Paper 360
MATT ELHARDT
Issues in today’s tissue industry are without a doubt causing disruption. How we respond to them—whether we perceive them as threats or opportunities, or choose to do nothing—is a reflection of different corporate mindsets that will impact the decisions business owners make.
Interestingly, these dynamics, while certainly disruptors, could be leveraged as opportunities as long as businesses have access to the intelligence that will enable them to make smart, individualized, and forward-thinking decisions.
PULP PRICES AND THE NON-INTEGRATED PINCH
As with the rest of the pulp and paper industry, the tissue sector is very capital-intensive. Fiber costs are the largest driver of tissue and towel production costs, representing a whopping 67 percent of total cost, followed by energy at 16 percent (Fig. 1).
Fiber prices have skyrocketed in the last couple of years, up almost 50 percent. This is having dramatic implications across tissue manufacturing worldwide, with non-integrated tissue mills being the most impacted.
Additionally, as fiber costs increase, machines with conventional technology become less competitive. Mills using that equipment are operating at higher cost and higher risk, and we expect that some of these mills will be under some amount of pressure going forward, particularly on margins.
So, why aren’t more mills integrating? One of the biggest obstacles to integration is the scale of pulp mills. A typical mill would require 10 tissue machines to match the scale of one world-class sized pulp fiberline (Fig. 2).
Compounding this is the fact that many tissue manufacturers worldwide have to blend a variety of pulp types (hardwoods, softwoods, and recycled) to meet certain criteria for product performance, which would still require them to purchase the pulp type that they do not manufacture (Fig. 3).
Other factors to consider relative to pulp integration:
• The increasing consolidation of the pulp industry
• The reality of non-integrated mills losing market share compared to integrated mills (mirroring what has already occurred in printing and writing)
• Low-cost pulp producers in Brazil and Indonesia are increasing their exports to high-cost countries
• Non-wood pulp technology (such as for wheat straw) is advancing as interest in alternative materials increases
TRENDS IN E-COMMERCE AND ITS IMPACT
E-commerce has increased its share of retail an average of 15 percent year over year. If that trend continues, in 15 years it will equal 30 percent of retail in the US, and even higher in other parts of the world where there is deeper penetration. Consumer packaged goods (where tissue resides) is currently at the low end of e-commerce (Fig. 4).
The implication is that, as e-commerce continues to grow, this segment is where the growth will take place. This is especially true given increases in home grocery delivery, the continued inroads of Amazon Prime (almost 100 million households), and the blurring of lines in big box stores such as Walmart, which offer both e-commerce and brick-and-mortar stores.
Tissue is extremely important to e-retailers who are looking to grow their business due to the fact that it is non-perishable, requires regular and repeat purchases, and nearly every household buys it. As such, tissue products provide an entryway for households to become accustomed to shopping for consumer goods online. As critically, e-commerce providers are promoting their own private label products. In the US, private label penetration is now at 30 percent. In the EU it is even higher at 55 percent of total market (Fig. 5).
As consumer preferences change in keeping with purchasing convenience, in-store brands that have been traditionally the industry leaders can expect to be impacted, especially given the fact that the e-commerce model requires 90 percent lower inventory costs than traditional grocery and convenience stores.
NEW TECHNOLOGY AND NEW CAPACITY
There are big differences worldwide in terms of manufacturing choices. Even though it represents 40 percent of the global tissue and towel market, Asian machines are less than half as large on average, compared with machines in Europe and North America (Fig. 6).
Additionally, as you can see in Fig. 7, most of the world still prefers to use conventional pressing technology, with the US and a few other countries leading the charge in building new tissue machines using advanced technology.
In many cases, the advanced machines can have an advantage in product performance characteristics and also can use less fiber, but the tradeoff is higher energy costs, a consideration that owners must take into account when making tissue machine choices.
Growth in China is dramatically shaping the industry as well. China has added more than 1,000 tissue machines over the last 10 years, yet its total tissue consumption is still relatively low. As consumer wealth and its population grows, it is anticipated that China’s tissue consumption will explode, with another 1,000 tissue machines required to meet the needs of such demand. This could have tremendous implications for machine manufacturers as well as producers around the globe.
SUSTAINABILITY ISSUES AND WATER
It is anticipated that by 2030 water demand will exceed supply by 25 percent. Seventy percent of business leaders across multiple industries see water issues as a substantive risk to their operations, impacting business growth and where to locate facilities, among other factors.
In the pulp and paper industry, water intensity increases with site technical age (Fig. 8). In water-stressed areas in particular, this can lead to even greater pressure to upgrade to newer machines, or to risk otherwise “good” mills shutting down in the future.
UP ALL NIGHT, OR SLEEPING SOUNDLY?
Quite simply, the difference comes down to determining whether the factors discussed are threats, or if they can become business opportunities. That means pulp and paper industry leaders need to:
• Fully understand the issues and their potential impact
• Recognize which issues to prioritize based on their company’s unique situation
• Have the ability to position themselves to take advantage of future market shifts
With the help of the insights that comes from sound business intelligence that describes your market environment and offers tools to enable you to scenario plan, you can make the right strategic decisions. The real question is, do you have enough understanding of the issues to make strategic choices that best position your company?
Matt Elhardt is VP business development, Fisher International, Inc. With deep expertise in the pulp and paper industries, Fisher International provides insights, intelligence, benchmarking, and modeling across myriad scenarios. For more information, visit www.fisheri.com.
