Tighter demand/supply will help tissuemakers offset rising costs

Pulp & Paper, Feb 2005

ANALYSIS OF TISSUE

GRADE STRUCTURE. Tissue paper is used in sanitary products, such as toilet and facial tissue, paper towels, and napkins, and is sold to consumer (retail) and commercial (away-from-home or AfH) customers. Consumer tissue accounts for 65% of the entire tissue market. The AfH market represents most of the remaining shipments and is sold to janitorial supply companies, hotels, offices, restaurants, schools, and government.

Most of the large producers rely on their own equipment to convert most of their product into finished goods sold by the case. However, there is ample tonnage to employ a host of independent converters as well. Mills sometimes enlist the help of independent brokers to sell their parent rolls to these converters. Roughly 8 to 10% of all U.S. tissue production is traded in this manner.

Retail and AfH account for 95% of all tissue production in the U.S. All of this falls into one of four primary grades: toilet tissue (47%), toweling (35%), napkins (11%), and facial (7%). Each of these may be further divided into retail and commerical tissue. The remaining 5% goes into industrial applications, absorbent products, wadding, wrapping, etc.

Typical basis weights range from 11 g/m^sup 2^ for single-ply toilet or facial tissue to 33 g/m^sup 2^ for heavy-weight toweling grades. About 60% of U.S. tissue is produced from wastepaper fiber, and of the 40% virgin pulp used in the furnish, about half is purchased on the market. The rest is made onsite at integrated facilities.

DEMAND. U.S. tissue production in 2004 was up 0.8% from the previous year, with demand in the large retail segment showing some weakness, while demand in the smaller AfH sector showed stronger 2% growth. With the continuing expansion in capacity, operating rates for 2005 averaged around 88%, down from 89% in 2003 and 92% in 2002.

Producers attempted to push through a 5 to 6% price increases on retail tissue last summer to offset rising fiber and energy costs. Commercial and industrial tissue producers also announced two price increases, with the second 10 to 15% hike scheduled for January 2005. Analysts expect producers to implement about 5 to 6% of the announced increase due to the recent slackness in operating rates.

CAPACITY GROWTH. U.S. tissue capacity growth is expected to slow to a 1.5% increase in 2005 and 0.5% rise in 2006. This followed capacity increases of 2.4% in 2004 and 3.1% in 2003 with Procter & Gamble, Georgia-Pacific (two machines), SCA, Potlatch, and First Quality Products all starting up new tissue machines. In 2005, the only two new tissue machines being installed are small machines being built adjacent to existing deinked pulp mills (Unicell in Brownstown, Ind.; and Augusta Tissue in Augusta, Ga.). G-P has also closed some older machines.

With a forecast 2.4% increase in overall demand, U.S. tissue production in 2005 is expected to jump 3.4%, which would pull operating rates to the 89% level (and closer to 92% with the removal of several indefinitely closed machines from the industry capacity base). With pulp prices projected to rise an average of $10/ton per month through June, producers will be under pressure to push through the previously announced price increases to maintain their margins.

U.S. tissue prices on average are expected to rise 4 to 5% in 2005 after showing an estimated 1% decline in 2004 due to intense competitive activity, partly related to the new machine startups, intense product promotion, and a battle for market share between P&G and G-R

In January, RISI published the inaugural issue of the World Tissue Forecast, which will include five-year forecasts for key countries, including in some cases grade detail, plus the pricing and cost outlook for tissue in North America and Western Europe on a per ton basis.