2003 was not the best year in the European tissue business – it was characterized by below-the-trend-line demand growth and price erosion in some key markets.
Prospects for 2004 are slightly more promising, at least from the point of view of economic circumstances, but it is too early to say that 2004 will be a peak year. The first years of the new millennium have already shown how competitive the European tissue business is today.
The very strong and continuously improving position of hard discounters is a key feature of recent retail developments – a major challenge for tissue companies, some of which may need to rethink their strategic alternatives. The role of brands is probably the most problematic question for internationally operating tissue companies – there is a major difference between Western Europe and North America.
Esko Uutela
European tissue consumption statistics for 2003 are not yet complete at the time of writing, but it is clear that relatively flat markets in Central Europe (excluding the eastern part of it) negatively influenced the overall European situation. Based on preliminary information, EU Consulting estimates that Western European tissue consumption grew by +2.5-3.0% in 2003 – this is somewhat below the long-term growth trend of +3.5%/yr.
But Eastern European growth continued at high single-digit figures – most probably a growth of at least +7-8% was recorded in Eastern Europe (incl. Russia) as a whole during 2003. In some individual markets, two-digit growth rates were reached. The total market volume of Eastern Europe continues to be rather low, but rapid growth has aroused increasing interest among tissue companies for either acquisitions or new investments in this region.
MAIN PROJECTS IN 2003
The number of new tissue machine projects was rather low in Europe in 2003. No major project was starting up before mid-2003. Three new tissue machines were started up in Western Europe, and two new PMs and one second-hand PM in Eastern Europe.
New capacity start-ups concentrated in June 2003: Kartogroup started up their Overmeccanica PM in Bousbecque in France; Comceh/Faper Group a new Toscotec PM in Calarasi in Romania; Sofidel Group a new Metso Paper PM in Ciechanow, Poland; and Glucholaskie Zaklady Papiernicze (GZP) a smaller self-assembled PM based on second-hand parts in Glucholazy, Poland.
Later in 2003, two additional new tissue machines were started up in Europe. Wepa of Germany completed the construction of a new Andritz PM at their Kriepa mill in Kriebethal, Saxony, Germany in September 2003; and Nuove Cartiere di Tivoli started up a new Toscotec machine for tissue parent reel production in Villa Adriana, close to Rome in November 2003.
Several machine rebuilds and mill capacity de-bottlenecking projects were carried out during 2003. In February, Wepa completed the installation of a twin-wire press on the deinking line which feeds PM6 and PM8, in order to help boost the mill’s tissue output. In March-April, Gomà-Camps’ PM5 at their La Riba mill in Spain was restarted after a major rebuild by Andritz.
In June, Zaklady Papiernicze w Olawie (ZPO) completed a small rebuild of their sole PM at Olawa, Poland. Also in the summer months, Kruger Tissue replaced a Yankee cylinder at their Disley mill in the UK, and Metsä Tissue installed a new Yankee cylinder and hood on their PM3 in Raubach, Germany. And although never officially announced, it looks like Kimberly-Clark’s PM2 at their Barrow-in-Furness mill in the UK was re-equipped with the “UCTAD” system during summer 2003.
In September-October, Renova completed an Andritz rebuild on their PM5 in Torres Novas, Portugal; K-C rebuilt a sole PM at their Rouen mill in France; Georgia-Pacific increased PM4 capacity at their Cuijk mill in the Netherlands through the installation of a new rewinder; Metsä Tissue increased the capacity of PM6 in Krapkowice, Poland by installing a new Yankee cylinder and making other modifications; and Cartiera Fenili replaced the hood of PM1 in Capannori, Lucca, Italy.
Towards the end of 2003, SCA made major replacement investments on PM1 at their Prudhoe mill in the UK. Skolwin Tissue in Szczecin-Skolwin, northern Poland, completed a small rebuild of their tissue machine in December 2003.
OWNERSHIP CHANGES
In January 2003, the bankrupt company Papierfabrik Sundern in Germany was purchased and restarted by two mill managers and two additional private investors, and renamed Papierwerk Sundern.
Metsä Tissue was subject to several ownership arrangements during 2003. At the beginning of 2003, M-real first purchased SCA’s 19.3% minority share in Metsä Tissue, acquired additional shares in Metsä Tissue in January-February and made in March a redemption offer to other minority shareholders after M-real’s ownership share exceeded 90%. Metsä Tissue was de-listed from the Helsinki Stock Exchange in June 2003.
Later in 2003, M-real sold its 66% ownership in Metsä Tissue to the Metsäliitto Group. The ownership arrangements were completed in January 2004 by selling a further 17% stake to Tapiola insurance company and another 17% to Varma and Sampo insurance companies.
In Poland, K-C acquired their first Eastern European tissue operation by purchasing the Klucze mill from International Paper in March 2003. Metsä Tissue gained an 85% ownership in the Polish tissue converter Krapex in late 2002-early 2003 and full control of the tissue mill ZPK (Zaklady Papiernicze w Krapkowicach) during the course of 2003.
