Tissue: is the glass half empty or half full? The tissue industry saw shutdowns, bankruptcies and mill closures but also renewed growth and new machine startups. So far, 2003 is offering the same mixed message.

The tissue industry in 2002 saw "the best of times and the worst of times." Some players went bankrupt, others barely survived, but for still others it was a very good year or a even strong year. Given the current weak state of the economy and the many global uncertainties, the tissue industry has remained a consistent performer in the paper industry. The significant and seemingly ominous changes on the surface of the tissue industry--consolidations, closures, and bankruptcies--have opened new opportunities for small and large manufacturers and converters.

Bigger companies continue to gain market share, given their large economies of scale and global marketing prowess. At the same time, however, independent converters are exploiting more market opportunities servicing smaller customers left behind as the big players concentrate exclusively on large accounts.

When considering the combination of a weak global pulp market with a slowly growing United States economy, larger mills will likely respond by trying to hold pricing through inventory control. Over the past years of multiple consolidations and closures, capital has become limited and cost cutting has been a common theme.

Some economists predict that slightly better times may be ahead, but the European economy is largely flat and the U.S. economy is growing only anemically. Uncertainty remains the key theme of today's markets. Tissue pricing may rebound weakly--or not at all. Much depends on world events that this industry cannot control. For example, some economists have concerns that the economy may be softening again. This would undercut consumer confidence and possibly lead to recession.

ECONOMIC SIGNALS

Despite a sluggish economy, global demand for tissue grew 2% in 2002 and should grow by 3% in 2003. These are not stunning numbers, but they positive compared to what has happened in other paper markets. Tissue demand in the United States was slightly more than seven million short tons in 2002. This is near the 2.1% 30-year average growth rate.

In these lean times, the major tissue manufacturers/marketers have been pouring vast amounts of money into their core markets. Both Procter & Gamble and Kimberly-Clark have been spending millions of dollars advertising and promoting pre-moistened toilet tissue. Through air dried (TAD) technology continues as the leading product in the premium market. While capital spending in the pulp and paper industry has i been decreasing during recent years, the tissue market segment has headed in the opposite direction. Consumer demand is the obvious reason. One estimate says that most of the twelve new paper machines and rebuilds planned for North America during 2002-2004 will produce tissue.

The near-term downside risk for tissue producers is the expected rise in pulp and secondary fiber prices. This will have a negative impact on profitability in a soft and uncertain economic environment. Passing on cost increases may not be optimum choice for manufacturers now. This is especially true in an environment where tissue producers and converters want to protect and maintain their current customer base while striving for an increase in market share.

EUROPEAN UPDATE

There has been significant market activity in several regions, notably Europe and North America.

In Europe, M-real is reportedly searching for a partner in its Metsa Tissue subsidiary, which the company has identified as a "non-core" asset. SCA had agreed to purchase Metsa Tissue but the European Commission (EC) blocked the deal in 2001 as anti-competitive. SCA, Kimberly-Clark and Georgia-Pacific are the market leaders in European tissue production, all with close to 18% of the market.

Other European developments include:

* LPC Group, based in the United Kingdom, has received approval from the Swedish government to increase tissue capacity at its Kias mill in Sweden from 42,000 metric tons/yr to 72,000 metric tons/yr. The company will install a new wet end and other equipment on its PM3. LPC purchased the plant from Duni in September 2002.

* Georgia-Pacific plans to boost capacity at its Cujik mill in The Netherlands from 24,000 tons/yr to about 27,000 tons/yr by installing a new rewinder. G-P may also rebuild PM4.

* Fabryka Papeiru Czerwonak (FPC) has a new tissue machine under construction at its Czerwonak, Poland mill. FPC plans to start construction on the unit this June and start up the machine in 2004.

* Cartalux was expected to start up a new 30,000 metric tons/yr tissue machine at its Comceh, Romania mill in May.

* Warsaw PPHU Rolls began construction of a new 10,000 metric tons/yr tissue machine at its Wloclawsek, Poland mill in March. The machine, based on recycled fiber, is expected to start up in 2005.

NORTH AMERICA: NEW MILLS AND NEW MACHINES

In North America, Georgia-Pacific, Procter & Gamble, SCA, Kruger (Scott Paper), and Potlatch have all announced new tissue mills and paper machines for North America. while a good portion of this capital investment has been centered in the United States, Canada has also been very active.

* Procter & Gamble in their US$ 350 million expansion project added two new TAD machines in Mehoopany, Pennsylvania. The first 75,000 tons per year addition started in 2001 followed by the second 75,000 tons/yr during the second half of 2002. The company has also announced installation of another 80,000 tons/yr TAD machine at Cape Girardeau, Missouri, in 2004 or 2005.

