Source: EU Consulting
Södra has a strong affinity for tissue. The attraction has been growing in recent years, and with good reason. As a pulp producer with no paper production capacity, the company already stands out in the industry. Tissue is set apart from other paper grades in that most production is non-integrated, with the exception of that which is based on recycled fiber.
So both Södra and most tissue producers are looking for partnerships, or to use Södra’s preferred terminology ‘strategic partnerships’ for its key accounts.
These partnerships seem to have been developing strongly over the past decade, which begs the question, why has tissue increased in importance for the Swedish company?
Apart from the obvious partnership motivation, Södra’s PulpServices program, which helps papermakers manage their pulp supply, has also been instrumental. Through PulpServices, Södra does for tissue makers what the tissue makers increasingly do for their customers – manage inventory and logistics. There is also a hedging service, so tissue makers who commit to a fixed price for a certain period with their customers can do so in the confidence that the price of their raw material is also fixed for the same period, which allows them to predict their margin more confidently.
Södra’s sales to the tissue industry have grown by 308% since 1999 and tissue customers now account for 27% of the company’s total pulp sales. This year, its total pulp output will be comfortably over 2 million tons, of which 560,000 tons will be sold to tissue producers. In 1999, it sold just 137,132 tons to tissue producers, or around 11% of its total pulp sales that year of just over 1.2 million tons.
The company offers a full portfolio of pulps for tissue producers, from chemi-thermomechanical (CTMP) to northern bleached softwood kraft (NBSK), and short fiber pulps such as birch and eucalyptus. And since the 50,000 forest owners who make up Södra’s stakeholders (or ‘members’) are also its timber suppliers, the company can exercise very strict control over its raw material.
WHAT IS IT ABOUT TISSUE?
Sowhat’s the attraction of tissue to Södra, apart from the fact that tissue producers are obvious partners, thanks to their lack of an integrated virgin pulp supply? The prospect of stable growth is an obvious enticement. The European tissue market is expected to grow by 3-4%/yr until 2015 (Western Europe about 2.5%, Eastern Europe about 7%), and, in the absence of some breakthrough alternative, tissue is regarded as pretty much a necessity by anybody who uses it. The committed capacity increases taking place during the remainder of this decade suggest that European tissue producers agree with the growth predictions.
The main growth story still comes from the main markets of Western Europe – Germany, the UK, France, Italy and Spain. The percentage growth in Eastern European countries might be more exciting, but in actual tonnage terms, the relatively mature Western European markets are still expected to deliver two thirds of Europe’s tissue growth.
By contrast, growth in other sectors of the paper industry is lower and much more volatile, being to a greater extent at the mercy of economic factors. The need for tissue doesn’t diminish during economic downturns, while the pagination of magazines and need for packaging materials most certainly does.
VIRGIN FIBER TO INCREASE
Södra also predicts that the use of virgin fibers will increase in consumer tissue, if not in away-from-home, where recycled fiber-based products are more acceptable. Hågen Rismark, business area manager for tissue, board and CTMP at Södra says: “While Södra is fully aware of the growing pressure from environmental groups to increase the use of recycled fiber in tissue, there is no evidence that consumers want anything but a whiter, more absorbent product. But this is an issue we have to watch carefully – and forest management and certification is, of course, a high priority for us.”
The trend towards the use of virgin fiber is largely driven by the call for more high-quality products in the consumer market. The current level of virgin fiber use in Western Europe is around 50%. Tissue producers have their sights set on those markets in Western Europe which retain a determinedly commodity view of tissue, as this is a huge potential growth sector for value-added tissue based on high-performance pulps which deliver specific characteristics, such as bulk and softness for toilet and facial tissue, and absorption and wet strength for towel.
While private label tissue products continue to claw a greater market share, their quality is increasing at the same time, so the private label factor is not expected to have a negative impact on virgin fiber use. Retailers are the most important customers for tissue producers, and private label is attractive to retailers, because it increases potential profitability and loyalty.
There is the added factor from Södra’s point of view that woodfree paper producers in Europe are busily integrating. Of course it is unlikely that any paper producer will be integrated with all its pulp needs, in terms of pulp variety, but it clearly makes sense for Södra to seek growth with partners which most need its services.
PULP FOCUS BRINGS BENEFITS
Södra has worked hard to ensure that its sole focus on pulp actually means something in the market. It has made an unusually heavy commitment to R&D. One of the ways in which it channels the know-how which this R&D activity generates is through PulpServices. This is about more than pure pulp innovation, however. It encompasses an on-line update service, long-term technical co-operation, technical support, hedging, IT and logistics solutions – basically every possible aspect of pulp procurement, and well beyond the services traditionally associated with the pulp supplier. According to the company, it is committed to increasing production of its ‘Black’ group of pulps, which are well suited to tissue, thanks to their high tensile, which reduces refining energy requirements, and the softness they impart. Södra says they are an extremely good substitute for the Canadian pulps which are increasingly rare in Europe as Canadian producers seek other markets.
The gradual withdrawal of Canadian volumes from the European scene has undoubtedly served to boost Södra’s business with Europe’s tissue makers considerably. Black volumes have increased from 225,000 tons in 2002 to a budgeted 350,000 tons this year. This is set to rise to 375,000 tons in 2008, thanks to 25,000 tons of new production at Södra’s Värö mill, which is all Black pulp quality.
Black grades have soared in volume terms. Black 85Z, for example, was at a lowly 25,000 tons in 2002 but is projected to reach 150,000 tons next year , well up even from this year’s budgeted 115,000 tons. There is still not enough Black pulp to meet demand, but Södra has been developing its Blue pulp grades in parallel, which have also proved popular among tissue makers.
DRIVING FORCES FOR DEMAND
Södra expects continued economic growth in Europe to fuel an increase in sales to Europe’s tissue makers. Population growth in the region is also expected, which will drive demand, even if use per capita remains static. But Södra expects use per capita in Western Europe to be anything but static. Western Europe’s per capita consumption of tissue was 14.6 kg in 2004, but Södra expects it to reach a USA-like 19.3 kg/capita by 2015 – which is a greater actual increase than in Eastern Europe (2.7 kg/capita rising to 5.8 kg/capita over the same timescale), although the effective doubling of demand undoubtedly makes Eastern Europe an exciting place to be.
The figures boil down to 2 million more tons consumed in Western Europe by 2015, and an extra one million tons in the East – all in all quite a few more tissue machines. The most exciting growth story is China, where 2004-2015 is expected to see more than 4.5 million tons of extra tissue demand*, and while Södra has no long-term contracts with Chinese tissue pulp buyers, it is a market which the company is following carefully. China aside, Western Europe is expected to see the greatest actual growth in tissue demand from 2004 to 2015, and Södra is in a strong position to take advantage of this.
“Increased product penetration levels are also expected to push pulp demand further as are developments in tissue products and specifications. Substitution effects and AfH use should also be taken into account,” says Rismark. The USA is the model of high product penetration, where the tissue industry has managed to put its products in virtually every room of the house, as well as the car. Europe’s tissue market is way off this level of penetration – a state of affairs which makes it anything but mature, and nothing if not attractive. TW
