Madame Jiang


Maura Leonardi

We are in China, precisely in Beijing, the “Northern Capital”, political center rich in history for the Chinese people. Here are the headquarters of the China National house-hold Paper Industry Association, nerve center of the paper and tissue industry. We met with Jiang Manxia, Secretary General of CNHPIA. In the past, Ms. Manxia was Director of the Institute of Environmental Protection at the Ministry of Light Industry, then assistant to the Director General of the China Paper Industry Development Co., Ltd. She has been covering this role since 1993 and is a key reference figure for the Chinese tissue industry and not only. For many years, China has been at the center of a two-digit growth trend and it represents a country with high potential for the field of tissue, too, both for what concerns its size (9,571,300 km²) and population (1,354,040,000). Today, the mapping of the market is beginning a change process that will also involve the internal regions of China that have up to now remained behind the scenes.

Perini Journal: Beijing is considered one of the most expensive cities in the world, proof of the country’s economic growth. Consumption is one of the parameters that measure a country’s state of health and wellbeing. How have growth figures increased in the last few years? What is the degree of penetration of tissue products?

Penetration degree of tissue products. Per capita annual tissue products consumption in China was 3.9 kg in 2011and it is estimated to reach 4.4 kg (the world average level for 2011) in 2012. Among various tissue products, the penetration degree of toilet tissue is the highest, this product being a necessity for everyone except perhaps people in remote rural areas. Toilet tissue accounted for about 62% of all tissue products in 2012. Facial tissue is mainly consumed by urban households, and its penetration degree has also increased consistently with the increase in the number of families possessing vehicles. Facial tissue has become gradually popular in third-tier and fourth-tier cities and in developed areas. Low-priced facial tissue with soft plastic packages is prevalent. Families having greater buying power have increased facial tissue consumption. In 2012, facial tissue accounted for 22% of all tissue products. The use of handkerchiefs is also relatively common in cities, and wallet type handkerchiefs are relatively popular with the young generation, too. The main reason for the large consumption of handkerchiefs is that they are easy to take along and many public washrooms in China do not provide toilet tissue. Handkerchiefs accounted for about 7.1% of all tissue products in 2012. The penetration of kitchen rolls is very low, there is a large gap compared to European or American consumption levels as they are consumed only by a few wealthier families in first-tier or second-tier cities, especially those who have had experience living abroad. Most families still use washable cloths. Kitchen rolls accounted for about 0.6% of all tissue products in 2012. As for table napkins, the concept in China is very different compared to European or US markets where these are colored and very strong, while in China they are very similar to facial tissue and are mainly consumed in restaurants and canteens and accounted for about 3.1% of all tissue products in 2012. Being mainly used in restrooms of office buildings, airports, and other public institutions, hand towels have gradually become popular in recent years with a relatively high growth rate and a share of about 2.8% among all tissue products in 2012. Beijing is one of the cities with the highest per capita consumption rate, approximately 9-10 kg. Considering a permanent population of 20 million, its annual consumption is 200,000 tons, 4% of the national consumption volume.

Perini Journal: A general view of China: current situation divided by region and future prospects. Regarding tissue production, can you give a current mapping of the situation?

Overall condition. China’s tissue market has maintained a rapid development since the 1990s, with a compound growth rate of about 10% over the last two decades. In recent years, not only has the development rate accelerated, but also high-end products have developed, and the proportion of these better quality products is becoming increasingly higher.

Tissue consumption in China grew by 12.7% in 2011 on a year-on-year basis, and is estimated to increase by around 13% in 2012. Growth rate will also be maintained at about 10%-12% in the next few years. In 2011 consumption was 525,000,000 tons, about 17.2% of global consumption, and sales accounted for approximately 15.8% of global sales. It is estimated that consumption will be 5.95 million tons, and per capita consumption will be 4.4kg in 2012, reaching the average world level for 2011.

China is a vast territory with 31 provinces, municipalities directly under the central government, and autonomous regions whose economic development and consumption levels vary one from the other, just like Europe which is comprised of many countries. Generally speaking, the consumption level of the eastern developed area, especially the Yangtze Delta and the Pearl River Delta areas, and first-tier cities such as Beijing, Shanghai, Guangzhou, Shenzhen, etc., is high, while that of the western area is relatively low. Seen from the development trend, the area with a relatively low consumption level in the past has a higher growth rate with the development of the economy.

