Eastern European Tissue Markets

Esko Uutela, EU Consulting/RISI

Eastern Europe accounts for about 44% of total European population, but only for 22% of total European tissue consumption. This means that there is still a lot of development potential, and the recent trends have been positive: in 2000 Eastern Europe accounted for less than 12% of total European tissue consumption. But there are still several countries that are on the early levels in their tissue business development.The average Eastern European per capita consumption of tissue was only 5.6 kg in 2015, which corresponds to only 35% of the average Western European level of 16 kg. The differences between countries are substantial: Slovenia is almost at the Western European level with its per capita consumption of 15.6 kg, and also Hungary, Croatia, Estonia, Poland, Lithuania and the Czech Republic have reached the level of more than 10 kg per capita (Figure 1). Moldova has the lowest per capita consumption of less than 1kg and also Georgia and Ukraine are at a low level of about 2kg or slightly more (Figure 1).

RUSSIA AND POLAND ARE THE TWO LARGEST TISSUE MARKETS IN EASTERN EUROPE, accounting for about 54% of regional consumption. They are followed by Hungary, Romania, the Czech Republic and Ukraine. These four countries account for more than three-quarters of the whole Eastern European tissue consumption (Figure 2). Moldova and Macedonia are the absolutely smallest markets with 3,000 tons and 5,000 tons of tissue consumption in 2015, respectively. (Figure 2)

EASTERN EUROPEAN TISSUE CONSUMPTION GREW BY AN ANNUAL AVERAGE RATE OF 6.1 % BETWEEN 2005 AND 2015. Belarus, Albania, Montenegro and Russia have shown the fastest relative growth rates, while in Moldova, Slovenia, Latvia and Bosnia and Herzegovina the tissue business has seen only moderate expansion (Table 1). As a whole, regional market volume has grown by about 830,000 tons in the past ten years, which has given good opportunities for tissue companies to invest in additional tissue capacity. (Table 1)Tissue consumption follows to some extent economic development in Eastern Europe but with some variation from year to year. The relationship is not very strict and it is more important to follow the trend growth rather than compare individual years. In the Great Recession year 2009, Eastern European GDP nosedived by as much as 6.5% but tissue consumption clearly less, by 1.4%. In 2010 tissue consumption recovered quickly and continued to grow also in 2011-2012. However, since 2011 most of the Eastern European economies have struggled and the regional GDP growth has been below 2.0% per year, in 2015 even negative. The poor economic growth has also radically curbed the growth in tissue consumption in the past three years while tissue production has increased massively based on investment decisions made during the 2010-2011 recovery from the recession (Figure 3). Regional net imports have decreased from the peak value of 136,000 tons in 2012 by about 100,000 tons to 37,000 tons in 2015. The political tension between the Western world and Russia with economic and financial sanctions due to the Ukrainian crisis has negatively affected the regional economy, not only Russia and Ukraine but also countries with high share of their foreign trade with Russia, such as Belarus, the Baltic countries and Bulgaria. In the following, some of the latest developments in the main markets will be discussed. (Figure 3)

RUSSIA. The Russian tissue market, the largest in Eastern Europe, was in a major upside move until recently when the political tension started to take its economic toll through the trade embargo of certain goods from the Western world. Tissue consumption growth was almost 10% per year from 2005 to 2012 but declined thereafter to 6.8% in 2013, 4.8% in 2014 and 3.2% in 2015, on the positive side despite the decline in the economy last year. These growth rates are showing that the tissue business continues to make good progress in the country but growth is drastically slowed by the economic situation and weakened purchasing power. Russia’s per capita consumption of tissue is still relatively low, only 3.8 kg in 2015, showing that there is still a lot of development potential. The recession has increased the interest in private labels, and even smaller regional chains are offering private labels. As a whole, the Russian retail sector is still rather fragmented, normally a limiting factor for private label penetration. We estimate that the average private label share in tissue products approached the 20% benchmark in 2015.A.C. Nielsen statistics show volume shares of even more than 30% for private labels in certain metropolitan regions.In 2014 Russia received about 160,000 tons of new tissue capacity, adding about 30% to the existing capacity. With slowing demand growth, the market has not been able to easily absorb the addition and the demand/supply situation turned into overcapacity. However, the simultaneous strong devaluation of the Russian currency has helped the domestic producers against tissue imports. Russia imported about 95,000 tons of tissue products in the peak years of 2011 and 2012 but only about half of that quantity in 2015. The weak currency has made Russian tissue exports competitive, and exports have grown strongly, mainly to Kazakhstan, Ukraine and Belarus, but also to Poland recently. In 2015 Russian foreign trade in tissue was balanced. In the first months of 2016, decline in imports and increase in exports have continued, so we expect that Russia will be a small net exporter in 2016.

