Bruce Janda, Senior consultant, Fisher International
Bruce Janda, Senior consultant, Fisher International

• Infection rates to get worse before significant herd immunity no sooner than end Q2 or Q3 2021

• Post-pandemic business travel and office occupancy impacted in the long term

• Most forecasts predict volume recoveries of 50-75% in this sector in the next two years

• Leisure travel to increase two-fold above pre-pandemic levels as vacations and family visits become crucial

• ‘New normal’ will change mix of consumer and commercial tissue demand

Bruce Janda, Senior consultant, Fisher International
Bruce Janda, Senior consultant, Fisher International

North America’s tissue business in the middle of the Covid-19 pandemic

North America represents the world’s most mature tissue market and maximum tissue consumption rate per capita. China and the Asian region have supplanted North America as the center of global
tissue growth.

However, the region’s product and consumer trends are still predictive of potential trends in the developing regions. Economic and social convention consider North America to comprise of Canada and the United States, although geographically it also includes Mexico and a group of islands in the region. Mexico’s demographics and economic statistics are reported as part of the Latin American region. However, since Canada, Mexico, and the United States are the only countries producing tissue in this area, we consider them as a unit. The new USMCA trade agreement supports intensive cross border tissue activity between these three countries initiated by the previous NAFTA treaty.

Several of the North American tissue producing companies operate in two of the three countries in this set. Kimberly-Clark Corporation operates in Canada and the United States. It also has minority ownership in Kimberly-Clark de Mexico, which includes some cooperative agreements. Essity has tissue production operations in the United States and Mexico as well. The Canadian based tissue producers have been very active in building capacity south of the Canadian border and in the United States. Kruger Tissue, Irving Consumer Products, and Cascades have all built new advanced TAD machines in the United States to produce ultra-premium consumer tissue.

The United States represents about two thirds of this region’s total population, with Mexico adding slightly more than one quarter of the total. Figure 1 shows the relative evolution of each country’s population over the past 14 years. Mexico is growing the fastest at approximately 1.04% in 2020. Canada is in second place, probably due to more immigration, and growing at 0.81%. The United States population increased at a rate of 0.4% in 2020, the lowest growth rate since 1900. Additionally, it lost relative population share to Mexico and Canada over the last 14 years.

Figure 2 represents the gross domestic product per capita of each of the three countries. Normalised by population, Canada and the United States’ economies are quite similar in generating individual purchasing power. The trend suggests that the United States recovered quicker and more completely from the Great Recession than Canada. Mexico is significantly lower in economic production per person, so it has not shown significant economic growth compared to Canada or the United States. As a result, the US consumer had relative income growth to support further tissue consumption versus the Mexican or Canadian consumer.

Unemployment rates represent a significant drag on the development of both consumer and commercial tissue consumption and new product adoption. Again, we see Mexico’s recovery from the Great Recession followed behind the United States, while Canada had a more moderate response and maintained lower unemployment overall in Figure 3. The Covid-19 pandemic has had a significant impact on unemployment in all three countries, but Mexico’s impact is significantly less than Canada and the United States. Figure 3 provides the best graphical illustration of the immediate effect of the pandemic.

Figure 4 shows the consumer price index for each of the three countries based on the year 2010. Canada and the United States follow very closely with relatively low inflation in historical terms. However, Mexico has been increasing much quicker. This makes Mexico’s tissue exports appear lower-priced, but makes it harder for Mexican consumers to purchase or import tissue.

Canada and the United States’ demographics and economics put them in a position to continue leadership in tissue consumption At-Home and AfH. Mexico continues to be in a strong position for tissue exports. Unfortunately, the Covid-19 pandemic struck quickly and hit the United States especially hard. Figure 5 shows the development of active Covid-19 cases per million population by each quarter of 2020. The fourth-quarter numbers do not include the last several weeks of December 2020. This has been an evident disruption in purchasing patterns and the portion of the commercial or AfH products in the United States.

Figure 6 looks at the pandemic from the manufacturing perspective. The states or provinces relative to the pandemic is indicated by red shading and tissue machine locations as green flags. Most of the United States’ tissue production is in the most impacted area, followed by eastern Canada’s mills. Tissue manufacturers have continued to run with little hindrance as essential industries and workers up to this point despite the pandemic. Any short-term supply disruptions in autumn Covid-19 surges were driven by short-term panic and hoarding. Tissue supply remains sufficient to meet demand overall. We can’t predict if tissue operators and producers will become affected in any post-holiday surge of cases. Tissue mills tend to be in remote locations, and it would be difficult for the pandemic to affect them all at once, causing a significant supply disruption. Mexico has been much less affected than the other countries, presumably due to lower travel rates.