Current production status of tissue products. The Chinese tissue industry is comprised of a total of more than 1,600 manufacturers, including 500 comprehensive manufacturers who not only produce parent rolls but also convert tissue products. The market is mainly occupied by local manufacturers. In 2011, the top 15 manufacturers took up 43.5% of the market, and the top four manufacturers, Hengan, Gold Hongye, Vinda, and C & S, accounted for 30% of the market. The top four manufacturers are respectively ranked eleventh, fifth (including the capacity in Indonesia), seventeenth, and twentieth in the world, and third, first (including the capacity in Indonesia), sixth, and ninth in Asia.

In recent years, the Chinese tissue industry has witnessed a rapid growth and an industrial upgrading period, with output increasing at a rate of 8%-12%. In 2011, output was 5,821,000 tons, and 8% was exported to more than 100 countries and regions all over the world. Exports are dominated by finished products for more than 80%.

The current condition is that:

• The overall equipment level of the industry has increased (paper machines and converting and packaging equipment).

• Since the international pulp price is at a relatively low level, influenced by European and American economy. Also, supply by South America has increased and international prices have remained low. Production costs are very low and the gross profit level of industry-leading enterprises has generally increased, with the year-on-year growth in sales reaching two digits. In agreement with the 2012 annual report, growth rate for Hengan was 14% and for Vinda Paper a 25% growth rate was registered.

• Investment continues mounting. Leading enterprises expand rapidly and other companies are entering the field. Newly-increased modern production capacity is intensified, exceeding the increase in market demand and yielding a situation of periodical excessive capacity and industry reshuffle. The implementation of a national policy of energy conservation and emission reduction and closing down backward production facilities, as well as market competition will change the industry structure and upgrade it.

Many new paper machine projects have commenced in recent years, so modern capacity has increased rapidly: the newly-increased capacity in 2009 was 333,000 tons, in 2010 – 415,000 tons, in 2011 – 574,000 tons, and in 2012 – 1,269,000 tons; the capacity of previously-announced projects that will be put into production in 2013 is about 1,350,000 tons, and what will be put into production in 2014 or later is about 2,500,000 tons.

Among newly-increased capacity projects, the number of new projects with the capacity of single paper machines reaching 60,000tpy also increased. There were two lines in 2009, three in 2010, four in 2011, and twelve in 2012.

It is predicted that Chinese market capacity will increase by 600,000-700,000t naturally each year, together with eliminated outdated capacity which is probably 200,000-300,000t per year. However, a lot of medium- and small-scale factories are replacing old paper machines with domestic paper machines having a relatively large width and enhanced speed. Seen from the concentrated launching of new modern capacity, a situation of supply exceeding demand is relatively obvious. However, market reflection is still inconspicuous because, for example, the projects newly built in 2012 will probably be put into production in the second half or the end of the year and full capacity will not be reached until 2013 or 2014. In addition, some projects are delayed. According to the original statistics of the China National Household Paper Industry Association (CNHPIA), planned new modern capacity in 2012 is about 1,500,000t; however, the total capacity actually put into production is about 1,269,000t.

In my opinion, the increase in capacity will mainly yield two effects; the prevailing favorable effect is that it can promote the optimization of an industrial structure, improve the overall level of technical equipment of the industry, and increase the proportion of high-quality products in the product structure.The adverse effect is that the excessively fast increase in capacity will cause the problem of excess of supply over demand after the newly-increased capacity is released completely, therefore causing price wars and a decrease in the capacity utilization rate. I believe such a negative factor will impact less on existing leading brands in our country, but will cause difficulties for new entrant enterprises (that, albeitlarge, are coming in from other industries) as well as medium- and small-sized enterprises.

Perini Journal: In your opinion, what are the main consumption drivers?

Surely the most important is economic development and increase in per capita disposable income. The second factor is change in living habits and more attention to personal hygiene.

