Tissue markets recover, future looks bright.

Editor's Note: This article is Part 1 of a two-part article on tissue market trends. Part 2 will appear in a later issue.

The booming 1990s brought on mega-mergers, buyouts and seemingly unlimited expansion of global tissue capacity. As the 2000s rolled in and 2001 brought a recession, a decline in global tissue demand, increased competition, and excess supply. Together, these trends led to reduced operating rates. This, coupled with the persistent rise in production cost, created the paper industry's version of "the perfect storm."

Nevertheless, a turning point appears to be in sight. For a change, not much new tissue capacity is planned for 2005 and beyond in North America. The big players are very cautious about adding new machines until the market tightens, which is enough for producers to successfully pass through cost increases. The new mantra is, "controlled production and controlled capacity increases."

Controlling oversupply is good, but the flip side of that coin is risking low inventories in both the tissue supply and tissue production sectors. Consequently, when there is a spike in demand, parent rolls and finished products could be harder to find than usual. The year 2003 was tough for tissue in the United States. The away-from-home (AFH) market shrank about 3.5%, and overall tissue production decreased. The American economy had a hard time rebounding from several shocks in 2001.

The early 2000s also saw U.S. per capita consumption of tissue level off at just over 23 kg. Per capital consumption throughout the rest of the world is still below 3 kg per person. Growth is now minimal in the U.S., and market share can only be won only through hard-fought and well financed competitive battles. Through-air-drying (TAD) remains the biggest news in tissue, and many of the newest product introductions in the United States are based on TAD tissue. TAD is generally used for higher priced, premium tissue products.

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Despite a difficult 2003, tissue consumption held steady in 2004. Early in the year, the big three--Georgia-Pacific (G-P), Kimberly-Clark Corp. (K-C), and Procter & Gamble (P & G), all reported net sales increases and gains in earnings for fiscal 2003. The same is expected to hold true when 2004 earnings are released.

U.S. tissue capacity rose approximately 2.5% in 2003; to over 8 million tons. Tissue paper capacity increased 0.9% in 2004, according to the American Forest & Paper Association's 45th Annual Survey of Paper, Paperboard, and Pulp Capacity. One new tissue paper machine is expected to come on line in 2005 and another machine that was "permanently" closed in 2003 is expected to restart production. In addition, machines that came on line in 2004 will add to U.S. tissue paper capacity in 2005 as they ramp up production and operate for the full year. As a result, tissue paper capacity is expected to increase 3.3% in 2005. With no new machines planned after 2005, annual growth rates for tissue paper capacity are expected to slow to 0.5% in 2006 and 0.1% in 2007. For the three year period of 2005-2007, tissue paper capacity growth is expected to average 1.3%.

By 2005, the TAD share of U.S. capacity increases since 2001 will be more than 500,000 tons. As a result, TAD may displace some conventional tissue capacity. As a sign of increased consumer demand for quality, hand-feel, softness and bulk, the new generation of paper machines other than TAD have enhanced features to provide those qualities for conventional tissue markets.

RISING COSTS

Both fiber and energy costs have recently risen well above historical levels, which together affect every aspect of the tissue business. Every kind of fiber (de-inked, recovered and virgin pulps), energy, natural gas, chemicals, transportation of raw and finished product, even insurance have increased several times and all remain at record highs. Profit margins at most mills have been squeezed.

In 2004, SCA initiated a 9% price increase in the AFH market for the first quarter. This was successfully followed by all major players as well as many independent converters. Then, the third quarter of 2004, G-P led the second AFH price increase. Both the integrated and non-integrated tissue makers and converters supported the second increase.

In the at-home (AH) segment, P & G was the leader in announcing the only price increase for that market in August 2004. P & G has used the strategy of offering discounts and promotions at the same time that they raise prices, effectively negating some of the price increase. In November 2004, G-P announced another 10-15% price increase, effective February 2005, for the commercial and AFH markets.

Until recently, the tissue industry has lacked the ability to raise prices. Excess capacity in 2000 and 2001, combined with declining demand and an economic downturn, made any price increases impossible. That trend may change in 2005 with a growing economy.

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NAFTA NEIGHBORS

In the U.S., tissue capacity has increased so rapidly that operating rates have remained low. However, elsewhere in the world, the reverse is true: supply is not keeping up with growing demand. While the United States tissue market often seems near saturation, much of the rest of the world is still catching up. International markets still have a long way to go to match retail tissue products in the United States and, to some extent, Japan.

The Canadian tissue market has settled down to an American growth pace over the past decade. In the 1970s, the Canadian tissue market was expanding at close to 4% per year. It now has a growth rate that averages less than 2% per year, only slightly less than the U.S. growth and per capita consumption rate.

In 2001, Canadian manufacturer Irving added Andritz TissueFlex technology at its PM2 in St. John. In addition, the company recently completed updating its Toronto mill with new converting lines and TissueFlex technology. Another Canadian company, Kruger, has installed a new tissue machine and has rebuilt its Crabtree/Lennoxville tissue machine.

U.S. manufacturers have been expanding distribution into Canada, close to doubling the country's tissue imports to just over 200,000 tons/yr. Ironically, this trend is balanced by Canada's export of tissue products, primarily into the United States. While operating rates are up in Canada, it may not be enough for producers to raise tissue prices. Canada faces the same production cost challenges as the United States, as well as the threat of imports and the same difficulty in successfully raising prices.

In Mexico, SCA acquired the remaining 50% of the Copamex group that it didn't own in the third quarter of 2004. At the time, Copamex was the largest supplier of incontinence products, and the second largest tissue company after Kimberly-Clark de Mexico. This acquisition gives SCA access to fast growing markets in Central America.

