Cause for celebration or contemplation?

Tissue production has reached a milestone in 2005 but there are worrying signs that too many investments will lead to serious overcapacity.

Guy Goldstein

25 million tons! This is the milestone which has been reached in 2005 for global tissue production. Is there overcapacity? Yes, definitely in certain areas of the world, scarcity in other parts and the supply growth is not always linked to market demands.

Production grows by about 750,000 tons per year representing quite a few tissue machines. At least 30 if we make a conservative calculation, based on: • 4 x 540 cm wide, high output machines at 55-60,000 tons each; • 8 x 270 cm wide, high productivity machines at 28-30,000 tons; • 18/20 machines of lower output for a total of 300,000 tons.

CALCULATIONS LIKE THIS DEFINITELY EXCITE THE PAPER MACHINE PRODUCERS AS WELL AS THE PROVIDERS OF CONVERTING EQUIPMENT, and do not even take into account the various types of rebuilds which are also being undertaken each year. These rebuilds are designed to provide more capacity from an existing machine at a lower investment per ton than a new machine.

So is this a boon for machine suppliers? Well, yes and no because, in my opinion, there are probably too many potential suppliers with different offerings and levels of technology, as well as quality of workmanship. The world is ready for some concentration which will lead to a smaller number of machine suppliers. Please don’t expect me to name the ones that should leave the party but I think it is time that all tissue machine makers started asking themselves what they are trying to accomplish with the ridiculously low prices they are offering. Can they really be making money on these projects or have they perhaps forgotten that motive?

OF COURSE THERE ARE SOME GOOD REASONS TO ACCOUNT FOR AT LEAST PART OF THE DROP IN TISSUE MACHINE PRICES. The price of a tissue machine is directly linked to the weight of stainless steel, the number of components and somewhat to the number of hours needed to design, build, assemble and erect these machines. The machines are more and more sophisticated due to the fact that the cost of automation has tumbled down and that standardization is, at long last, winning the game. A tissue machine nowadays is more and more a carbon copy of a previous order, with less customization. It is also an assembly of standard components, moving towards a true “plug & play” type of design.

WIDTHS ARE BEING STANDARDIZED ON 540 OR 270 CM. Yankees can be bought off the shelf. Hoods and dust treatment come with just a few levels of sophistication. Soon the choice will simply be whether you want left or right hand drive.

According to manufacturers we may soon see "Buy one, get one free" offers. Or, as one of the biggest retailers puts it, "Everyday lower prices"! The machine vendors are complaining of extremely low margins but...still taking orders. Is this wise?

THE PRICES ARE SO LOW THAT SOME COMPANIES IN THE FAR-EAST ARE ORDERING MULTIPLE MACHINES THREE AT A TIME FOR ONE COMPANY or even recently an order for 10 (hopefully) identical machines. One machine manufacturer in Japan is making machines in batches, which was never the case before.

The production capacity being installed in China today is growing at double the market growth... it sounds like Italy or Spain! In China you see both very modern world class machines and machines made locally with a capacity of 5-10 tons/day. India is supposed to be the next very big market but even though population-wise it will outgrow China, there are still a lot of cultural barriers as well as a lack of organized distribution for the time being. The country will overcome its hurdles. But it will take time.

Back in the mid-80's a lot of people where thinking that tissue consumption in India was about to explode. Some big name consultants got fat selling...wind. They are now busy selling studies on the tissue market on Mars. It’s potentially huge, virgin... and untapped, but truly a long way away.

As in many countries it is not only the number of people, the culture, the urbanization, and the level of income but a combination of these plus the need for distribution to span across huge territories to bring the goods to the doorstep of the potential users.

