One major trend in recent years has been a rapid shift from conventional tissue products to ultra and premium quality products based on the use of TAD technology.
Esko Uutela, Principal, Tissue, EU Consulting/RISI
Volume growth is suffering from lightweighting. North American tissue consumption grew at an average rate of 1.8% annually from 1994 until 2014 while the market volume grew an average of 128,000 tonnes per year. Market growth had already been slowing significantly since 2003, but in 2009 the Great Recession caused the first major consumption decline, of 1.9% (Figure 1). Consumption growth decelerated from 2.6% per year in 1994-2004 to only 1.0% per year in 2004-2014, which is negatively affected by the major decline in 2009. Since the recession the market grew by an average 1.3% per year in 2010-2014. The first months of 2015 indicate that market growth could be clearly stronger this year, even close to 2% but it all depends whether this market strength will continue in the second half of the year.
One major trend in recent years has been a rapid shift from conventional tissue products to ultra and premium quality products based on the use of TAD technology. Several new TAD tissue machines have been built, most of them targeting the retailer label sector which has received new emphasis in the United States after the largest retailer, Wal-Mart, decided to make a major quality upgrade to its “Great Value” brand and started to require ultra-quality products from its suppliers. Other major chains have had to follow this pattern and now the trend is toward ultra-quality products in private label household towels and toilet tissue as well. The increase in the share of TAD products, which can produce the same size roll by using up to 20-25% less fiber than with conventional technology, has negatively affected production volumes measured by weight. When comparing the growth in the production of tissue parent rolls (tons) and in converted tissue product shipments (based on the number of cases), there is a clear discrepancy: converted product shipments show higher growth than parent roll production. This means that on average, the same number of rolls is packed in a case as earlier, but the case now weighs less as it contains products with higher bulk. Unfortunately there are no statistics available on how the average weight of a case has developed. It would be fairer to measure production growth in terms of area rather than weight, but this is also not the current industry practice. We estimate that market growth would be 0.3-0.5 percentage points higher without the lightweighting effect.
THE TREND TO TAD PRODUCTS HAS NOT BEEN AS STRONG IN CANADA AS IN THE USA, but domestic suppliers have increasingly launched new premium category products, for example, by adding a third ply in toilet tissue. This is a development resembling Central European quality patterns. But the tissue paper section of a typical Canadian store is “a sea of white,” with very few towels or napkins sold with prints or solid colors. Three-ply toilet tissue is growing in importance in Canada, while kitchen towels seem to be going in the direction of TAD technology. Another market trend is that downsizing of the sheet size is continuing. We can record major sheet size reductions from traditional 4.5” x 4.5” to new dimensions that started with squares measuring 4.27” x 4.0” (P&G “Charmin” and G-P “Angel Soft”), then 4.20” x 4.0” (K-C “Cottonelle”), and most recently 4.0” x 4.0” (G-P “Quilted Northern” and “Angel Soft”), and even to 3.92” x 4.0” (P&G “Charmin”, “White Cloud” three-ply by Kruger for Wal-Mart), 4.3” x 3.66” (“Marcal Pride” by Soundview) and comparable sizes in private labels, such as 4.1” x 3.7” (“Great Value” single-ply by Wal-Mart and “Willow Soft” single-ply by Aldi). Traditionally, the US sheet sizes of bathroom tissue have been above those of Western Europe, but some of the newest reductions have even undercut European sizes, a move that would have been unthinkable 10-15 years ago. But now it looks like this way of material saving has been mostly exhausted and further major sheet size reductions are unlikely.
US TISSUE IMPORTS CONTINUE TO GROW. US foreign trade in tissue products has grown at a rapid pace, and imports have grown faster than exports. Trade between the USA, Canada and Mexico increased substantially after the NAFTA free trade agreement in 1994, but in recent years, imports from China and Indonesia (integrated producers based on low-cost hardwood pulp) have contributed the most to the growth in imports. The average growth rate of tissue imports was 2.5% per year in 2008-2014 (Figure 2). In 2013-2014, imports accounted for 10% of US tissue demand. For Canadian tissue companies, the US market has been an important outlet, with both parent rolls and converted products sold over the border. Canadian exports, mainly to the USA, but also to a number of other destinations, grew steadily until 2008, but have since declined due to competition by overseas suppliers and some capacity closures. Exports now account for slightly less than half of Canadian production. Canadian tissue imports have also grown as US tissue companies have launched their brands in Canada, and some imports are now coming from Asia.
US IMPORT SOURCES OF PARENT ROLLS AND CONVERTED TISSUE PRODUCTS ARE SURPRISINGLY DIFFERENT. In parent rolls (37% of total imports) the main sources are Canada, Indonesia and Mexico while imports from China are relatively small (Figure 3). Cascades Tissue has traditionally been the main Canadian parent roll supplier to the United States, although recently the company has made significant efforts to increasingly integrate its tissue capacity with converting operations. Asia Pulp and Paper (APP) is the main supplier from Indonesia, mainly to its two affiliated converting plants in the United States, but there are also other Indonesian suppliers who export to North America. APP’s affiliate St. Croix Tissue has a two-PM tissue mill under construction in Maine close to the Canadian border, and it is likely that imports from Indonesia will decline when the mill is in full operation. Kimberly-Clark Mexico is supplying parent rolls to its US counterpart and this trade flow has also been continuous, showing only some variations based on the domestic market situation in Mexico.
