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The world's hottest tobacco product: vapor

While cigarette sales volume slipped 0.4 percent worldwide in 2014, the global vapor tobacco industry nearly doubled in size to $6 billion from 2013 to 2014. That's according to a report from Euromonitor International, which expects the industry to continue its rapid growth -- unless regulation and taxation deliver a serious buzzkill.

With $2.8 billion in sales in 2014, the U.S. accounts for about half of all global vapor sales, which includes e-cigarettes and e-liquids. The industry is also growing quickly in Europe -- especially the U.K., Italy, Poland and France. The Euromonitor report issued Monday found sales are gaining ground in 50 markets globally, with Egypt another hot spot for growth, said Shane MacGuill, a tobacco analyst at Euromonitor.

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Part of the growth is fueled by the perception that vapor products are healthier than traditional cigarettes. Plus, the vapor wares aren't yet taxed at the same high rate, so they're significantly cheaper.

"That's what makes the sector so vulnerable," MacGuill said.

"The bombastic predictions for vapour's future could easily, well, vapourise if legislation brings about tobacco-level taxation," Zora Milenkovic, Euromonitor's head of tobacco research wrote in the report, noting that the Italian and Portuguese markets have already taken a hit.

Other hurdles include possible limits on tar levels, demands for child-proofing or bans on public vaping. Without restrictions, however, Euromonitor predicts the vapor market can reach over $50 billion in 15 years.

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The health benefits of vapor products are still up in the air. "While they may have a role to play in smoking cessation or reduction, their long-term effects on public health are not yet known," the European Commission said in 2014 when issuing new rules for tobacco products.

In the U.S., nearly 18 percent of adults smoke cigarettes, down from 21 percent in 2005, according to the U.S. Center for Disease Control and Prevention. And about 10 percent of U.S. adults now use vapor products, according to a Reuters/Ipsos poll released earlier this month. It also found that smokers are using the alternatives as a supplement to traditional cigarettes but not making the switch completely.

One new area in the vapor market is the heat-not-burn products, which are ash-less and minimize smoke. Euromonitor forecasts a global 42 percent compound annual growth rate for this segment from 2014 to 2019.

R.J. Reynolds Tobacco (RAI) on Feb. 2 rolled out its REVO heat-not-burn cigarette in Wisconsin, company spokesman Richard Smith said in an email.

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RJR, which also makes Camel and Newport brands, "chose the Wisconsin market because adult tobacco consumers in Wisconsin have shown they are interested in having a variety of options to consider in tobacco products," Smith said. "Given the positive reception by adult tobacco consumers in Wisconsin to other innovative products such as the VUSE Digital Vapor Cigarette, the state seemed to be the right place to make REVO available."

He declined to offer sales figures for REVO or where the company will sell it next. "The focus right now is on educating adult smokers in Wisconsin that this is another tobacco product option to consider," Smith said.

Globally, Philip Morris, (PM) maker of Marlboro, is rolling out its own heat-not-burn product, called iQOS. The company said it plans to increase spending in 2015's second half to promote the "reduced-risk product" nationally in Japan and Italy. iQOS will also get pilot or national launches in other countries.

In another sign of optimism for the sector, Japan Tobacco International (JTI) earlier this year was confident enough to buy the international intellectual property rights to San Francisco-based Ploom vaporizers, MacGuill said.

And although the vapor product market has grown by 70 percent since it first emerged in 2005, its "sales equate to only the 20th largest cigarettes market in the world, and cigarettes will continue to dominate the tobacco industry, unsurpassed as a nicotine delivery device until such a time as a new generation product vapour device (or something entirely novel) comes to usurp its dominance," Milenkovic wrote in the Euromonitor report.

"In the meantime," she added, "legislation will persist in its aim to de-normalise smoking, leaving price the main consumer purchasing decision and company battleground for years to come. To be sure, cigarettes volumes sales will remain flat over the next five years, barely mustering 0.3 percent increase on average per annum, compared to around 3.5 percent for value sales, showing that pricing power will prevail, albeit at a reduced rate."