Tissue industry adjusts to new markets, embraces new technology: the tissue industry has ridden the ups and downs of recent global economics to emerge as a consolidated segment of the paper industry that should enjoy growth in coming years.

The past year has proven the risks of predicting the future. After a wild roller-coaster ride on Wall Street in 2000 and the earlier part of 2001, September 11, 2001, changed the entire world permanently. As a result of the unprecedented terrorist attacks on American skies and soil, Wall Street closed for almost one week. The global economy showed the strain, and everyone has been working toward recovery. The tissue market is no exception.

While consumer demand that drives the at-home tissue market remained fairly stable, the away-from-home market showed the economic dependency of that side of the business. While the tissue industry maintained some growth and expansion, it also contracted through continued mergers and acquisitions and the closure of some failed businesses.

THREE LARGE PRODUCERS

In the midst of this market turmoil, the industry has embraced significant new technologies. Most notable is through-air-dried (TAD). Procter & Gamble completely exited manufacturing conventional tissue in its U.S. production facilities. Currently, manufacture of all P&G products in the United States uses TAD. Kimberly-Clark in the United States has gone one step further by expanding the development of its uncreped through-air-dried (UCTAD) technology and adding new capacity. In Mexico, the company started a new, state-of-the-art, 90,000-tons/year UCTAD machine during the middle of 2002.

Georgia-Pacific, the largest of the three companies named to this point, has also announced plans to add 70,000 tons/year of TAD capacity sometime in 2003. Scott Paper Ltd., a division of Kruger Inc., recently rebuilt and equipped a paper machine in Hull, Quebec, Canada, with a "TissueFlex" press from Andritz Group. This should allow them to produce a towel close to TAD quality.

According to the American Forest and Paper Association (AF&PA), the tissue sector of the paper industry tops the North American paper market in operating rates, at more than 90%. The market is still growing despite being fairly mature. Capacity is increasing but at a slower rate each year. As long as demand grows even slowly, the tissue industry sector can respond with increased capacity.

In the at-home market, Georgia-Pacific, Kimberly-Clark, and Procter & Gamble have almost 80% of the consumer tissue products category. These include tissue, towels, and napkins. All three companies have been divesting some more cyclical assets while focusing on reaching consumers by having more mobility and increased options.

In the away-from-home (AFH) segment, SCA Tissue North America gained third position through acquisition of some Georgia-Pacific planned divestiture assets. The top three in AFH now control approximately 80% of that segment of the market. This is double what the top three companies in Europe control there.

The large Swedish parent of SCA Tissue North America, SCA, may be thinking that timing was less than optimal because their entry into the economically-driven market coincided with the tragic events of September 11. SCA Tissue North America also acquired Encore Paper in South Glen Falls, New York, USA, and added 85,000 tons/year capacity. This brought the total North American tissue-making capacity for SCA Tissue North America to 445,000 tons/year.

EUROPEAN PICTURE

In Europe, the recent deal by SCA to purchase Cartoinvest of Italy proved that president and CEO Sverker Martin-Lof has retreated after the unsuccessful attempt to acquire Metsa Tissue. The Carrara family will receive more than US$ 263 million from SCA for the purchase of Cartoinvest, which the family owns. In addition, SCA assumes significant Cartoinvest debt. Martin-Lof has indicated that Cartoinvest will serve as a base for further Italian acquisitions and a way to increase its position in the away-from-home market. SCA reportedly does not have immediate plans to move into the at-home market because a large investment is necessary to establish a brand. Martin-Lof has stated that he prefers to supply private-label products, work "with" retailers rather than "against" them, and work with suppliers vs. building machinery. He has also said he expects further consolidations in Europe.

The American Tissue Corp. bankruptcy that hit the news on Sept 10, 2001, had a dual economic impact on the industry. It affected parent rolls and finished goods sales. Shutdowns of many tissue making facilities of the company followed their announcement. This eliminated capacity of approximately 300,000-400,000 tons/year from the market. For parent rolls, the move eliminated approximately 50,000-70,000 tons/year of capacity of parent rolls that American Tissue Corporation claimed it sold.

While the bankruptcy announcement was not good news for American Tissue, the timing was somewhat beneficial for the entire tissue industry. As their tonnage left the market, a better supply-and-demand equilibrium occurred for markets of parent rolls and finished goods. Basically, the business of the number four player ceased and enabled other manufacturers to move their tonnage and case goods to fill the vacuum created. The market was already thriving with excess capacity at all levels searching for new homes and customers.

In addition, the exit of American Tissue from its core volume businesses in at-home and away-from-home markets created larger opportunities for manufacturers and converters. It allowed them to tap into the existing client base and expand their client reach.

FUTURE INFLUENCES

According to AF&PA, U.S. tissue capacity will grow by only 2.0% this year and 0.7% in 2003. While four new machines per year came online in 1999, 2000, and 2001, only one new machine will come online in the United States per year in 2002, 2003, and maybe 2004.