Kimberly Clark de Mexico still controls the lion's share of that market with close to 600,000 metric tons/yr of installed capacity, including one TAD and one state-of-the-art UCTAD production line. KCM maintains the lead in capacity increases in Mexico with long-term commitment of parent roll, sales into the U.S. market.

THE GLOBAL TISSUE PICTURE

While K-C, G-P and P & G continue to control more than 80% of the North American market, the big three players in Europe--SCA, G-P and K-C--control less than 50% of that market. Another difference is that North America is far ahead in TAD technology. In North America, the number of TAD machines in use is close to 20% of the nearly 140 tissue machines, while in Europe the figure is only 7 out of 104 tissue machines.

Markets throughout Europe in 2003 were just as difficult as they were in North America. Both demand and pricing slipped, putting pressure on producers. While Western Europe's growth dropped to 2-3%, Eastern Europe had a relative boom with growth rates of 7-8%. Of course, per capita usage in Eastern Europe is still considerably lower than Western European usage. Western Europe, and particularly Scandinavia, is close to tracking U.S. per capita consumption.

Despite low population growth in Western European tissue markets, manufacturers have continued to prosper by introducing an ever wider range of products. Even toilet paper has been elevated to a luxury experience in the premium category, particularly in the U.K., and the trend is spreading throughout Western Europe, from Scandinavia to Spain.

Growth in kitchen towels and napkins has been particularly strong as tissue replaces cloth and linen on a large scale. Tissue manufacturers have also been extremely innovative with niche-targeted items such as travel packs, cosmetic tissues, mini-packs and even packaging targeted specifically to men and women.

Supply in Western Europe is expected to continue its growth pattern of 3-4%/yr through 2006. That would mean a 44% increase from 1996 to 2006, and a rise in tissue capacity from less than 5 million metric tons/yr to just less than 7 million metric tons/yr. The market seems to have a good distribution of small capacity mills, below 30,000 metric tons/yr. By 2006, up to 10 large machines are expected to start up throughout the European continent, with a capacity increase of 400,000 metric tons/yr.

While Spain could face overcapacity if all proposed projects are actually built, Spanish market volume has actually doubled in the past 10 years and the country has been in short supply of parent rolls. In fact, Spain has enjoyed the fastest relative growth in Europe. Spain is also being introduced to a broad line of innovative products, such as multi-colored and textured table napkins from Goma-Camps.

However, in terms of pure volume growth, Russia has seen the biggest increase. Even though Poland has been getting a lot of attention from global players, tissue consumption in Russia seems to have the biggest potential.

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Tissue prices declined in Western Europe, falling 10% or more since 2002, forced downward by increased competition and lower pulp costs. While prices are increasing once again in Western Europe, the challenge is to maintain profit margins while dealing with increased production costs. The Euro's recent strength has helped European tissue manufacturers increase their buying power, offsetting some of the pulp cost increases.

Cost-consciousness throughout Europe (40 countries) may be one of the reasons there are only 11 TAD machines in five countries, with a total capacity of between 500,000-600,000 metric tons yr. That's less than 10% of Europe's more than 7 million metric tons/yr capacity. The UK is still the most likely place to find retail TAD tissue.

Out of Western Europe's nearly 7 million metric tons/yr of capacity in 2004, SCA owned 1.4 million, putting it in the lead. G-P clocked in at 821,000 metric tons/yr and K-C at 795,000--close to neck and neck, again. However, looking at global tissue capacity, K-C is now number one, at just over 3.7 million metric tons/yr, while close rival G-P logs in at just over 3.6 million metric tons/yr.

K-C reached the number one spot through takeovers and other deals, such as its 100% ownership of Klabin Kimberly in Brazil, KCK Tissue in Argentina, and the new TAD line in Australia. G-P's additions were primarily in the United States, where it is still the number one producer. While SCA is number one in Europe, it's still a distant third in the U.S., even though it has exceeded the 2 million tons/yr capacity mark.

Japanese tissue producers are facing tough competition from China and some oversupply in the market. Profitability is being squeezed with supermarkets and other chains battling each other by promoting discounted products. This has left producers with significant shortfalls.

Demand in the Middle East grew at 11%/yr over the past 10 years, but per capita consumption is still around 2 kg per person. Facial tissue is the dominant seller in that region, at 60% in some markets and close to 85% in others. Who's handling the demand? Local converters that have grown from under 10 converters in 1980s to nearly 100 today.

WHAT YOU WILL LEARN

* How tissue companies coped with overcapacity and declining demand early in the decade.

* Recent capacity additions.

* Current trends in global tissue markets.

ADDITIONAL RESOURCES

* "Tissue roll continues," by Jaakko Poyry Consulting, Solutions!, April 2005. To access this article, insert the following Product Code in the search field at www.tappi.org: 05APRSO52.

* "Tissue: The quest for softness and absorbency," edited by Janice Bottiglieri, Solutions!, March 2005. Product Code: 05MARSO24.

Founded in 1976, Convermat specializes in the sales of parent rolls of tissue, napkin, towel, specialty paper, and wipers. Convermat holds a major share of parent rolls of tissue sales in the United States and a number of growing and emerging countries. Convermat has a large tissue, towel, napkins and wiper customer base, with a solid presence in the United States, Canada, Mexico and more than 80 countries around the world. Convermat's sales staff handles all aspects of the sales transaction, including transportation/logistics, documentation, technical specifications, foreign currency management, credit financing and post-sales service. Headquartered in Great Neck, New York, USA, Convermat has offices in Plantation, Florida; Appleton, Wisconsin; and Los Angeles, California. For more information, visit www.convermat.com.

SHAW SHAHERY, CONVERMAT

ABOUT THE AUTHOR

Shaw Shahery, is founder and president/CEO of Convermat. Contact him by email at [e-mail].

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