Urbanization: more and more people from rural areas was influenced by others and change habits, or due to living standard improve.

The fourth factor: Population growth.

Another important factor in for consumption development is the growth of the modern retail industry (increase in retail stores and progress in less-developed cities and in the countryside).

Perini Journal: How are Chinese cellulose production and converting companies respecting the environment?

The Chinese government is very attentive to the environment and to the industry’s eco-sustainability. There are several different phases in the production process that are kept in consideration when it comes to respecting the environment.

Considerations on environmental problems are mainly embodied in aspects such as fiber raw material, production processes, wastewater treatment, logistics, etc.

Fiber is the first aspect to be taken into consideration in terms of safeguarding the environment. As an excellent raw material for tissue making, timber is a renewable resource and its rational utilization will not endanger the environment. Wood pulp can make full use of biomass raw materials. The alkali recovery process recycles alkali and heat energy.

Many tissue converting industries purchase the fiber. When purchasing pulp, it is required that the fiber raw material of the pulp manufacturer comes from properly managed forests, PSC- or PEFC-certified. China is short on forest resources. Under the historical background of green and low carbon, the development mode of “integration of forest, pulp, and paper” is continuously advocated and equal importance is attached to afforestation and exploitation & utilization.

When choosing their suppliers, Hengan and Vinda must request the certifications necessary for pulp production, such as for example PSC or PEFC.

The fiber raw material is dominated by timber, and non-timber fiber and secondary fiber are utilized properly.

Another important factor is the production process and and converting, too. The paper machine production of large enterprises with advanced technology is characterized by low energy consumption, less consumption of clean water, recycling of paper machine white water and fiber raw material, and up-to-standard discharge of wastewater after secondary biological treatment. Large enterprises are pushing the elimination of existing outdated capacity through expansion and integration.

It is essential to:

• Exploit the potentialities of energy saving and emission reduction through technical improvement and innovation and full utilization of resources and energy.

• Save energy, reducing consumption of raw materials, water, and steam (steel dryer and heat insulating cover), carrying out combined heat and power generation, and utilizing waste heat of air covers;

• Improve yield by using high efficiency converting equipment, and reducing the use of packaging material by simplifying product packaging and promoting large-package products.

• Not use raw materials & excipients in the production process that may be harmful to humans.

• Guarantee product safety by excellent management of production and processing.

Large enterprises establish paper production facilities and tissue converting plants in various places to reduce transportation distance logistics. Converting facilities were built throughout China in order to reduce transportation costs, facilitating logistics.

Curtailing the use of fuel coal and replacing it with natural gas and fuel oil to respect the environment and reduce CO2 emissions.

Regarding energy saving, the Chinese government is currently recommending enterprises not to pursue excessive bleaching and not to add fluorescent whitening agents in product standards, and sets only an upper limit for the brightness (whiteness) of household paper. For example, the old national standard for facial tissue requires that brightness be 80%-90%, while the current national standard requires that brightness not be more than 90%.

On the use of tissue waste raw material. China is still different compared to the global market. In our country, in the fiber raw material structure of tissue, the proportion of wood pulp is nearly the same as the world average level, about 60%. The proportion of waste tissue pulp is about 33% averagely in the world and higher in developed countries, while in China it is only 6.8%. Other raw materials used in China are mainly rice and wheat straw pulp, bamboo pulp, bagasse pulp, etc. This proportion is approximately 34% which is nearly the same with that of waste pulp in foreign countries.

In terms of reducing the use of timber raw material and increasing the use of waste tissue raw material, China has a different situation. There are many small plants in China, so in consideration of product safety and sanitation, relevant Chinese laws and regulations and product standards prescribe that tissue towel products are not allowed to use waste as raw material and waste tissue pulp is only permitted for the production of toilet tissue and hand towels. The to-be-promulgated new national standard for tissue toweling products prohibits the use of fluorescent whitening agents. The use of waste raw material will yield unqualified products since printing paper contains fluorescent whitening agents. The waste materials used for tissue overseas is good quality office paper, printing paper, etc.; since the consumption of printing paper decreases, the source of waste raw material decreases accordingly and the proportion of waste pulp tissue has a downward trend. While China is more disadvantaged in terms of the source of high-quality waste tissue raw material, its proportion in the fiber raw material structure will not increase too much. Currently, in consideration of environmental protection, some domestic plants are launching true-color and wheat straw pulp toilet paper, namely unbleached toilet paper, and the toilet tissue produced from recycled waste milk boxes, which, however, is still in a promotional stage on the market, low in production, and less recognized by ordinary consumers.