POLAND. Poland’s tissue consumption has experienced a surprisingly strong annual average growth of about 8% since its EU membership in 2004. In particular, the penetration of kitchen towels into Polish households and the continuing move from single-ply to multi-ply toilet paper has been very fast and greatly helped market volume growth. However, in recent years market growth has clearly slowed, indicating that the strongest penetration phase of additional products such as towels is over and the market is showing signs of gradual maturation. Polish per capita consumption of tissue is already relatively high, almost 12 kg in 2015, which also shows that the market is rather well developed. Private label share is also high, on average between 60% and 70%, depending on the product.Poland’s geographical location on the border to Western Europe means that foreign trade is an important part of the Polish tissue business. Poland imported about 230,000 tons and exported almost 340,000 tons of tissue in 2015. Trade with Germany is particularly important. Poland has attracted several foreign companies, such as ICT (Tronchetti), Metsä Tissue, Sofidel, WEPA and Fripa, to invest in the country. ICT’s mill with three large tissue machines in Kostrzyn on the German border is now the by far largest tissue mill in Poland. Metsä Tissue completed its Polish mill reorganization and expansion a couple of years ago. Sofidel has announced a new expansion project with a new large NTT PM in Poland, and also WEPA will build a second PM at its Piechowice mill.

HUNGARY. Hungary belongs to the most advanced tissue markets in Eastern Europe, with its per capita consumption of 12.6 kg in 2015, it is high up in the ranking, second only to Slovenia in the region. Hungary is an interesting market also for the reason that there is only one major tissue mill (a second mill also exists but it is very tiny) and tissue converters play a major role in the supply system. The existence of several important converters also means that more than half of Hungary’s tissue imports are parent reels. Tissue converters sell both brands and private labels and some of them also work as sub-contractors for large multinationals, such as SCA, Kimberly-Clark and WEPA. Private label share is high (more than 70%) only in kitchen towels while in toilet paper local converter brands have a strong position and private label share is below 50%. The main recent feature of the market has been acquisitions. In 2015, the single important tissue mill Higi Papirsoft was purchased by the Serbian company Drenik in all quietness under the nose of the largest local converter, Vajda Papir. Sofidel recently strengthened its position in the country by acquiring the consumer tissue business of Forest Papir in the first quarter of 2016. And even more recently, the Italian Lucart Group purchased the smaller Hungarian AfH tissue converter Bokk Papir at the end of May 2016. We would not be surprised if additional converter acquisitions follow.

ROMANIA. Based on population, Romania with its official population of almost 22 million people is the fourth largest country in Eastern Europe. However, it should be remembered that reportedly about one-tenth of population is working abroad and so all not consumers in Romania except in holiday seasons. Romania’s tissue consumption has a good although varying growth trend but per capita consumption (5.8 kg in 2015) is around the average in Eastern Europe but still far from the average EU level. Romania’s tissue consumption was in 2015 at the same level with that of Hungary, so sharing the third largest market position in the region. Several tissue mills operate in Romania although a few small and old mills with obsolete technology have closed in recent years. The Pehart Tec Group, now owned by the Polish private equity company Abris Capital, is the leading player and it recently started up the second new PM at its second mill in Dej. Thanks to this group and its parent reel exports, Romania has developed into a net exporter in the past few years. The Italian Sofidel Group owns a mill in the country and has the second highest capacity at its Comceh mill, but in the domestic market it is leader with its converted tissue product sales.

