Tissue business in a strong growth phase in Iran

Esko Uutela, EU Consulting/RISI

Political and economic events disturbed the development. One may ask what kind of dealings does history and culture have in the tissue context? Well, it is true that the tissue business is a relatively new chapter in human history with less than 100 years’ tradition compared to 6,000 years of Persian/Iranian history. It is not the time frame but civilization which is important, including high hygienic standards as part of improving wellness and the quality of everyday life, actually a prerequisite for the start of tissue business development. In this respect Iran is in principle well qualified but has suffered from sudden political changes and recently also from economic sanctions.

The tissue industry is rather a new development in the whole of the Middle East, and so also in Iran. RISI’s Mill Asset Data Base records 1966 as the installation year of Novzohour Paper Industries’ tissue machine, but most likely the PM first produced other grades such as wrapping paper and the move to tissue paper followed at a later stage, most probably around 1980 when we have our first record for tissue production in Iran.

IRAN WAS IN A GOOD DEVELOPMENT PHASE OF THE PULP AND PAPER BUSINESS IN THE LATE 1970S, and there was a large Master Plan project for further development of the pulp and paper industries committed to a renowned engineering and consulting company based in Finland, the company I worked for in the early days of my career. If I remember correctly, there was also some plan for the tissue branch, nothing very revolutionary but part of the program. However, the Islamic Revolution in 1979 stopped everything and the project personnel already moved to the country needed to return home as there was no further financing for the project available. Radical political changes and separation from support by the USA, including sanctions against Iran, followed by the Iraq war (1980-1988), practically separated the country from most important international connections. As a result, very few new developments happened in the pulp and paper industry in this time, and the situation was the same also in the tissue business.

After the death of Ayatollah Khomeini in 1989, some political changes took place and according to some sources, it was a move from autocracy to clerical oligarchy. This was a small positive sign for developing the economy and industry, supported by economically powerful religious foundations. In the tissue business, two new investments in new capacity took place: Latif Paper Products’ new Voith PM came on stream in 1994 and Harir Khuzestan Tissue’s Over Meccanica PM in 195. These investments multiplied domestic tissue production in Iran. Also, new small tissue converters started to emerge in the country.  

HOWEVER, POLITICAL TENSION CONTINUED AND IN 1995 THE USA EXPANDED ITS SANCTIONS TO INCLUDE COMPANIES DEALING WITH THE IRANIAN GOVERNMENT. The tissue business was negatively affected by the overall turbulence and uncertainty in the region as a whole (Iraq was the second major problem). In Iran, after the two new tissue machines started up just before the sharpening of the political situation, there were no major investments in new tissue capacity in the next ten years, but the number of small tissue converters continued to grow and so did parent roll imports. Since 1995, investments in tissue making did not include any major move before Latif’s rebuild project completed in 2008. In 2006, the political situation worsened; the UN Security Council passed Resolution 1696 and imposed sanctions after Iran refused to suspend its uranium enrichment program. These sanctions made banking and insurance transactions and shipping of goods to the country difficult, taking a serious toll on Iran’s economy and people.

But surprisingly, the sanctions did not stop tissue parent reel imports, which continued to grow rapidly also after 2006 and total tissue imports reached the peak volume of 84,000 tons in 2013 (Table 1). According to statistics, imports came mainly from other countries in the Middle East, such as the United Arab Emirates, although we believe that a substantial quantity of these deliveries were actually transit shipments from Asia (China, Indonesia, India).

ECONOMIC AND POPULATION GROWTH DRIVING TISSUE DEMAND. Even though isolation from the western world caused many kinds of problems for the industry and also limited availability of imported goods to domestic citizens, Iran’s economy, very much based on oil and gas exports, continued to grow in 1993-2008 despite the political instability, sanctions and partial isolation from western countries. The average GDP growth was 4.2% per year in 1993-2008 and real GDP almost doubled during that period. But in 2012 Iran’s economy contracted by 6.6% and in 2013 by 1.9%, affected by serious western sanctions and oil export problems, and the average five year economic growth was only 0.8% per year between 2008 and 2013. In 2014 and 2015, there was some recovery but GDP growth remained low. However, it looks like there is no direct relationship with annual GDP variations and Iranian tissue consumption and the main issue continued to be product availability related to the trade and financing embargo.

