it has to be remembered that where tobacco is concerned, a lack of practicality or even rationality is no bar to an idea’s being accepted.

Indeed, on April 3, BAT, which is usually most restrained in its public pronouncements, was given to suggest that a conclusion drawn from a U.K. report on standardized packaging defied logic. BAT’s argument was that while the report, drawn up at the request of the government, had said there were limitations to the evidence currently available on standardized packaging, it had said also that such packaging could be an effective measure for public health in the U.K. I suppose the report could have added that such packaging might not be an effective measure.

On the same day, the smokers’ group Forest said that whereas it made sense for the government to take time and consult further, it seemed perverse to commit to a policy before those discussions had taken place. Forest’s comment came after the public health minister, Jane Ellison, had said that while the government was currently minded to proceed with standardized packaging, it would conduct a final short consultation.

Beyond shareholders

What this underlines, I think, is the need for BAT and other tobacco companies to move as quickly as possible to increase sales of innovative products. And BAT seems to be intent on doing just that. It is developing a new range of innovative, less risky tobacco and nicotine products, including e-cigarettes, heat-not-burn devices and reduced-toxicant cigarettes.

And its Sustainability Summary (http://doiop.com/batreport) kicks off with the words: “As our company is evolving and changing, so is our approach to sustainability. We have sharpened our business strategy, putting a much greater emphasis on sustainability. This Summary Report focuses on our three key areas of harm reduction, sustainable agriculture and corporate behavior.”

This is interesting because it makes you reflect on how much the industry is changing. In fact, the process of change has been going on for some time, at least from the point where tobacco companies started to accept publicly that tobacco use involved certain risks. But to start with, change was fitful because the industry was finding its way and, it has to be admitted, some old, less desirable practices were difficult to stamp out. And let’s face it, there is still some way to go. But I cannot help thinking that most of the changes are now heading generally in the right direction and would be difficult to reverse.

In fact, it now seems to be the case that it is many of the tobacco industry’s critics who find themselves floundering in the river of change. This seems apparent from the sometimes irrational reactions that occur in respect of products such as snus and e-cigarettes.

Of course, much of the BAT report will be dismissed by the industry’s critics as a bunch of fine words, and it is, but give it a fair hearing and I think you’ll find it is more than that. I was much taken with this quote included in the Q&A with Durante: “It’s about creating shared value and making sure that what we do as a business doesn’t just benefit our shareholders, but can also have a much wider, positive impact for society.”

Again, the reaction might be that BAT would say that, wouldn’t it? And I, as chief cynic, would sometimes agree. But there was no need for BAT to include such a sentence. And it didn’t just slip it in there as something that seemed like a good idea at the time. Multinational companies the size of BAT don’t talk about operating their businesses, so they don’t “just benefit our shareholders” without thinking that idea through.

As I said above, there is a sense that change is going in the right direction and is irreversible. BAT is clearly confident that its sustainability feedback loop—in operation for some time now—is fully working. And why shouldn’t it be confident? It almost stands to reason that if the sustainability settings for the likes of tobacco growers and consumers are correct, the benefits feed back automatically into the business machine and the output for shareholders is pretty much assured.

Sweet solution

| May 1, 2014

Alliance One is helping Kenya reverse deforestation.

By Robin Sutton Anders

The lush forests that once spread across Kenya’s landscape are now vanishing at an alarming rate. While environmental impacts of deforestation border upon dismal, the lack of trees also threatens the entire country with drought.

Today, the Kenyan government seeks to save its country’s green by constitutionally mandating an increase in forest cover from its current 1.7 percent to 10 percent by 2030, and Alliance One International is stepping in to help. As an independent leaf tobacco merchant that purchases tobacco in more than 45 countries—with a strong network of flue-cured growers in Kenya—Alliance One has good reason to accept the challenge.

“We would like to de-link tobacco from any form of deforestation and to sustain the environment in our growing regions,” says Francis Chege, deputy managing director of Alliance One Kenya. “Our main focus is to progressively reduce the use of firewood used for curing tobacco and ensure the wood that is used originates from a sustainably grown source. We believe this can be achieved through commitment and collaboration with the national government and other stakeholders.”

Starting with a program that helps growers cure their tobacco with sugarcane waste material instead of wood and continuing on to a reforestation program that has resulted in the annual planting of 4 million trees, Alliance One’s work has met with growing success—and has received international acclaim.

Innovation from within

Alliance One’s first reforestation strategy calls on the region’s surrounding crops. The idea of bagasse briquetting, or using a sugarcane waste product to produce a combustible wood alternative, was originally brought to management’s attention by Valentine Ogongo and James Gichuche in the company’s agronomy department.

“One of our core values is to ‘pursue innovation and excellence,’ and this stood out as an obvious example,” says Chege. “We immediately approached local sugar factories to get their buy-in. Then the Kenya management team presented a proposal to our corporate office, which immediately approved the initial investment for the test phase.”

The concept behind substituting traditional wood in tobacco curing barns is simple: Unlike wood, where one piece can burn differently from the next, briquettes burn uniformly. “Tests have proven that briquettes can be used as a fuel replacement without affecting the quality of a tobacco leaf in a flue-cured curing barn,” says Chege. “The controlled flame—and temperature increase—actually gives the farmer more control, resulting in a steady tobacco cure.”