CZECH REPUBLIC. The Czech Republic, besides Hungary, is the second interesting Central Eastern European market with a weak domestic tissue industry. The only small domestic mill has been years under insolvency protection and operated with low capacity utilization. Traditionally,the market used to be dominated by the Slovak mills but for years it has been very open and tissue is imported from a great many sources; the number of suppliers is surprisingly high. The private label share is high in hankies and kitchen towels but somewhat lower in toilet paper.As a relatively large market of more than 100,000 tons per year, the country has been eyed by several companies for investment but until recently, none of the plans have been realized. Currently there is one small mill project under construction, involving a small Chinese-made tissue PM, but the company has not made much noise about its plan and the start-up schedule is also unclear but probably the PM will be in operation by the end of 2016. Another, larger tissue mill project has also been announced, but we are not sure how serious it is.

UKRAINE. Ukraine was the fourth largest Eastern European tissue market still in 2014 but recently its tissue consumption has suffered from the annexation of the Crimea by Russia and the war in eastern Ukraine. According to our information, tissue consumption fell by about 10% in 2014 and even more in 2015, -12-13%. Per capita consumption has also declined and was not more than 2.4 kg in 2015. Several tissue mills operate in the country, among which Kiev Cardboard and Paper Mill, ownership registered under the Austrian Pulp Mill Holding but in practice owned by a local oligarch with plans to expand into Russia. There is also one major tissue converter with large export activities in the neighboring countries. The situation in Ukraine continues to be difficult and parts of eastern Ukraine are isolated from economic activities, including tissue.

THE BALKAN COUNTRIES. The Eastern European part of the Balkan Peninsula includes the ex-Yugoslavian countries Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Kosovo, Montenegro and Macedonia plus Albania. For tissue tracking, we cannot separate Kosovo from Serbia as Serbia does not report foreign trade with Kosovo, and the vast majority of tissue used in Kosovo originates from Serbia. Croatia and Serbia are the largest markets and Montenegro, Albania and Macedonia the smallest ones. Total market size in these countries is about 180,000 tons but as divided between several countries, the fragmentation makes it difficult to effectively operate in the region.Slovenia has the highest per capita consumption (15.6 kg in 2015) of the Western European level, followed by Croatia with about 12 kg per head. There are relatively few tissue mills in the region, led by Paloma of Slovenia, Drenik of Serbia and the Banja Luka mill owned by the Slovak SHP Group in Bosnia and Herzegovina. Violeta, a converter operating in Bosnia and Herzegovina and Croatia, also belongs to the main regional tissue suppliers. No tissue mills exist in Albania, Croatia, Kosovo, Macedonia and Montenegro. The only expansion announced is a rebuild project by Drenik in Serbia.

THE BALTIC COUNTRIES. Estonia, Latvia and Lithuania consume together about 60,000 tons of tissue per year. Estonia has the highest per capita consumption of almost 12 kg, followed by Lithuania but Latvia lags clearly behind. Each individual market is rather small, restricting the interest of the largest global players in this region.There is only one tissue mill in the Baltic countries, Grigeo Grigiškes in Lithuania, which has recently expanded and is heavily involved in the export business as well. Imports from neighboring countries such as Finland, Sweden, Poland and Russia also play a major role in the competition. Grigeo is expected to continue on its rather aggressive expansion path. Bulgaria. Bulgaria joined the EU in 2007 which was - based on the circumstances in the country at that time - somewhat surprising to many spectators. Bulgaria’s tissue consumption has recently grown rather rapidly, and now with 7.5 kg per head it is clearly above the regional average.

BULGARIA has four major players which can produce more than the country needs, so the country is a small net exporter today. The Nikopol Group recently expanded with a new PM but otherwise there are no new project announcements. 

SLOVAKIA. Slovakia is a traditional European tissue producer and one of the major exporters in the region. The two existing players (Metsä Tissue and the SHP Group) with three mills have a strong regional foothold but the market is very open and imports play a major role in the domestic market. Surprisingly, the domestic players do not have any very dominating role in the market and the private label share is one of the highest in Europe (in kitchen towels above 80%). No new expansion project is known in Slovakia at the moment.