REGARDING OVERCAPACITY, what are we doing? Not much really. The big guys like K-C, SCA and G-P have announced tonnage reductions and lay-offs which they call, quote: "Initiatives to further improve the Competitive Position". In fact, they are basically taking uncompetitive equipment out of production which has been neglected for years. The old equipment has no use even in underdeveloped countries, where it might have been welcomed 20 years ago. One is appalled at the state of some mills in very large companies; you get the impression that nothing has happened for decades. Which is correct! All the same, only a couple per cent of world production is being taken out and it is really being done because they are facing competition from modern, state-of-the-art equipment installed by relative newcomers.

In many countries nowadays investments which are being made are state-of-the-art, ready for full automation. Many countries will not accept used equipment as it has been too often used by the large groups as a tax deduction in their home country rather than being scrapped.

LET’S HAVE A QUICK LOOK AT WHAT IS HAPPENING IN CERTAIN COUNTRIES. Italy: We know for a fact that production is double consumption. Tissue consumption is in the area of 765,000 tons and will grow to perhaps 1,000,000 tons within the next ten years. Installed capacity is already 1,650,000 tons, meaning export capacity is 900,000 tons which is really quite a surplus!

Spain/Portugal: We cannot really separate the two countries, as they are so close geographically and culturally. Consumption is around 700,000 tons now and capacity only 620,000 tons so at this point, there is a net deficit. The installation of a number of new machines will clearly fill (or perhaps overfill) the gap. SCA is adding 60,000 tons at Valls, ICT is aiming at 65,000 tons, Iberica de Papel 18,000 tons, Georgia Pacific Allo PM3 60,000 tons, Goma Camps/Wepa 55,000 tons, and Sofidel 30,000 tons.

The total amounts to a potential net of 288,000 tons meaning a net surplus for export of 200,000 tons. In addition, Renova is also planning a new PM in the near future (but it could be in France).

Turkey: With the clear domination of the market by Ipek Kagit, the Eczaçibaçsi/Georgia Pacific joint venture, Turkish entrepreneurs have jumped on the bandwagon. With a demand of 135,000 tons and an installed capacity of close to 170,000 tons, the country is already a net exporter. Two new PMs are on the way with a total addition of 85,000 tons. This extra capacity will find its way to the Middle East which is also investing a lot and will become an exporter too.

Eastern Europe will benefit from this capacity since many projects in that area seem to meet with political as well as financing hurdles and a well trained bureaucracy. Poland is the exception due to its internal growth and the proximity of Germany, its natural outlet.

I COULD GO ON AND ON WITH INDIVIDUAL COUNTRIES, BUT THAT IS NOT THE MEANING OF THIS VIEWPOINT. The situation is not hopeless but certainly very serious. In my opinion, it will most likely lead to another slump in investments in the next few years while everybody tries to fill up their existing equipment and pipelines. The big guys are at somewhat of an advantage being able to push out more products through their brands, but distribution and particularly "hard discounters" work against them, lowering prices and return and while now delivering a level of quality close to the majors.

IN SUMMARY, I WOULD SAY THAT OVERCAPACITY IS DEFINITELY A MAJOR ECONOMIC PROBLEM which in certain areas of the world, particularly in Europe, could end up in a bloodbath. Brands are being seriously threatened by the now high quality private labels together with the new breed of lower margin distributors. The big guys need to invest wisely, reviewing systematically their competitive positions and measuring the gap that they may have with the new kid on the block and his new shiny investment. I think all mills will be affected by these developments. Clearly dedicated machines will be fewer and fewer, except perhaps in the very large, mature markets. Be ready for flexibility, and have more modular machines with quick change over capabilities.

The world of tissue needs to come to its senses and think carefully about investments which in the end could drive both the industry and perhaps even their company down. I know it is a fierce fight out there, but there need not be more casualties than necessary. •

Dr. Guy Goldstein is an independent consultant, but we have agreed that he will answer, to the best of his knowledge, any reasonable questions related to our industry.

You can contact him through the Perini Journal at: e-mail: perinijournal@fp.kpl.net.

Answers will be given either via the PJL or directly.

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