Kruger Inc. acquired a 50% ownership in Charles Turner Co. Ltd., Bolton, UK in early 2003 and merged the company with Kruger Tissue Industrial Division formally on May 1.
In July, the Sofidel Group acquired 100% of Imbalpaper, Valdottavo, Lucca, after the company had earlier gone into financial difficulties. This deal was organized through Papernet, Sofidel’s subsidiary operating in the AfH sector. The older of Imbalpaper’s two paper machines was idled in late 2003.
SCA acquired the French company Segas and control over the production, development and patent rights pertaining to a competitive dispenser system for hard-rolled tissue paper products. The seller was Paredes, the French distribution company that simultaneously acquired SCA’s AfH tissue distribution company Apura in France.
In late 2003, the Italian tissue machinery entrepreneur, Mr. Fabio Perini, reached a preliminary understanding with the shareholders of Goulds (D&M) Ltd., tissue converters based in Heywood, UK, by virtue of which Goulds will make a major investment in the activities of the Celtech Group. Celtech runs a tissue mill, Celtech International in Lancaster, and Celsoft Tissues, a converting facility in Morecambe Bay.
ORGANIZATIONAL CHANGES
A number of important personnel changes took place in the leading European tissue companies during 2003 and early 2004.
A major surprise to industry observers was SCA’s announcement in late July that Stefan Angwald, President of SCA’s European Hygiene Products Division, had left his position as a result of opinions about business restructuring differing from those of SCA’s CEO Jan Åström. SCA also reorganised their business into four new groups: Personal Care (fluff products), AfH Tissue, Consumer Tissue and Growth Markets. This reorganisation made the performances of SCA’s different hygiene product sectors more transparent to follow. SCA also deleted one organisational level of reporting so that the four unit directors Ole Terland (Consumer Tissue), Rijk Schipper (AfH Tissue), Gunnar Johansson (Personal Care) and Scott Jungles (Growth Markets) now report directly to CEO Jan Åström.
Metsä Tissue received a new President and CEO. As of August 1, 2003, Mikko Helander took over the leadership of the company from Hannu Anttila who joined Metsäliitto Group (now the main owners of Metsä Tissue).
Kimberly-Clark presented their new global business plan in July 2003 focussing on three business categories; grow, sustain and fix. The global approach also resulted into major organizational and management changes within the company: since January 2004 K-C’s North American and European Personal Care groups were combined under a single North Atlantic management team.
Rob van der Merwe, formerly head of K-C Europe, was nominated the leader of the new unit.
K-C also formed a Developing and Emerging Markets business unit, led by Robert Abernathy, in order to maximise growth opportunities in Asia, Latin America and Eastern Europe – a similarity with SCA’s reorganization. K-C and SCA have clearly emphasized their global strategy and efforts to grow with new opportunities arising in developing markets.
In February 2004, Georgia-Pacific announced that John F. Lundgren, President – European Consumer Products, was resigning to become Chairman and CEO of The Stanley Works in the United States. With John, the European tissue business lost one of the most famous and respected faces. William Schultz, President of G-P’s Dixie business in the USA, was promoted to new President – European Consumer Products after Lundgren.
TISSUE PRICES UNDER PRESSURE
An alerting feature for the tissue industry’s profitability has been price erosion of tissue products in general. Tissue prices have experienced strong downward pressure since late 2002, which continued throughout 2003. The UK market – the second largest in Europe after Germany – has been particularly affected. SCA’s CEO Jan Åström stated in a recent interview that UK consumer tissue prices have fallen 20% since 1999, with about 10% of the slide occurring in late 2002-early 2003.
Åström concluded that there are several reasons for price erosion, “including aggressive pricing on the part of our competitors and establishment of the hard discounters such as Aldi and Lidl in the UK which added to the price pressure.” It is true that particularly Procter & Gamble have used aggressive campaigning in their efforts to capture market share for their “Charmin” toilet paper and “Bounty” kitchen towel brands. These efforts have been concentrated on the two largest markets – Germany and the UK. Competitors in the branded business have had to follow – and also retailer label prices have been indirectly influenced by these developments.
The increasing importance of hard discounters is another factor which has put pressure on tissue prices, particularly in Germany.
It is expected that discounters will soon account for 40% of the German retail business, and Aldi will soon surpass Edeka/AVA as the largest retailer. Another hard discounter, Lidl has shown the fastest expansion pace in recent years. Aldi’s negotiation power is strong, and it establishes benchmarks for purchasing prices of other chains. Retailers are surprisingly well aware of the current prices paid.
EXPECTATIONS FOR 2004
Economic growth has been sluggish in Europe, though there are weak hopes that towards the end of 2004 Europe will follow, though with a substantial delay, the strong economic growth of the USA. We expect tissue demand to pick up somewhat in 2004, possibly reaching the long-term growth trend, provided we will see a gradual improvement in European economies.
However, the outlook is not very promising in some European countries – including the largest economy, Germany.
According to most tissue companies, price erosion stopped towards the end of 2003 and prices stabilized, though at a lower level. But increasing raw material prices, high energy and transport costs (continuing high oil price) and regular salary and social cost increases are good arguments for tissue companies to announce price increases to retailers and other customers during this year. We are likely to see higher average tissue prices in 2004 compared with 2003 – the level of increases can hopefully more than offset cost increases so that there would be a positive contribution to the overall profitability of the tissue industry.
