Esko Uutela, Principal, Tissue, EU Consulting/RISI
The China National Household Paper Industry Association (CNHPIA) has recently released its annual report on the developments in the Chinese tissue and hygienic products markets and industry during 2013. Comments from market participants and suppliers indicated that toward the end of 2013, market growth had slowed down, and the recently published CNHPIA figures confirmed these reports. Tissue production and sales went up by 8.5% in 2013, but consumption only grew by 7.2%, according to CNHPIA. However, our consumption growth figure is less, at 6.7%, because the CNHPIA seems to exclude the category “others” (the code 48.18.900 of the Harmonized System, which includes products such as medical tissue and many other specialties, as well as tissue rolls narrower than 36 cm) from its export figures.
The production number provided by CNHPIA is considered as the best available estimate for Chinese tissue production as it is based on data received from a vast number of companies, although many suppliers did not want to publish their individual production numbers, which was the case in the past. We do not agree with the growth figures recently published by the China Paper Association (CPA), which were only 1.9% and 0.4% for 2013 tissue production and consumption growth, respectively. The historical figures of CPA also show unbelievable variation from year to year, and we think the CNHPIA data are much closer to the reports we hear from tissue companies, machinery suppliers and other spectators close to the market place.
The past 10 years, from 2003-2013, showed average growth of 8.7% per year for tissue production, 3.5% per year for total imports, 14.2% per year for total exports and 8.1% per year for tissue consumption. Growth in tissue exports has recently accelerated - in 2012 growth was 19%, in 2013 it was 25% and the first five months of 2014 growth was more than 30%. However, export growth for the whole year of 2014 is expected to be lower than in the first months, the reason being that Chinese tissue exports grew particularly strongly in the second half of 2013 and it is most likely that this growth cannot be repeated in late 2014 considering the global supply/demand situation in tissue markets.
TISSUE DEMAND FOLLOWS ECONOMIC GROWTH, ALBEIT NOT VERY CLOSELY.
Economic development and demographic factors such as population growth and degree of urbanization are the main drivers for tissue consumption in all emerging economies, including China. Having a look at the long-term development in China, from 1993 to 2013, it can be seen that the growth rates of real GDP and tissue consumption follow each other, but not very strictly with some annual variation in the relation (Figure 1). The average ratio between tissue consumption growth and GDP growth is close to parity (0.98) in the twenty-year period, but varies between 1.60 in 1998 and 0.44 in 2007 when GDP grew by 7.8% and 14.2% while tissue consumption by 12.6% and 6.2%, respectively (Figure 1).
The future outlook for economic growth is not very promising when comparing with the past growth rates but globally seen, still very positive. RISI’s ten-year GDP forecast currently suggests an average growth rate of 6.6% for real GDP in 2013-2023, and tissue consumption is expected to grow at very much the same pace. Population growth is also slowing down to about 0.5% per year, and so not very much contributing to tissue demand. But the share between urban and rural population has been quickly changing in favor of urban population. In 2013, almost 54% of the Chinese population lived in urban areas while in 2000 rural population still accounted for a share of 64% (Figure 2). In June 2013, the Chinese government announced a plan to move 250 million rural residents into newly constructed towns and cities over the next dozen of years. These measures for accelerating urbanization will strongly contribute to the growth in Chinese tissue consumption.
CHINA SHOULD NOT BE CONSIDERED AS A SINGLE MARKET
in the way of many outsiders, it is a huge country with regions in very different phases of development. This also applies to tissue consumption. The results of recent RISI China tissue study with special focus on China’s regional developments, clearly shows that opportunities in the business are different in various parts of China. A good example of this is shown by major differences in per capita tissue consumption between the eight officially defined economic regions of China. With more than 11 kg/capita in Shanghai and more than 9 kg/capita in Beijing, the Western, Central and Northeastern Economic Zones show only figures in the range of 3-4 kg/capita, lowering the average per capita consumption to only 4.5 kg in 2013. This means there is still a lot of untapped potential, but the prospects are best in Central China where economic development continues up to double as fast as in China on average (Figure 3).