MAIN REGIONAL SUPPLIERS. The Eastern European tissue industry is relatively fragmented: the ten largest suppliers do not account for more than about half of regional capacity. The capacity shares of the largest suppliers are less than 10%, so there is clearly less consolidation than in North America or Western Europe (Figure 4). The Italian ICT Group (Industrie Cartarie Tronchetti) took the largest supplier position from Metsä Tissue after the third large PM was started up at the Kostrzyn mill in late 2015. However, it should be noted that the Polish ICT mill is a major exporter to Germany so that only part of its production is for Eastern European consumers. SCA operates two mills housing three tissue machines in Russia, which entitle it to the third position based on installed capacity. Syassky of Russia has recently started up a new PM that replaced an old one, which boosted the company to the fourth position, only slightly ahead of the SHP Group of Slovakia, owned by ECO Invest. Abris Capital, a Polish private equity company ranks sixth on the capacity list. It purchased the Romanian MG Tec Group and seems to be looking for more acquisitions in the region. The company won the tender for the privatization of the Slovenian Paloma in late 2015, but has recently withdrawn from the deal for unknown reasons – probably they have found something more interesting than Paloma to acquire. With Paloma, Abris Capital would have occupied the third largest supplier position. The Russian STG Group, Kiev Cardboard and Paper Mill of Ukraine, Paloma and Sofidel (with two mills in Poland and Romania) complete the top ten suppliers list.

DEMAND/SUPPLY OUTLOOK. The current and still continuing political tension between Russia and Ukraine and the recently prolonged economic and trade sanctions by the EU against Russia shadow medium-term outlook in the region. The Central Eastern European countries are only little influenced by the situation but the economies in Russia, Ukraine and Belarus are not expected to fully recover before 2018-2019, and this provided that the efforts exist to find some alleviation to the crisis. For the whole of Eastern Europe, we do not expect tissue consumption to grow more than slightly above 4% per year in 2016-2017, and then some acceleration to more than 5% per year. For 2015-2025, average demand growth is expected to be 4.6% per year. In 2015, six new machines were started up, of which one was a double-width PM (ICT Poland), three were standard single-width PMs and two rather small PMs in Bulgaria and Poland (Table 2). There were also a couple of older and inefficient PM closures. In 2016 only three new PM start-ups are expected, two of which have already come on stream. W. Lewandovski replaced its PM in Poland with a new one but capacity change remained rather small, Syassky of Russia also replaced its PM3 but in this case the capacity doubled. The third PM is a small Chinese-made PM that should come on stream at the mill of a new player in the Czech Republic but there is limited information available about the phase of this project. Drenik will have a major rebuild on its PM1 in Belgrade, Serbia.

FOR 2017-2018 THERE ARE CURRENTLY ONLY THREE COMMITTED PROJECTS LISTED, of which WEPA Piechowice PM will be the first to come on stream in the first quarter of 2017. Two machines are world-class large PMs from renowned suppliers. Sofidel will build the first Eastern European PM based on Valmet’s NTT technology. The Arkhbum Tissue Group will build a greenfield project with a large Andritz PM in Russia, and although the company says it will be completed by the end of 2017 it is likely due to Russian overcapacity that the start-up date will be in 2018 rather than 2017. Velvet Care of Poland is also considering an investment in a second, large PM but there is not yet an official announcement that the project will be realized. Another new project has been published for the Czech Republic but it is still at its early planning stage. After the 2009 recession investment activity in new tissue capacity was rather weak in Eastern Europe in 2011-2013, but picked up in 2014 and the effective capacity change (learning curves considered) reached its new peak in 2015 as many of the 2014 investments were completed late in the year so that their influence on capacity was in 2015 rather than in 2014. Capacity change will remain at a high level of almost 160,000 tons also in 2016 but then fall somewhat to 120,000 tons in 2017. How the situation will develop thereafter depends to a great extent how many new projects will still emerge. (Figure 5) 

CAPACITY UTILIZATION HAS NEVER BEEN AT A VERY HIGH LEVEL IN EASTERN EUROPE. Relatively few investments helped it pick up substantially in 2012-2014 but the new investment wave from late 2014 onward and lower consumption growth turned the average operating rate to south in 2015 and this trend will continue in 2016 and 2017 (Figure 5). The medium-term demand/supply outlook is not very rosy, partly also due to the continuing political problems with Russia, but in the longer term improvement can be expected as there is still a lot of growth potential in Eastern European tissue markets. * 

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.

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