INVESTMENT ACTIVITY PICKING UP
2004 will see more tissue machines starting up than during 2003. Current project announcements indicate that at least 10 new and second-hand tissue machines should be starting up in Europe in the course of this year.
Sofidel’s Delipapier PM2 (55,000 t/yr) was reportedly in the start-up phase in Meurthe-et-Moselle, France at the time of writing in late March 2004.
In Italy there are as many as five new tissue projects which should come on stream by the end of 2004. The start-up of Cartiera Carma’s PM2 in Pietrabuona, Pistoia has been postponed several times but the Recard PM should now finally be on line in the second quarter of 2004. Three projects are in southern Italy, where subsidies are available for investments in structurally weak regions: Tecnocarta’s mill is ready for start-up in Pietramelara but lacking working capital; CSL Group’s/Cartatech’s project in Rizziconi, Calabria, is also at an unclear phase because of some irregularities related to the project; and the latest news is Cartiera Antonio e Carlo Camera’s self-assembled PM in Minori, close to Naples which should come on stream in May 2004.
Cartiera Fenili’s PM2 in Capannori, Lucca is due to be started up in September.
LPC Kisa’s Andritz PM in Sweden should be started up before the end of the year, provided that permission problems for re-channelling a small brook-bed can be solved and not delay the construction work.
Kartogroup’s Leuna project in Germany is finally moving forward. The foundation stone of the project was officially laid on March 19, and the company aims at starting the PM before the end of 2004.
In Poland, investments are also set to continue. Fabryka Papieru Czerwonak’s self-assembled second-hand PM should be completed in late 2004. Filar of Chodecz is due to start-up a small second-hand PM during 2004, but no recent news is available on the phase of this project. A couple of additional tissue PMs (PPHU Rolls/Wloclawek and ZPO/Olawa) should have their start-ups in early 2005.
In the Ukraine, two paper mills at Dnepropetrovsk and Lvov are reportedly installing a second-hand PM each. Both should be started up before the end of 2004. However, there are no detailed descriptions available concerning these projects.
Two major rebuild projects have so far been announced: Novacare (former Papeteries Mougeot) PM3 overhauling was completed by A. Celli of Italy in March 2004; and Andritz will modernize Procter & Gamble’s PM2 in Neuss, Germany in July 2004.
FUTURE FOCUS IN THE SOUTH AND THE EAST
Beyond 2004, investment activity is expected to concentrate mainly in the south and the east of Europe. Sofidel will enter the UK market with a new PM at their Intertissue subsidiary in South Wales, but otherwise projects have been planned for the most rapidly growing markets in the eastern and southern parts of the continent.
Spain has recently been in short supply of parent reels with rapidly growing domestic tissue consumption. Imports have grown substantially, and several companies have set their sights on the Spanish market. But three major projects have recently been announced at rather short intervals: IC Tronchetti’s greenfield mill project in El Burgo de Ebro (Zaragoza), Aragon; Gomà-Camps’ greenfield mill in Ejea de los Caballeros (Zaragoza), Aragon; and Tisu de Lourizan’s (JV between the pulp company Ence and Georgia-Pacific) mill to be integrated with an eucalyptus pulp mill in Galicia. In addition, the LPC Group has announced the construction of a tissue converting plant in the area of Los Barrios, southern Spain.
If all these investments will be realized at too short intervals, there is a threat of overcapacity in the Iberian Peninsula – a similar situation that was experienced in the early 1990s when several PMs came on stream in 1990-1992. However, it should be noted that Spain’s market volume has doubled with respect to a decade ago so that new capacity can be more easily absorbed.
One note is that the LPC Group seems to be expanding very rapidly – resembling Italian family-owned companies during the course of the past ten years. Sweden’s PM is expected to be followed by a similar installation in Scotland, and also Spain may be integrated with a tissue PM at a later stage. Rumors suggest that LPC’s focus is also on the Central European market through either an acquisition, or by establishing converting operations there.
In Eastern Europe, numerous investment plans have been presented by small and medium-size companies, many of which, however, have to fight for their existence. Financing is a key issue, a typical problem for Eastern European projects.
We also expect some investment news from Russia rather soon. The Russian tissue market has grown rapidly, and existing capacities are already well utilised. Several internationally operating companies are known to have plans for the Russian market, most of them having their interest in a mill to be located close to the main consumption centre, the Moscow metropolitan area.
There is no single tissue mill existing close to Moscow, only some converting operations. It may well be that more about these plans will be spoken of already during 2004.
SCA’s interest in expanding in Eastern Europe and especially in Russia has been publicly expressed by the company. The company has already collected experiences from Russia through their Svetogorsk mill close to the Finnish border, serving mainly the St. Petersburg region. SCA may be among the first companies to invest in the Russian tissue business, which offers huge long-term growth opportunities, in spite of the challenging nature of any major investment to be carried out by a foreign company in the Russian scenario. •