Predicting the tissue demand trajectory through the rest of the pandemic, when the pandemic will end, or what ongoing tissue demand will look like in a post-pandemic market is the subject of much speculation. The assumptions used in this analysis are that the infection rates could continue to get worse before vaccination and recovery rates create significant herd immunity. This will probably not be reached in the US or Canada before the end of quarter two or three of 2021. Economists project that post-pandemic business travel and office occupancy may be impacted in the long term. Most forecasts are for recoveries of 50 to 75% of the volume associated with this form of business activity in the next two years. However, the same projections suggest that leisure travel will increase two levels higher than pre-pandemic as vacations and family visits will become more critical. This can change the proportion of consumer and commercial tissue demand and the mix of commercial products required to meet the ‘new normal’ of North American AfH tissue demand.

Figure 6 shows the active Covid-19 cases per million by state or province.

Figure 7 shows the relative production of tissue in each of the three countries. Overall production in the region has grown. Canada’s share of the aggregate output has remained relatively stable. Still, the United States’ share has shrunk some as Mexico has increased overall production levels and the resulting percentage of the North American total.

Figures 8 and 9 illustrate the relative share of North American tissue exports and imports in world trade by each country. Tissue exports from North America are more than double imports to the region. Mexico’s share of exports has grown significantly over the 14 years. At the same time, Canada and the United States have lost share.

The import chart in Figure 9 shows that most tissue imports are coming from China and Indonesia. Europe and South American countries make up the balance.

Overall trade between the three countries in the region is greater than the total imports from outside. Figure 10 shows the USA imports from Canada and Mexico. Canada’s tissue imports represented more than three quarters of the US intraregional supply early in the chart, but Mexico exports to the United States have increased to about 40% of the total. Mexico is quickly becoming an essential source for supply to the United States and a significant global tissue trade player.

Mexico’s tissue trade growth is also supported by Figure 11, where the number of tissue machines added or subtracted each year is represented in a stacked waterfall chart. Of the announced and under construction machines through 2020, three are included in this chart. All three countries have been adding machines and taking out old equipment, however Mexico has added the most machines over the timeframe studied.

The pandemic has shifted demand away from commercial tissue use AfH to consumer tissue as the stay-at-home orders took effect, and all travel has plummeted. North American commercial tissue demand represents a larger share than any other region. The United States commercial tissue demand had been running about 34% of total tissue. Figure 12 shows the overall North American tissue production by grade. Specialty tissue is relatively small, at 1% of the total. Commercial tissue capacity represents 30% of aggregate production. 

This is the tissue sector hit by the pandemic. The chart represents tissue machine production capacity and not converting capacity. Some commercial base sheet capacity has shifted to support consumer tissue production to meet the increased demand as consumers spend their time at home.

The finished products break down the tissue grade production capacities in Figure 13. The United States has several distinguishing features, such as consumers demanding the highest softness levels in the world, which requires more energy to deliver. Extra softness is achieved by increased eucalyptus fibre purchases, non-pressing processes such as TAD, and over drying the sheet on Yankee before creping. 

The US consumer towel production capacity represents 87% of the total consumer towel. US consumers are well known for using more kitchen roll towels per household than any other country. The breakdown of commercial tissue products by country is also descriptive of the United States’ tissue market. 

Commercial tissue capacity in the United States represents 94% of all commercial hand towels produced in North America. US commercial napkin represents 90% of total capacity and commercial bath 86%. It’s not surprising that the United States sees the pandemic’s most significant impact on tissue demand by product.

Most of the commercial bath tissue formats are designed for dispenser use in high volume venues. Giant unperforated rolls of tissue on three-inch cores cannot be used effectively at home while concerts, athletic events, and daily travel are curtailed. The base sheets used for many of these products are not easily shifted into consumer production. Dispenser napkins are still being issued for takeout food, but the table napkins used for in-house dining have been sharply curtailed. Commercial hand towel production is more of a mixed consequence as the increased focus on sanitation and handwashing tends to increase demand. There has been some movement toward replacing electric hot-air dryers with paper towels to improve sanitation. At the same time, overall travel and office occupancy rates are down. Like commercial bath tissue base sheets, most hand towel capacity is challenging to shift directly into useful consumer kitchen roll towels for increased sanitation at home. It is reasonable to expect that commercial tissue demand will recover post-pandemic due to increased leisure travel, making up for less office occupancy. If the trend toward improved hand hygiene continues, a net increase in commercial hand towel demand is possible. If we all continued to wash our hands while out of the home, this demand could increase by up to 50%.