Perini Journal: Rolls without a core are most frequently used in China: why? What are future developments?

It is necessary to introduce the categories and consumption habits of the different regions. Consumption habits in China differ greatly compared to foreign countries. As far as toilet rolls are concerned, the product package in China is different from that in other countries; here, generally 10 rolls form a bag and each roll has an individual package, while rolls in the large-pack format in Europe and North America do not have individual packaging. In addition, according to market research statistics, the proportion of coreless rolls in our country has increased in recent years and has exceeded that of cored rolls in 2011. In China, the trend for coreless products is growing. Except for toilet rolls, we also have draw-out toilet tissue and flat toilet tissue. The package of draw-out toilet tissue is similar to that of facial tissue. The consumption habits in various regions of China are different, too. For example, consumers like to use flat toilet tissue very much in the Yangtze River Basin, while consumers in the northern area, especially second-tier, third-tier or below cities prefer coreless rolls. Chinese consumers have low requirement for softness of toilet tissue and pursue cost-effective products, so toilet tissue products are generally not embossed.

Reasons for coreless rolls becoming the most common product. According to Nielsen China 2011 data:

• Toilet tissue sales increased by 11.2% and average price increased by 6.5%; sales increase was mainly spurred by coreless rolls.

• Sales shares of various toilet products are: cored rolls 42.8%, coreless rolls 45.1%, draw-out toilet tissue21%, flat toilet tissue 9.4%, others 0.6%.

The reason for the prevalence of coreless rolls is their economical efficiency. Manufacturers can save 5-6 cents per roll without core. Coreless rolls are usually medium- and low-grade products which will generally not be used by wealthier, middle class urban families or above who still prefer to use the cored rolls that can be placed on the roll dispenser in bathrooms.

Future development. Sales increase of toilet tissue mainly depends on urbanization and consumption by families who did not use toilet tissue before. From such a perspective, the proportion of coreless rolls will further increase; however, the increase in disposable personal income will inhibit such trend and make it impossible for them to replace cored rolls completely. Consumption habits are different in cities; for example, in Beijing families consume cored rolls more than coreless ones.

Future growth trends will be guided by a greater penetration of coreless products in families that today do not use toilet paper.

Perini Journal: How are tissue products distributed in China? Which are the main distribution channels?

There are different distribution methods. Tissue is still mainly distributed by dealers wholesale. In addition, large-scale manufacturers establish their own sales companies (offices) in various locations and have their own main customers, comprising the KA channel, commercial channel (products other than for household use), and online sales.

Main distribution channels. The main distribution channels comprise the modern retailing (KA) channel (hypermarket, chain supermarkets, convenience stores), traditional channels (wholesale markets such as bazaars, etc., town groceries, village stores), the commercial channel (public institutions, restaurants, hotels), e-business (online stores), as well as a small number of maternal and infant shops, drug stores, etc.

Private Label. Currently there are fewer domestic private label tissue products in our country, and brand products prevail. The market has also changed in recent years and some private label products have emerged in various places, such as at the Beijing Jingkelong supermarket that already possesses its supermarket brand toilet tissue products. However, Carrefour, Wal-Mart, etc. still have no supermarket brand toilet paper. Currently, most Chinese supermarket brand products are still restricted to medium- and low-grade toilet tissue, but they do not occupy a considerable market share as they do in Europe and North America.

Perini Journal: Current general view of the field: total cellulose produced and consumed. Division by geographical area and type of production.

Zone-based paper production. The production of wood pulp base tissue is mainly concentrated in Eastern China (including Jiangsu, Shanghai, Fujian, Shandong, Zhejiang, and Anhui), South China (including Guangdong, Guangxi, and Hainan), and Middle China (including Hubei, Hunan, Henan, and Jiangxi).