* Georgia-Pacific started their new 80,000 tons/year TAD machine at Port Hudson, Louisiana, USA, during the fourth quarter of 2002. As part of an announced US$ 250 million expansion of tissue operations, the company will start another 80,000 tons/year TAD line at their Wauna site in Oregon. In addition, Georgia-Pacific will expand tissue operations at Halsey, Oregon, and Palatka, Florida.

* As part of its US$ 240 million expansion project, SCA announced an 110,000 tons/yr wet crepe machine for their green field site in Barton, Alabama, that will produce paper towels, tablecloths, napkins, and toilet tissue. This project should secure the position of SCA in the southeastern United States, improve papermaking cost, increase converting efficiency, and reduce dependency on outsourcing of parent rolls. Start up should occur in the middle of 2004. The company expects to consolidate the operations of three other converting facilities in Barton--Brattleboro, Vermont, by March 2003, Atlanta, Georgia, by the third quarter of 2003, and the LaGrange, Georgia, facility in the fourth quarter of 2003.

* Potlatch will spend approximately US$ 66 million to construct its new 102 inch wide, 30,000 tons/yr TAD tissue machine in Las Vegas, Nevada, USA, to service western markets in the United States and national accounts. Startup should occur in early 2004.

* Kimberly-Clark started two new uncreped through-air-dried (UCTAD) lines in 2001. The combined operations at Jenks, Oklahoma, USA, and Loudon, Tennessee, introduced capacity of approximately 140,000 tons/yr. In Mexico, Kimberly-Clark de Mexico brought a 90,000 tons/yr UCTAD unit online in the first quarter of 2002. The Mexican subsidiary has also been operating another 35,000 tons/yr TAD line in Mexico since mid 1999. In another move, KimberlyClark has shifted some away from home (AFH) towel and tissue grades into a newly introduced Super Premium line using its UCTAD technology.

* A newly formed, privately held company--First Quality Tissue LLP--announced a US$ 250 million project to enter the consumer tissue market. First Quality's plans include a brand new "state-of-the-art" 70,000 tons/yr TAD machine and a complete line of converting equipment for consumer tissue, towel, and napkin products. This new plant will be in Lock Haven, Pennsylvania, USA, at the former International Paper manufacturing facility. Startup should be during 2004.

NORTHERN EXPOSURE

Canadian manufacturers have also been actively pursuing new tissue capacity:

* In a C$ 120 million expansion project, Kruger and its Scott Paper Canada group is installing a new 33,000 tons/yr tissue machine at its Crabtree, Quebec, Canada, mill with a Metso machine designed for speeds of 2000 m/min using a furnish of virgin and de-inked fiber. The upgrade in Crabtree includes two winders, automation of a wrapping line, and robotics for unitization of cases. Scott Paper will also upgrade and add a new wet end to the No. 5 paper machine at its Lennoxville, Quebec, mill.

* In addition, Scott Paper will restart the 110,000 tons/yr Memphis, Tennessee, USA, tissue plant purchased from bankrupt American Tissue in August 2002. Scott Paper is the primary tissue producer in Canada with close to 40% market share. Scott Paper also invested C$ 12 million in Alberta in the first expansion phase of its Calgary tissue converting facility. These investments should satisfy future needs of Scott for its Canadian market and improve efforts to increase the company's U.S. market.

* Cascades Tissue Group is another Canadian company with a growing interest in the U.S. market. While Cascades has not added any new tissue machines in recent years, it has assembled sizable capacity by buying other tissue assets. In September 2001, the company purchased two tissue mills from bankrupt Plainwell. This increased its production capacity by approximately 110,000 tons/yr and moved Cascades ranking in North America from seventh to fifth. In 2002, it acquired the dry crepe tissue machine lease from bankrupt American Tissue at the Boise facility in St. Helens, Oregon, USA, and the wet crepe towel machine in Mechanicsville, New York. with these two sites, Cascades added another 85,000 tons/yr to become the number four player in North America with total capacity of approximately 430,000 tons/yr.

THE NEW "TAD" STANDARD

An important observation is that most new machines will have TAD technology--dearly the new standard for premium tissue, The drive for higher quality has therefore been fueling much growth. TAD has played an important role in improving tissue quality for added softness, volume, and absorbency.

A TAD sheet is stronger than traditional Yankee dried tissue or towel and can have up to 50% higher absorbency. In initial capital and operation cost, TAD machine installations require 30%-40% higher capital investment in addition to highly intensive energy consumption cost. Lower fiber consumption during manufacturing, improved product quality, and higher pricing of TAD substrate sheets offset some increased costs.

