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SPECIAL FEATURE: ANNUAL REVIEW 2019

As 2019 draws to a close, TWM asks leading figures across tissue’s global supply chain for their retrospectives on 2019… and predictions for 2020

Paul Fecher, Northwood chairman, Northwood Paper, Tissue & Hygiene

TWM/1: How have the events in the tissue industry in the last year impacted your business?

“2018 and 2019 have performed independent of logical evolution, there has been a disconnect between availability, and subsequently the consequences of price erosion.

It started with tight supply and aggressive pricing policy by pulp suppliers which forced tissue prices to head north.

During the period, we have seen the strengthening of the US$ as well as the Euro against the wounded British pound, or should I say Sterling weakened against all currencies.

“The continued uncertainty which still prevails over Brexit enforces lack of clarity.

In 2019, as far as the UK is concerned demand has been solid, the biggest issue is uncertainty and constant lack of government being able to govern.

At first, we thought that the extra demand for fibre to replace plastic would compensate for the soft pulp demand from China, however that decline was greater than the growth produced by substitution.

The interference by Asian governments on RF imports has had catastrophic short-term consequences on the lower grade RF supply balance, encouraging mills to substitute cheap low-grade materials into packaging so reducing demand for virgin fibre.

This resulted in an oversupply of pulp which in spite of consolidation by the pulp suppliers the supply and demand balance could not be managed and price erosion followed.

“We at Northwood have navigated these challenges and managed to turn many of them into positive opportunity whereby we have secured additional tissue manufacturing capacity and converting facilities thereby further integrating our business at least in its supply of RC Tissue grades.”

TWM/2: What main tissue trends are you expecting to see in 2019/2020?

“At Northwood we are constantly looking to reduce our effect on the negative by products of manufacturing recycled tissues as well as battling to further reduce our usage of energy as well as water.

We have invested heavily to reduce the water content and also to preserve fibre in our sludge production, saving CO2 as we have reduced the number of trucks needed to dispose of our waste stream by almost 20%.

We have also acquired a co-generation facility meaning we create our own electricity which we also sell to the grid.

All our transport fleet is updated and meets the best in practice emission targets.

“We have added a number of new additional converting lines to make AfH
rolled towel and toilet products, we are a major supplier of private label as well as our well-known brands of Leonardo, North Shore, Essentials, Optimum, Whisper, Hush and Rhino covering folded as well as the full hygienic product portfolio needed by our clients be they in the professional or consumer sectors.

Additionally, in Spain under the Saten Brand we offer the full table top assortment further making Northwood the complete supply chain partner of choice.

We use virgin tissue or RC tissue as appropriate to best suit the product criteria.”

TWM/3: How are the changing economic conditions around the world impacting the tissue industry?

“The only certainty we have is that we have no certainty and we need to be aware of sudden changes and mitigate against these headwinds and with our excellent leadership team we are well placed to continue on the path followed during the last decade.

We now manufacture over 100,000mt of RC tissue/towel grades most of which is consumed internally.

We continue to select opportunities to grow our market offering and manage the unfavourable climates presented.”

TWM/4: Are you seeing demand for tissue products in new geographical areas, and if so, where and why?

“Demand for our grades continue to grow.

We are covering selected markets as served historically but we are well placed as capacity grows to expand the Northwood footprint and now we also have mainland Europe paper making, converting and a distribution base so we are able to present to cross border buyers a robust supply chain partner.”

TWM/5: What are the main challenges and opportunities facing the tissue market in the immediate future and how are you tackling them?

“By far the biggest challenge facing our industry is currency volatility, however we have well-honed systems in place to manage the peaks and troughs.

The gyrations of the pulp market, be it availability or price development, continue to confound all the soothsayers as no amount of forecasting and algorithms can shed a light on developments until they are upon us in the global village that we now all inhabit.

We are in a very vibrant sector which demands 24/7 commitment and that is the only way one stands a chance of making the right judgment call.

In the UK once Brexit is effected or cancelled, one uncertainty will be removed and if we have a government that encourages enterprise and competition and lets business evolve, we are positively looking forward to responsively growing our businesses.”

Bud Chase, vice president – tissue, EDT

“Throughout 2019 we continue to see competition in At-Home and high-quality AfH sectors of our industry.

Simply stated, this is competition between products which are essentially not marketed, i.e. big box store “brands” and traditional brands we all know supported by branding costs and paid shelf space at local outlets.