And while briquettes can be constructed from many biomass materials, including dust, rice husks and coffee husks, Alliance One used sugarcane because bagasse has a high calorific content. “That means fewer briquettes are required to cure a hectare of tobacco in a barn, compared to other products,” explains Chege.

Plus, three sugar factories operate in Alliance One’s growing area, so the crop presents a viable long-term sustainable source of raw material. “The strong sugarcane farmer base helped us to get the briquettes to tobacco farmers quickly to replace the wood required as the standard fuel for curing,” Chege says.

Additionally, bagasse briquetting offers a sustainable solution for the disposal of sugarcane waste. “Until the idea of briquetting started three years ago, the sugarcane factories used a small volume of bagasse waste to fuel their boilers, and the excess was disposed of at a cost,” Chege says. “But now, there is a commercial value attached.”

He adds that not only do the briquettes save farmers money, they also save on the amount of time growers spend cutting, transporting, splitting and stacking firewood. “The briquettes are delivered to the farmers by the company. The farmers have not had to make any changes to existing barns, as briquettes are cut to the right size from the factory to fit the furnaces in their current state,” Chege says.

Bagasse challenges

Bagasse integration, however, is not without its “teething problems”—the phrase Chege uses to describe the challenges faced by Alliance One. “The challenges were mainly technical in nature,” he explains. The first of which is sugarcane’s composition: If not decomposed, the large, fibrous form of bagasse can quickly degrade machines.

To discover how to most effectively preserve its machinery, Alliance One conducted extensive tests to see how production could be improved to accommodate bagasse’s stringy makeup. “We found that after breaking down the size of the material using a hammer mill, production increased by around 25 percent, and the machinery experienced less trauma,” Chege says.

The transition from firewood to briquettes also required buy-in from the farmers. “Their main concern was in storage of the briquettes,” says Chege. “Briquettes easily disintegrate if exposed to wet conditions, and therefore have to be stored in-house or under an enclosed shed. We put in a condition that farmers must provide storage to qualify for use of briquette.” Chege says farmers were willing to provide the infrastructure in exchange for the cheaper and more efficient fuel alternative.

“We can confidently affirm that, having seen the cost-cutting and reduction in labor days, the farmers are now accepting the new concept,” says Chege. After having gone through the initial trial of running bagasse through briquette machines, Alliance One is comfortable with expanding its investment and commitment.

Environmental sustainability

During the project’s test phase, which ran from January through August 2013, Alliance One saved 2,666 trees through the production of more than 200 metric tons of briquettes from bagasse. And that’s just the beginning, says Chege. “Our intention is to expand our investment in briquetting plants from curing 50 percent to 100 percent of the Alliance One portion of the current 12 million kilos [of] production volumes by 2015,” he says.

In this first year of full production, Alliance One hopes to produce about 7,500 metric tons of briquettes, enough to cure 1,664 hectares of tobacco. If that figure were realized, the company could spare 40 hectares of trees in the first year alone.

“The introduction of a briquetting plant was an expensive venture in terms of cost,” Chege says. “However, the long-term savings far outweigh the costs.” If the company meets its eventual target of 34,944 tons of briquettes each year, then 186 hectares, or 465,919 trees, would be preserved.

Farmer savings

While environmental sustainability was the original target, Kenyan farmers have also realized the added benefit of significant savings to their operations. To cure one hectare of tobacco with wood costs growers $610, whereas to cure the same amount with briquettes only costs $418.

Alliance One believes this project will also have a significant impact on household energy requirements by providing an alternative fuel for domestic cooking and heating. “The more bagasse being used, the less pressure on forests since households will not have to cut trees for their domestic needs,” says Chege. “That alone would go a long way in helping the country achieve its target of 10 percent land cover under forest by 2030.”

Tree restocking

Alliance One International employs a robust agronomy department that includes professional agronomists, foresters and technicians who work directly with farmers to aid in another of the company’s missions: to plant 4 million trees a year.

“The reforestation program started in 2003,” says Chege. “To date, we have planted over 30 million trees, with 23 million surviving.”

AOI Kenya manages 22 nurseries across the country. To ensure its reforestation target is met, the company sells the seedlings from these nurseries to tobacco, commercial and independent farmers at 2 cents each. “We also donate tree seedlings to schools, government institutions and non-cultivated government areas for reforestation.”

Not only does the program get the government closer to its target, it also helps growers from a financial perspective, as they have the availability of tree seedlings to grow as a cash crop or for domestic use.

Alliance One’s tree experts offer specific guidelines to growers for how to select the type of tree seedlings, how to plant the seedlings, how to care for them during the rainy season, how to determine the appropriate fertilization regimen and how to effectively apply certain pesticides. “This is in order to achieve self-sufficiency for tobacco at the same time, assisting with reducing domestic consumption,” says Chege. “The program has been very well received by farmers as a continuous sustainable wood source.”

Future initiatives

Alliance One may still be in the initial roll-out phase of the bagasse project, but the company is already looking ahead to solar energy-assisted curing barns. “These curing barns are currently in the research and development stage,” says Chege. “One of the initiatives is the ongoing conversion of conventional barns to more efficient rocket barns in order to reduce curing’s fuel usage.”

According to Chege, the company is also partnering with a nongovernmental organization to introduce energy-saving cooking stoves and solar lamps for lighting within its farming communities. “Through commitment and collaboration with the national government and all other stakeholders—and by investing in reforestation—we not only protect the future viability of the tobacco crop, but we also help protect the natural resources and biodiversity of the country.”