Iran’s gradually improving economic welfare and growing middle class with people’s increasing hygienic consciousness created over the years latent demand for tissue products that had been scarcely available; and the country had reached the threshold for the break-through of tissue. Iran’s population has been growing at a rate of 1.2%-1.3% per year, contributing to the demand for FMCG such as tissue.

IRAN’S TISSUE CONSUMPTION GREW AT AN AVERAGE RATE OF 6.7% PER YEAR IN 1995-2005, more than domestic production (3.8% per year) which was not able to satisfy the demand and imports of tissue, mainly parent reels, began to grow from the late 1990s onward. But in the past 10 years, the growth rate doubled to more than 13% per year in 2005-2015 and the market volume almost doubled between 2010 and 2015 (Table 1). This is very promising considering the existence of western sanctions. New domestic supply made this possible and although it was complicated to organize equipment deliveries and payments due to the sanctions, a few new mills were able to start operations. Before the new capacity, the supply of tissue parent reels was scarce and imports problematic, and repor-tedly the existing domestic mills were able to sell their production against advance payments with delivery timed even three months after the order!

IRAN, WITH ITS ABOUT 160,000 TONS OF ANNUAL TISSUE CONSUMPTION, IS NOW THE THIRD LARGEST MARKET IN THE MENA REGION, only Turkey and Saudi Arabia are ahead of Iran. But with a population of about 80 million, per capita consumption of tissue continues to be low, only about 2 kg per head, showing that there is still a lot of potential to grow.

Similarly to other Islamic countries, facial tissue is the dominating tissue grade, accounting for about 63% of total consumption (Figu-re 1). Toilet paper is the second largest tissue product segment with a share of approximately 30% of consumption. Toweling has begun to develop only recently, mainly kitchen towels while AfH toweling is still in the starting blocks. Napkins are also a tiny segment as facial tissue is used as a kind of all-around tissue by households.

NEW INVESTMENTS CHANGING THE SUPPLY STRUCTURE. Iran has recently experienced a wave of new investments which began in 2010 but culminated in 2013-2015 when two new large and two medium sized PMs came on stream and started to take their effect in the marketplace, which also caused major changes in the supplier rankings. New capacity since 2010, including also a couple of PMs expected to come on stream this year, exceeds 240,000 tons per year and will multiply the country’s tissue capacity. The first investment after the Latif rebuild in 2008 was by a new player, Iranian Fartac Arman Company (IFC Group) in a new Chinese made tissue machine in the Tehran area in 2010. The company expanded from trading into tissue making. It also purchased a board manufacturing line at the same time from the same Chinese supplier (Nanning Elite Tissue Machine). However, there is little information available about the company’s product range.

The Hayat Kimya Group of Turkey which had expanded fast in its home country, decided to expand to Iran and built a new tissue mill with a large tissue mill located in Zencan, about 180 km northwest of Tehran. The new mill came on stream in the second quarter of 2013, making Hayat Kimya the largest tissue supplier in the country, based on capacity.

ANOTHER NEW TISSUE PM WAS STARTED UP BY GOLBONEH PARS INDUSTRIAL CO. (G.P.I.) IN THE TEHRAN REGION IN FEBRUARY 2014. This PM was originally ordered from the Italian OverMeccanica and after its bankruptcy continued by ABK Italia, a smaller PM with a trim of 2.8 m and capacity of 21,000 tons per year.

The second large Valmet PM had been purchased Zarrin Barge Persia, an Iranian tissue and absorbent hygiene products converter in late 2011 or early 2012 but the project was delayed several times before the start-up of the 70,000 tpy PM finally took place in Saveh, some 130 km southwest of Tehran, in early 2015. The company originally planned to build two tissue PMs, but currently there is no information about the phase with the second tissue PM plan. In late 2015, Azerbaijan Narmeh Paper Industries brought a new Recard PM online at its mill in Tarbiz, northwestern Iran. This PM features a trim width of 2.9m and a speed of 1,800 m/min, we estimate its capacity is close to 30,000 tons per year. This project was also delayed at least by more than one year, reflecting the problems created by western sanctions.