The North American region has the highest percentage of advanced tissue technology deployment in the world. Figure 14 shows that this is concentrated in consumer kitchen towel production and represents almost half of consumer bath capacity. Canada, Mexico, and the United States all have advanced technology tissue machines.

Advanced tissue technology is concentrated in the United States tissue capacity compared to Mexico and Canada. Figure 15 shows that more than 80% of consumer towels and 60% of consumer bath tissue capacity is advanced tissue making. This provides superior absorbency and softness. 

The private label market in the United States has rapidly shifted two ultra-premium performances requiring this advanced technology. It’s interesting to note that commercial hand towels are starting to have significant input from advanced technology. This results in lower grammage and more effective hand dries.

Integrated fibre supply is a significant contribution to lower-cost production. Figure 16 shows the relative percent of furnish purchased by product format for each of the three countries. Industrial tissue tends to use high amounts of purchased fibre, and the commercial products have traditionally used high percentages of integrated recycled furnish. 

The consumer bath, facial, and towel products all have large portions of purchased pulp in the US and Canada. Consumer product performance preferences drive this. The United States also has a larger than expected percent integrated virgin fibre in tissue products, mostly due to integrated Georgia-Pacific tissue sites.

Major trading partners and future tissue import sources were chosen to create a comparison set to benchmark North American tissue production assets. This set includes China, Indonesia, Brazil, and Italy. Figure 17 shows the machines’ relative quality expressed as average machine technical age and average machine trim width. 

The US and Canada have older machines, but the US has the widest trim width in the set, supporting lower-cost production. China has the newest tissue machines and the largest capacity shown as the bubble’s size, but these machines tend to be narrow.

Figure 18 shows the deployment of advanced tissue technology within the comparison set used for benchmarking. Only the countries in North America have advanced tissue technology. We continue to see advanced technology in the US moving to more than 40% of total capacity. The advanced tissue technology capacity in Mexico is used both to support high-end local products and base sheet exports to the United States.

The increased energy-use in the United States used for the increased softness preference is seen in Figure 19. This presents a cash cost per tonne benchmark for each of the comparison set countries. Indonesia and Brazil are the low-cost producers due to the low-cost hardwood integrated furnish available. China and Mexico enjoy relatively low labour costs in the middle of the curve. The United States has the highest cost structure which is close to Canada and Italy.

The cash cost per tonne can be misleading if advanced technology is used to produce higher performance products with lower fibre content. Figure 20 provides a cash cost benchmark based on a case volume of product adjusted for reduced basis weight on advanced technology machines. In this case, Indonesia and Brazil remain low cost producers, but the United States is the next lowest cost based on an average of case weight between advanced and conventional tissue.

Benchmarking production by carbon emission is becoming more important as various governments implement carbon tax regimes. Figure 21 shows an overall carbon emission per ton of product on a cradle to gate basis. This is based on a tonne of product like the original cost per tonne curve and overstates the carbon emissions of the United States in terms of carbon per sheet of tissue used.

North America’s tissue business is well connected by trade and cross border ownership. However, there are really two separate markets. The consumer or retail products reflect consumer demand for very high softness and absorbency in either branded or private label products. The commercial or AfH tissue has a lesser focus on softness and is controlled by the facility management. In many cases, ease of service, low cost to maintain, and reduced theft or damage drive the tissue performance instead of the consumer. Commercial hand towels appear to be somewhat of an exception where increased amounts of advanced technology are used to reduce sheet use and please business patrons.

It remains to be seen if the tissue supply chain in North America can continue to deliver as the Covid-19 infection rates continue to spike before a vaccination can be implemented on a vast scale. The post pandemic recovery can be expected to be as disjointed as different parts of the economy rebound. This would suggest a return to a slow and steady consumer tissue growth, but the commercial or AfH tissue business could be somewhat changed. Increased focus on leisure and travel will drive increased consumption, while a slow return to the office coupled with reduced business travels and increased home office use will change the mix of consumer tissue products.

Analysis of competitive positions requires specifics on tissue producers and individual machines. This article presents a static summary of North America’s tissue industry today. 

Fibre prices, exchange rates, and environmental regulations will change, providing some participants with advantages and others with new challenges. North America’s tissue mills will continue to change hands and perhaps consolidate; neighbouring countries may invest in tissue-making capacity, thus affecting North America’s imports and exports.

About Fisher International, Inc.

Fisher International, by virtue of its deep expertise in the pulp and paper industry, provides insights, intelligence, benchmarking, and modelling across myriad scenarios. By arming companies with the knowledge that will help them gain a better understanding of their strengths and help identify weaknesses, Fisher is helping businesses stave off challenges and better position themselves for
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