EXTREME INVESTMENTS HAVE LED TO OVERCAPACITY, CAUSING PROJECT DELAYS.
The fast growing Chinese market has attracted both existing tissue suppliers and new entrepreneurs to invest in new tissue capacity in China. The Chinese economy is well regulated by the government in many issues, but there seems to be no control mechanism for new investments in the tissue sector, only mandatory closures for old polluting and energy wasting mills. The main issue is that very few Chinese tissue suppliers seem to base their expansion plans on realistic market prospects or the regional supply/demand balance, expecting that the growing market will absorb the new capacity anyway. This may have been the case still about 10 years ago, but no longer today as too many companies are makingefforts to take the opportunity to grow based on at least partly unrealistic assumptions about possible market share gains and expectations for expansion. Most of the largest Chinese tissue suppliers have had to change their timing for capacity additions. These companies include Gold Hongye (APP), Hengan International and C&S Paper, and many smaller companies. Of the four largest companies, only Vinda Paper, now majority-owned by SCA, has not officially postponed its planned 130,000 tonne per year expansion at two mill sites in Guangdong and Zhejiang Provinces announced for late this year, but on the other hand, there are no details available on equipment suppliers, timing or other specifics. Some of the new potential entrants, including APRIL for example are reportedly still seriously considering whether to enter the tissue business or not. Some other players, including Sun Paper and Lee& Man, seem to be on the way to realizing their plans. Sun Paper has already established its converting base and tissue brands, and the first PM has also been started up.
The market situation seems not to be frightening all market participants from their ambitious plans. One of these companies to mention is Shandong Tralin Paper, now on the way to changing its name to Shandong Tranlin, based in Liaocheng, Shandong. The company is known for its straw pulp-based tissue production, and having personally tried its products, I have to say not too bad quality. The company has plans to add a vast number of Chinese-made tissue machines at its mill in Shandong, adding at least 250,000 tonnes per year of new capacity, and even close to 400,000 tonnes per year has been in discussions. In addition, the company recently announced a US$2 billion investment plan for an integrated straw pulp and tissue mill in Virginia, USA, which would be a very bold move by the Chinese company. However, we are not so sure how realistic this plan is, particularly financing but also marketing the product in a totally new market with complicated competitive conditions. So the main question is how can this be financially realized, but of course we do not know if they have financial backing from some of the main US players, such as Kimberly-Clark who has recently announced its wish to try non-wood pulps in their products, including bamboo pulp in the forefront but also other non-wood pulps, including straw pulp, were not excluded. But there is no officially announced context with these two plans.
OLD CAPACITY CLOSURES HAVE PARTLY HELPED THE CHINESE OVERCAPACITY SITUATION
but we expect the peak in these closures to have been passed so that less capacity will be closed in the next few years, at least based on mandatory regulations by the Chinese government. Financial/profitability reasons could be another case, but we would not like to speculate on such events. In 2012-2013, some major capacity reductions took place based on financial reasons, including some major companies such as Ningxie Meijie, Guangdong Huizhou Fook Woo, Ningxia Sand Lake Paper, Shanghai Potential Paper, and many other smaller producers.
Overcapacity characterizes the Chinese tissue business at the moment, and it looks like the situation will not improve in the next couple of years without some radical cutoffs in capacity. Announced delays have already changed the situation but still not enough. The Chinese market is not expected to grow more than 400-500,000 tonnes per year in 2014-2016, and the current outlook is that twice or even three times as much capacity is in the pipeline now. Closures and delays are likely to help, but only partly, meaning no radical change in the situation. Exports are growing, but there are also limits based on the global overcapacity and high transport costs limiting profitable exports to more distant locations than the Asia-Pacific region (Figure 4).