“The cost to bring branded products to market must be offset by either reduced manufacturing costs or brand loyalty driven by genuine quality differences that consumers will pay more for.

“Manufacturing costs remain a slight competitive advantage for the traditional producers of branded consumer products because they have a more experienced production labour/management pool, but this is evaporating rapidly as retirements occur and time passes allowing experience to build in the newer players.

“As this experience base continues to equalise, where will the future advantage be?

Innovation always remains an attractive possibility, but innovation in what?

Manufacturers have been challenged for years to innovate something on the product side that truly gets the attention of the consumer (roll size, quantity, perf options, softness, absorbency, etc).

Improving either softness or absorbency are innovation areas that many are working on but creating a big enough change in softness or absorbency to get and keep the attention of the consumer remains a challenge for many. Enzyme technologies are available to help do this but require a committed approach.

While there are fundamental differences between papermaking asset classes like TAD types, Structured Tissue or Felted Tissue along with their respective stock prep systems, these will likely not be the major innovation drivers due to asset commonality between various producers.

“Eucalyptus, a well-known softness driver, is also commonly available to all.

Local wood baskets may play a key role as producers learn how to modify those cost-effective fibre types for maximum softness and absorbency contribution vs just accepting the historic status quo from those pulp types.

Using enzymes to modify local fibre types to allow for expanded use without giving up, or even improving softness or absorbency could be a major advantage for some. “Ironically, another opportunity to gain competitive advantage may lie with retirements occurring now.

Companies who handle this phenomenon well by preserving experience through commitment to extensive training, higher-level internal data disciplines or strategic supplier partnerships may see a reduced negative impact.

In addition to maximising quality contributions from using more local or a more cost effective furnish, one of the most important parts of gaining a competitive advantage in the next five years could be to lose less manufacturing efficiency from experience loss than your competitor.”

Scott Griffin, director – tissue sales, Central National Gottesman (CNG)

TWM/1: How have the events in the tissue industry in the last year impacted your business and the global tissue industry?

“During 2017 and 2018, we saw massive run-ups in fibre prices alongside significant increases in tissue capacity.

Throughout this period, and in 2019, competition has been at an all-time high in the tissue segment.

This certainly makes life tough for everyone in the business.

This has led some producers to rethink their go-to-market strategies for parent rolls.

So I suppose the silver lining for CNG has been that we have had the opportunity to develop several new and meaningful partnerships globally whereby suppliers have been keen to take advantage of our sales reach and supply chain capabilities.

It is also nice that many of these companies are major customers of
CNG for woodpulp.”

TWM/2: What main tissue trends are you expecting to see in 2019/2020?

“From a supply standpoint, brand owners and retailers will continue to vie for share and domestic demand will continue to outpace domestic supply.

There will be more rationalisation of older mill and converting assets.

Companies who have neglected to adequately re-invest will struggle to remain relevant in this hyper-competitive North American landscape.

Further, we will likely see more consolidation among retailers and AfH distributors.

This will put pressure on an already fragmented supply of integrated producers and independent converters.

That said, there will always be room in the market for well-executed projects and well-run companies, regardless of their size.

“We are involved in a major straw pulp mill project starting now in Eastern Washington.

It will be very interesting to see how this “tree free” fibre is incorporated into the tissue segment and what value consumers might place on such a product.

In addition, there are very creative initiatives being taken by AfH players looking to replace higher cost non-woven substrates with 100% cellulose based ones.

And lastly, manufacturers are utilising conventional dry crepe to achieve national brand equivalent quality in the consumer space through continued advancements in paper making and converting line technologies.”

TWM/3: How are the changing economic conditions around the world impacting your business and the tissue industry at large?

“Growth rates in tissue will surely be impacted by an economic downturn but we have faith that this impact will remain healthy relative to other consumer products and commodities.

Globally, we still see positive growth in the near term.

We’ve been impressed by the pace of growth in many developing regions.

In China, we have noted the skill with which producers have moderated their production rates in order to keep supply and demand in balance during an otherwise over-supplied period.”

TWM/4: Are you seeing demand for tissue products in new geographical areas, and if so, where and why?

“In several developing regions we are excited about demand growth.

For instance, this summer we opened our new office in Gothenburg, Sweden, with a specific focus on serving the sub-Saharan markets.

I believe this demonstrates our enthusiasm for these markets and our willingness to invest time and resources in the success of our customers there.