There are still two additional tissue projects which we expect to come on stream in 2016. Sivan Tissue Paper, located in the Tehran region, has purchased a small tissue PM from Chinese supplier Shandong Xinhe Papermaking Engineering Co. The PM was planned to come on stream in late 2015 but as we have not heard about its start-up, we believe this project is also delayed. The second new project is by Arian Cellulosa Sanat, part of the Golrang Industrial Group in Eshtehard, about 100 km west of Tehran. This PM has an estimated capacity of about 35,000 tons per year and it has been ordered from A.Celli Paper of Italy. Currently the project is pending and still needs “some adjustments” but it is likely that this PM will also come on stream later this year.

NEW INVESTMENTS HAVE ALSO CHANGED THE STRUCTURE OF THE IRANIAN TISSUE MARKET. The Turkish Hayat Kimya Group entered the Iranian tissue market in 2011 and started to sell its products in the country as preparation for the tissue mill investment. Traditionally the Iranian tissue market had been dominated by independent tissue and hygiene product converters, some of which had grown rather large, such as Pars Crepe, Pars Cellulose and Zarrin Barge Persia. Hayat Kimya’s aggressive penetration into the market changed the competitive situation very quickly. We believe that Zarrin Barge Persia’s new mill investment was a reaction to the invasion by Hayat Kimya. Other converters also started to consider backward integration, particularly because tissue parent rolls were in short supply and imports from abroad were problematic because of the political situation and timing of deliveries uncertain. At the end of 2015, Pars Hayat and Zarrin Barge Persia each account for slightly more than 29% of the Iranian tissue base paper capa-city, followed by Azerbaijan Narmeh Paper Industries (12%), Latif Paper Products and Golboneh Pars Industrial (about 9% each).

FUTURE PROSPECTS BRIGHT BUT LOW OIL PRICE A THREAT TO ECONOMY. At the beginning of April 2015, the P5+1Group (China, Fran-ce, Russia, UK, USA plus Germany) and Iran, meeting in Lausanne, Switzerland, reached a provisional agreement on a framework that, once finalized and implemented, would lift most of the sanctions in exchange for limits on Iran’s nuclear programs extending for at least ten years. As a result, UN sanctions were lifted on January 16, 2016. This relief of political tension and the reopening of world markets to Iran are expected to help economic development and facilitate Iranian companies to realize planned investments and procurement of raw materials and imports of spare parts etc. This is good news for the Iranian tissue business which is expected to continue to grow strongly in the next ten years. The average growth rate in tissue consumption is expected to be around 10% per year until 2023. But the starting level is so low that annual volume growth will remain below 20,000 tons. It will take three years before market growth will be able to absorb the capacity of one large tissue paper machine. This means that recent investments have resulted in a temporary overcapacity situation and it is likely that tissue imports will decline further (Figure 3). Assuming that Iran will not develop into a major net exporter of tissue, capacity utilization will be depressed in the next two to three years. New investments would not be needed before 2020, although it looks like a couple of players are already prepared for new investments.

A SMALL CLOUD ON THE OTHERWISE CLEAR HORIZON IS THE FACT THAT HOW THE IRANIAN ECONOMY WILL DEVELOP IN THE NEXT FEW YEARS. The annulment of sanctions has opened the doors to world markets, facilitating oil and gas exports from Iran. Petroleum accounts for about 80% of Iranian exports, so the economy is very vulnerable and dependent on oil prices. The announcement about the removal of sanctions against Iran resulted in an immediate fall in oil prices on the world market and most of the current forecasts expect only gradual price recovery in the next five years. This will likely limit Iran’s economic growth for the next few years and may have some indirect negative effects on tissue product penetration. However, the longer term prospects are good and tissue consumption will likely continue to record further strong growth in Iran. *

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.