IN CONVERTED TISSUE PRODUCTS, CHINA REACHED THE CANADIAN LEVEL IN US IMPORTS. This is surprising as the transport distance and transport costs are high for bulky products such as converted tissue. And the main imported product from China is not facial tissue, which can be more conveniently packed than rolled goods, but bathroom tissue! One may ask how this can be possible and what is the profitability of toilet roll deliveries from China? Most of the imports of Chinese converted products are sold by merchants and traders in the US AfH tissue sector.
RETAILER LABELS EXPECTED TO BE THE MAIN GROWTH AREA IN THE NEXT FEW YEARS. North American tissue consumption is expected to grow by 1.4-1.5% per year in terms of volume in the next five years. However, the value growth will be clearly more through quality upgrading, so it may even be double the volume growth. Our forecast is rather conservative but recent years have shown clear signs of maturation in North America. One major driving force is population growth, which varies from year to year in the range from 0.7% to 1.0% per year. This means that roughly two-thirds of North American tissue market growth is due to population growth and only one-third because of increasing product penetration levels and higher per capita consumption.
IT IS EXPECTED THAT IN THE AT-HOME SECTOR RETAILER LABELS WILL CONTINUE TO GROW FURTHER. Currently the average retailer label share is around 27% in the US market, measured in terms of volume. This is still relatively low in comparison to Western Europe, where the average retailer label share is more than 60%. However, we do not expect very rapid but rather slow increase in the retailer label share (0.5 percentage points per year). Brand owners have invested a lot of money and effort in promotion and new product version launches to defend themselves against the private label invasion. Led by P&G and K-C, an increasing share of advertising has recently moved from commercial to social media, such as Facebook and Twitter, which permit branded tissue companies to communicate to people personally and efficiently (modern direct mail in electronic form rather than postal!). Tissue brands will likely defend their current market volumes but all the market growth in the At-Home tissue sector will be in retailer labels (Figure 4). The battle between brands and retailer labels will be increasingly hectic.
A CROWD OF NEW INVESTMENTS WILL RESULT IN TIGHTENING COMPETITION. Investment activity in the North American tissue industry is clearly accelerating. No single new tissue PM was started up in 2014, although Cascades Tissue’s fine paper PM conversion to tissue in St. Helens, Oregon can be compared with new large PM start-ups based on its capacity effect. Six new machines have been committed for 2015, of which medium-size PMs from Double Tree Paper Mills/Royal Converting and Orchids Paper Product Co. were already brought on stream in March 2015. First Quality Tissue’s new Valmet TAD PM (the third PM of the mill), von Drehle’s Valmet “NTT” PM, St. Croix Tissue’s (APP) first Andritz conventional PM and one confidential Valmet PM should all came on stream in the last quarter of 2015 (Table 1). For 2016, we have currently four new PM projects on our list, starting with First Quality Tissue’s Voith “ATMOS” PM for the Anderson mill in South Carolina (the fourth PM of the mill) in the first quarter. St. Croix Tissue/APP should start up its second Andritz PM at the Maine mill by the end of the second quarter. First Quality Tissue has announced the start-up of its seventh tissue PM for near the end of 2016, this time at the Lock Haven mill in Pennsylvania. One Valmet confidential PM should also come on stream in 2016.
AFTER 2016, WE HAVE THREE COMMITTED PROJECTS FOR 2017. Orchids Paper Products Co.’s new mill in Barnwell County, South Carolina is expected to start up in the first quarter of 2017. This was originally a plan developed by South Georgia Tissue which is now in the hands of Orchids. The most recent project announcement came from the graphic paper producer Resolute Forest Products, a new tissue mill to be built next to its Calhoun mill in Tennessee. Market rumors suggest it could be a PM based on new structured/textured web forming technology, but we cannot confirm at the time of writing. It should also be ramped up in the first quarter of 2017.
Procter & Gamble’s second PM for the Utah mill is expected to come on stream during 2017, although no exact time schedule has been officially announced by the company. Potential developments include two projects which most likely will go forward. Kruger Products is planning a new TAD PM but the location is not yet 100% decided, with possibilities being Memphis, Tennessee, where its first TAD is running, or one of its Canadian mills as the company would need more ultra quality products in Canada. Sofidel will certainly expand its North American presence and has reportedly selected a new mill site for two PMs and integrated converting in the Mid-Atlantic region, in Pennsylvania close to the border of New Jersey, although there has not been an official announcement yet. In addition, several graphic paper producers are considering possibilities for rebuilding their paper machines for tissue instead of newsprint and other graphic paper grades whose demand continues to fall as closures would be the unavoidable end for their mills. ST Tissue’s second fine paper PM conversion in Franklin, Virginia, is one of these conversion projects. Slowing market growth and a crowd of new projects will change the balanced North American market to overcapacity and tightening competition in the next two to three years. Closures of old capacity could help, but only marginally, and tissue buyers are expected to benefit from the increasing supply.
Esko Uutela, Principal, Tissue, EU Consulting/RISI, can be reached at: Tel: +49-8151-2919, Mobile: +49-172-852 4447 or Email: euutela@risi.com.