In addition, small manufacturers gather in Hebei and most of them use domestic small paper machines and commercial pulp as the main raw material; their annual output is about 500,000 tons. Guangxi is the gathering place of bagasse pulp toilet tissue manufacturers, with an annual output of around 600,000-800,000 tons. Sichuan is a place where bamboo pulp toilet tissue manufacturers concentrate, with an annual output of about 500,000 tons.

Zoned consumption volume. The consumption volume/amount of tissue in various regions is mainly decided by factors such as economic development level, population (including external population), degree of urbanization, consumption habits and retail industry development (store intensity), etc.

According to surveys by ACNielsen, Guangdong and Jiangsu are the provinces while Shanghai and Beijing are the cities with the highest consumption amount of household paper.

Perini Journal: How is the Government supporting companies’ development and product distribution in the territory?

Being concerned about people’s livelihood, the government supports the production of fast-moving consumer goods and the development of small- and medium-scale enterprises, which is mainly embodied in aspects of project examination and approval, financing, reduction of enterprises’ tax burden, etc. The industry belongs to the category of companies producing Fast Consumer Products and the Chinese government supports Chinese companies that work in this field also through development plans and reduced taxation. It supports the industry also through the distribution of tissue products and has tried to make the Western regions, where the product is not very diffused, more attractive. For example, Hubei Province has attracted the 4 major producers to create facilities there.

The government carries out a light industry revitalizing policy, supports the development and research of advanced paper machines, and promotes the elimination of outdated capacity from the point of view of quality standards, environmental protection, energy savings and emissions reduction.

Perini Journal: Outlook for the future.

The market still enjoys growth potential: China’s annual per capita consumption level in 2012 is the same as the world average level (4.4 kg) for 2011, but still has a significant gap with North America (25 kg), Japan and Western Europe (15 kg), Hong Kong/Macao/Taiwan (10 kg) of China.

The Chinese economy is still growing rapidly and household disposable income and purchasing power continue to rise. It is predicated that the increase of market volume will be synchronized with GDP growth and maintain a high level.

The urbanization process, the economic development of western China, and the penetration of the modern retail industry will all combine to make consumption habits change, increasing use of household paper.

Supermarket commodities such as mother and baby products, household paper, etc. have become available at online stores, so consumption potential will be further released.

The phenomenon that retailer brand products occupy a large market share in European and North American countries has not yet emerged in China. Supermarket brands do not constitute a threat to brand manufacturers, so enterprises can maintain a reasonable profit level.

The domestic proportion of Away-from-Home products is about 12%, while that in overseas mature markets is above 30%. Folded products such as hand towels, napkins, etc. still have great room for development.

With the change in lifestyles and consumption habits, requirements for product quality and grade will increase consistently, the demands for facial tissue and handkerchiefs will further rise, and kitchen rolls will also gradually become popular.

Industrial upgrading and development opportunities of leading enterprises:

Currently, nearly 50% of tissue products are manufactured by medium- and small-scale enterprises, and paper machines with low speed, low productivity, and high energy consumption dominate.

Given the need for environmental protection and emissions reduction, small-scale paper production enterprises will be further closed pursuant to national policy.

The elimination of outdated capacity helps balance supply and demand and make room for the development of leading enterprises adhering to the concept of sustainable development. The industry is undergoing integration and recombination and investment is approaching the peak as well, creating a great challenge for medium- and small-scale enterprises ranked in the second echelon.

The risk of excess capacity and price competition has shown its signs. However, it will not get highlighted in the short term and has less influence on leading enterprises and brands.

APP, April, Chenming, Nine Dragons, Sun Paper, etc. enjoy advantages in cost competition due to self-produced pulp or waste paper raw material, and their rapid expansion will produce significant effects on the Chinese market pattern.

Since consumer loyalty to tissuebrands is relatively low, price wars may occur in conditions of excess capacity and large-scale retailers may also possibly take the opportunity to expand the market share of labeled products though low price.

Talking with Ms. Jiang Manxia allowed us to see the tissue field with new eyes and to understand the new dynamics of a very interesting, constantly evolving market. *

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