The following are among important events that will influence the tissue industry in the future:

* Procter & Gamble was expected to start its second 75,000 tons/year TAD machine in Mehoopany, Pennsylvania, USA, in the middle of 2002.

* Georgia-Pacific will increase TAD capacity by 70,000 tons/year by starting a unit at a site in the southern United States. This is the only announced additional capacity for 2003 to date.

* In September 2001, Perkins Papers Ltd., a subsidiary of Cascades, Inc., acquired two tissue mills from bankrupt Plainwell Inc. This added approximately 110,000 tons/year of capacity and moved Cascades from seventh to fifth among North American tissue producers.

* The tissue industry has become a significant part of the paper industry. Tissue machines comprise half those under construction globally. Global demand for tissue should increase at slightly over 3% per year in the foreseeable future.

* North American demand is still leading the world, with consumption in the United States projected to reach more than 7 million tons in 2003.

* Kimberly-Clark should begin operation in Columbia in December 2002. It will probably export 60%-70% of its production to Latin American neighbors.

* In total, 46 new tissue machines should start operations outside the United States with a capacity of 1.6 million tons. This includes Europe, Asia, and Latin America.

* Brazil is an interesting case study. It kept current with expanded capacity based on inflated domestic demand. Subsequent economic downturns literally diminished demand, but companies there continued to add capacity. As a result, some of this excess capacity has found its way into the U.S. market.

* Kimberly-Clark introduced a coreless bathroom tissue roll for the AFH market that can double the usage while only increasing the cost to the consumer by about 20%.

* Kruger Inc. obtained ownership of "White Cloud" bathroom tissue sold almost exclusively through Wal-Mart stores. A smart move would have Scott Canada rolling off other paper products under the "White Cloud" name to capitalize on the strong consumer pull of the brand.

* European tissue producers have been expanding, especially in the United Kingdom and Italy.

* People previously did not think of pulp and paper stocks as a safe haven. Guess where the safe money was over the past year?

AMERICAN TISSUE UPDATE

Following the American Tissue, bankruptcy and its closure of various facilities, the following manufacturing assets have new owners among the acquisition-oriented players:

* Fraser Papers of Nexfor Group purchased the Berlin/Gorham mill last May. That action brought approximately 40,000 tons/year of wet crepe towel capacity back into the market. Under agreement with the new owners, Convermat Corp. sells this entire wet crepe capacity.

* Perkins Paper Ltd. purchased the St. Helens tissue machine lease at the Boise, Idaho, USA, facilities to gain approximately 45,000 tons/year of dry crepe tissue capacity. In addition, it also purchased the Mechanicsville, New York, site that can make approximately 45,000 tons/year of wet crepe towel. Perkins Paper Ltd. now ranks as the number four player in North America for wadding capacity. It is also a significant player in the wet crepe towel markets.

* In July, Cellu Tissue was able to outbid the competition to acquire the Neenah, Wisconsin, facilities with five tissue machines. The total capacity is approximately 70,000 tons/year.

* On August 29, 2002, Kruger group of Canada announced its repurchase of the former Memphis Tissue facility with four paper machines. This site will be integrated into the Kruger/Scott TissueGroup and will facilitate expansion into the U.S. market. Also, this will enable Scott Tissue to increase production of its White Cloud brand and open new markets.

* Still pending for tissue manufacturing is the former Shelby operation in Memphis, Tennessee, with one machine. Others are the former Steven and Thompson site in Greenwich, Connecticut; and the Tree Free facility in Augusta, Maine.

CONSOLIDATION ASSESSMENT

Consolidation has been the trend in the North American tissue market since the early 1990s. The five leading producers now own 85% of the market. The top ten producers have more than 90%. More consolidation will probably occur at all tier levels--larger and smaller tissue players and converters.

* Low pricing and lower margins may put further pressure on converters. Some are already suffering cash flow shortages and lack of supplier support.

* Fewer, larger companies will have more control of capacity and production.

* We'll see more controlled capacity increases, due to the smaller number of players.

* Closure and shutting down of older, less efficient production mills will lead to a reduction in total market capacity.

TRACKING THE TRENDS

Moving into the second year of the new millennium, the tissue industry has shown that it is maintaining trends that some thought might be difficult to sustain. These include continued globalization, continued expansion of capacity while the number of players diminishes through acquisition, and a very strong push toward on-demand production.

Although capacity is increasing, production control is the mantra of the day. On-demand production is hardly a new concept in business, but it is new to the tissue sector. It means the industry is becoming surgically precise in a mass production business. This is what the future holds.

IN THIS ARTICLE YOU WILL LEARN:

* The consumer's role in the tissue industry

* Which tissue mills have closed or changed hands

* The future of the tissue industry

ADDITIONAL RESOURCES:

* Home page for the American Forest and Paper Association: www.afandpa.org

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

About the author: Shaw Shahery is founder and president of Convermat Corp., Great Neck, NY. Convermat specializes in sales of parent roils of tissue, napkins, towels, wipers, specialty paper, board, kraft, and pulp in more than 80 countries. Contact Shahery by telephone at [phone] or by email at [e-mail]