Growth in population and income may mean fall in export pressure on Chinese overcapacity
Tissue outlook – another Chinese riddle?
While the digital world slowly absorbs all senses and skills, from communication to reading and writing, certain human habits and body functions cannot be converted to digital mode. This is where the tissue industry comes into its own, with the evergrowing papermaking business a bright spot in the time of crisis.
Two world powers in the tissue industry, USA and China, are in very different states of this business. The current leader, USA, mostly operates ageing paper making assets and uses minimum capital for equipment upgrades. China is leading the way in new state-of-the-art paper machine installations. In the US the story about re-opening an old 200 people paper mill in Gorham, New Hampshire, for tissue operation makes big news. In China, the recent startup of a brand new high capacity tissue machine by the industry leader Hengan Group at the Rizhao downtown paper mill with the highest smokestack in the world seems like an obscure event.
Indeed, while the modest growth of tissue consumption in the developed world can be explained mostly by population increase, the developing world shows substantial advances in tissue business rapidly accommodating the customs and conveniences of modern day life.
Benchmarking Tissue Consumption
One of the major indicators of consumerism is a usage of disposable goods, from household products to surgical supplies and tissue consumption should be somewhere on the top of the list, varying from country to country. There is no clear method to establish realistic numbers for annual tissue consumption per capita which satisfies both environmentalists and manufacturers.
The range of tissue product usage is wide. The USA stands out with 23kg per capita per year. This number may reflect high spending for disposable household products like kitchen towels and napkins, and passion for premium soft toilet tissue made of long virgin fibres. Excessive tissue use is embedded in the mind of an average American making him or her the darling for tissue makers and helping to create the world leading country in tissue production and consumption. Ironically, combined amounts of unrolled bands of toilet tissue hanging from trees on Halloween across the country may possibly exceed an annual take of toilet paper in some African countries.
I remember visiting the canteen at the German paper mill a few years ago with American colleagues. It was a self-service place with mill employees picking up food meals and reaching a stack of folded napkins just before a cash register. I noticed local employees taking exactly one napkin, and Americans including myself grabbing a few instead. On the opposite end of the consumption range is Russia with 2kg, and with growth over 50% for the last eight years. While the country does not show consumption growth at the scale of Brazil, another member of the BRIC group, tissue products gradually gain recognition as well as other disposables.
Considering western Europe and Japan are somewhere in the middle, where level of per capita annual usage is noted from 11 to 16kg, it’s reasonable to establish this amount as a point of developed market reference. For emerging economies of South America, eastern Europe, Asia and Africa the balance of rising convenience and health standards may bring regional tissue markets to this level in a 10 to 15 year period. A reverse development for the North American market, however, meaning gradual drop in per capita consumption seems to be practically unlikely and any such signals may indicate very serious economic downturn.
Is the chinese excess volume an export threat?
According to project surveys on new tissue capacity by Tissue World Magazine for 2011 and 2012, Chinese tissue industry takes a lion’s share with over thirty new installations bringing almost 1.3m tonnes to the market. China currently takes the world’s second place in tissue production and consumption after the United States. Based on the reports from China National Household Industry Association (CNHIA) the estimated tissue production output in 2011 was nearly 5.7m tonnes while the country’s consumption reached 5.1m tonnes (or about 3.8 kg per year per capita). This makes up about 600,000 tonnes annual surplus tissue output which can satisfy the markets of a few European countries.
While attempting to analyse the dynamics of an annual tissue surplus for years to come, we should assume reduction of a production volume from current 8-10% to 4-6% due to continuing industrial slowdown in China. According to CNHIA, tissue consumption grew 10% in 2011 if compared with the previous year, or by about 460,000 tonnes. The safe guess for tissue consumption growth in the next five years might be around 5-6%.
This development may gradually reduce an excess amount available for export. The share of the tissue consumption increase related to population growth seems to be less significant than the income progress. A fertility rate in China now is 1.6 (lower than that of western Europe), which translates to population growth stabilised at about 0.5% in recent years or seven million people (at the current average rate of 3.8 kg an additional volume will be 26,600 tons).
While the cost structure of tissue products manufactured on modern paper machines and automated converting lines remained consistent across the world, the shipping portion of it is quite noteworthy. Indeed a chance to buy Chinese tissue exports in Australia, New Zealand or Philippines is much higher than in Europe, the United States, Canada or Mexico.
An advantage of domestically made tissue products is that, unlike other paper, it’s not economical to ship tissue paper from overseas because of its bulk.
Shipping cost from China is the global economy enigma. How else can someone bring a weightless pack of 3-ply virgin pocket hanky pack to a major supermarket chain in New Jersey, USA, and sell it for profit three times cheaper than similar 2-ply Kleenex?
The multistore grocery discounter Jack’s World in New York City offers similar 99 cents deals on imported from China toilet tissue and kitchen rolls. In the United States the current pattern of growth for Chinese imports shows slow spreading from major metropolitan area discount stores to key supermarket chains.
Different sources list the current size of the Chinese so-called middle class from 250 to 300m people with, according to the World Bank, annual per capita income of between $1,006 and $12,275. Such a group’s tissue annual consumption might be estimated around 6-10kg per capita with the higher limit reaching reported level of consumption in three dozen Chinese cities with population over two million including megapolises of Shanghai and Beijing.
At this rate the total tissue volume consumed by well-to-do Chinese comes to three million tonnes. Out of the current total of five million tonnes, the balance of about two million tonnes is spread among almost one billion people with very low income. Still the per capita number comes to 2 kg – the level in the range of such countries as Russia – and high potential to grow further.
Combining effects of population growth and income improvement might reduce the export pressure coming from the growing capacity of Chinese tissue industry.
Tissue market development seems to be quite predictable based on such obvious factors as population dynamics and modern habit influence, but only the future will show the genuine market development.