TAD closely but invisibly relates to branded tissue products by treating consumer loyalty to specific premium products. Since the technology is readily available, more independent operations will add TAD production to their product mix.

The impact of the new machines and especially the TAD lines will influence total tissue capacity. A significant amount of the new capacity will occur by the end of 2004. Several questions arise from this situation:

* Can the North American market absorb all these new machines--a total of more than 400,000 tons in TAD alone?

* What influence will the new machines have on the conventional tissue market?

* Will the industry experience another extended period of excess supply vs. demand?

* If so, will that occur in TAD or in conventional tissue?

One thing i8 clear: the North American market needs approximately 150,000-200,000 tons/yr in new capacity to meet the average projected growth of 2% per annum in a maturing market.

BETTER TIMES AHEAD?

In the short term, the slowdown that began in the final quarter of 2002 seemed to have continued in the first quarter of 2003. Business should improve especially as the AFH market begins to improve in the spring. In the longer term, manufacturing technology, raw material cost, inventory control, new and improved product development, proper logistics, outsourcing management, strong supply chain, and development of strong strategic alliances will be the key characteristics to maintain a competitive edge. SI

WORLDWIDE MEGA MARKETS FOR TISSUE PRODUCTS

Globally, the tissue industry is a US$ 30 billion business with volume of approximately 25 million tons. North America comprises half followed by Europe, Asia, and other markets. In total, the industry has had an average global growth of approximately 4% per year in the past decade. Fifty-seven new machines should start operation by the end of 2004 to add almost two million tons of new capacity worldwide.

With 22 kg per capita consumption, North America is nearly twice the size of the next two largest--Japan and Western Europe each at approximately 13 kg. China, Asia, and Africa, each below 2 kg per capita illustrate the potential for global growth in a westernized world.

Total world average per capita consumption of tissue is approximately 3.4 kg. Some forecasters predict that world tissue demand will grow at 3.2% per year through 2010. This means a market exceeding 30 million tons in only seven years. The largest growth should come in China and parts of Asia where the economies may improve as standards of living increase and businesses grow.

While toilet paper has the highest consumption rates in all regions with the exception of the Near and Middle East, demand for toilet tissue should grow slightly below average. Toweling including kitchen towel rolls, bleached and kraft industrial towels, wipes, and napkin grades will remain the fastest growing product lines.

In the AFH category, North America still leads the world in tissue consumption with 38% vs. 35% for Europe. As consolidation continues, the high level of concentration among the top three producers in both AFH and at home (AH) market segments in the United States is ironic. In the AFH industrial and commercial market, the top three-Georgia-Pacific at 40%, Kimberly-Clark at 27%, and SCA at 21%--control more than 85% of the 2.5 million tons and nearly US$ 4 billion in sales. Food service represents 40% of this segment. It should have the fastest growth of 3%-4% in the future. Following this are healthcare with 15% of the market, office buildings with 12%, education with 10%, and lodging and all others accounting for the remainder.

Similar concentration is prevalent in the AH retail and consumer market led by the prominent brand leaders--Kimberly-Clark with 34%, Georgia-Pacific with 32% and Procter & Gamble with 22%. In the almost US$12 billion tissue industry in the United States, another significant observation is that the four leading producers control more than 85% of all sales and production capacity of the market in the United States. The same group also controls more than 50% of world capacity.

Considering market share for private label vs. brand name, brand names have played a more dominant role in the United States. Branding in the United States has always been a vital part of any marketing campaign. In European markets, this figure varies widely by country. In all cases, store brands in European markets have an equal or higher share than the brand leaders. Also, integrated tissue producers have been exiting the pulp business focus more closely on changing consumer needs, launch new products, and add value to existing products. While pulp is a more readily available commodity, fiber cost and pulp prices will remain the dominant factors in cost and profitability for all tissue producers.--Shaw Shahery

IN THIS ARTICLE YOU WILL LEARN:

* How the growth of large tissue manufacturers benefits small and mid sized converters

* The opportunities and challenges in a slow growth market

* Details on new capacity in Europe and North America

ADDITIONAL RESOURCES:

* "Tissue industry adjusts to new markets, embraces new technology," by Shaw Shahery. Solutions!, October 2002, p. 37.

* To view previous Solutions Article dealing with the tissue sector, search for "tissue" in the category "all journals" as www.tappi.org

* Convermat web site: www.convermat.com, dedicated solely to the tissue industry

Shaw Shahery is founder and president of Convermat Corp., Great Neck, NY. Convermat specializes in sales of parent rolls of tissue, napkins, towels, wipers, specialty paper, board, kraft, and pulp in more than 80 countries. Contact Shahery by telephone at +1 516 487. 7100 or by email at [e-mail]