With the population being in excess of one billion people and tissue consumption expanding in certain countries there in recent years we feel this region offers promising growth potential.”

TWM/5: What are the main challenges and opportunities facing the tissue market in the immediate future and how are you tackling them?

“The main challenges and opportunities facing the tissue market for our parent roll merchant group today is identifying industry partners committed to building long-term sustainable relationships. While the nature of each transaction varies (spot, mid-term or long-term) having common values is essential in building a strong partnership that fuels growth in the long run.”

TWM/6: What do you make of the Trump/China trade wars?

“Regardless of your opinion of the President’s strategy, most Americans agree that the trade relationship between the US and China was in great need of a rebalancing.

That said, we will be overjoyed to see the end of the trade war!”

Daniel Signori, technical director, Mili

TWM/1: What key events has the tissue industry been impacted by during 2019?

“The Brazilian market is going through a very complex year.

On one side we have excess supply offer and we understand that the current market has a 30% idleness rate.

On the other we see the increased concentration of retail players, with more power in negotiations, and this combination is causing the margins practiced by the industry to fall sharply.

The year has been challenging with companies concerned about their costs and streamlining their processes.”

TWM/2: How have tissue company merger and acquisitions impacted the industry?

“Not only in the Brazilian tissue market, but the world market tends to consolidate and medium-sized companies tend to be rare in virtually all sectors.

In Brazil, we had the consolidation of the fourth and second largest installed capacity, which generated a company with approximately 20% of the market.

It is still early to assess whether there has been a change in behaviour in the companies’ commercial line because these changes usually have a maturation period and there was no significant reflex in the market per hour.”

TWM/3: What new trends have you seen in terms of the tissue segments?

“The Brazilian market continues to mature and the trend is having a good growth rate in the AfH segment as we see in Europe and the USA.

The private label sector will also have a tendency to increase forced mainly by the large concentration in the retail sector.

The challenge for the industry will be to create brands strong enough to increase value in the consumer’s mind, values such as sustainability, softness and quality should serve as differentials at the moment of choice.

Otherwise tissue risks becoming a commodity, which is not good for the consumer, much less for the industry.”

“Automation and Industry 4.0 gain strength in equipment and processes.

This will allow the emergence of differentiated products fighting for specific consumer niches, rationalising the use of inputs will also be a differential to continue competing in such a difficult market.”

TWM/4: How is the world’s economy impacting the tissue market, are we seeing increasing demand in certain regions for tissue products?

“Brazil has regions with very distinct characteristics, south and southeast behave very differently than north and northeast.

We foresee a good growth in these last two regions and we note that the slowdown in global growth added to the internal crisis brings a negative mood component to all consumers.

But if some internal indicators start to improve, this consumption will grow again and we have an excellent expectation for the year 2020.”

TWM/5: What key opportunities are there in 2020 for tissue companies, and what key challenges?

“We look forward to the year 2020, after three years of internal crisis and decreased consumption, new indicators of economic recovery have appeared and with them the expected increase in consumption, greater use of installed capacity will bring greater scale and cost reduction.

With better margins, it will be possible to increase the flow of investments in equipment and processes making the products even more competitive.

“The challenge is already having the minimum technological level to guarantee competitive operating costs.

In a sector as dynamic as this, one is either growing or disappearing, there is no second way.”

Alexander Wirth, senior manager, StepChange Consulting

TWM/1: With dropping pulp prices in 2019, how has the tissue industry been affected?

“From a profit perspective, this year has shown some relief driven by reduced input costs as pulp prices have been declining.

We are monitoring the results of the key players of the industry closely and it can be observed that the net profit and EBITDA results of companies active in the tissue peer group have remained stable in the first half of 2019, compared to the previous year.

We noticed as well, that some big players are consolidating their positions, and are openly questioning margins in tissue.

Their strategy is mainly focused on hygiene segments where margins are higher, products are more complex and brand building has a higher potential to lock in customers.”

TWM/2: How are tissue markets performing and what is the balance sheet impact?

“Inventories are up and cash flows are down, which signals that demand is slow.

Overall, significant working capital increases can be observed, we see a plus of 75% compared to 2018, driven by inventory increases at many of the
key players in the industry.

In particular, working capital levels of CMPC and Hengan International, who traditionally operate on higher inventory levels than European or North American players, have increased further to over 80 days inventory outstanding.

Looking at Returns on Capital Invested, the tissue industry continues to show solid returns and continues to invest.

But, overcapacities already exist in nearly all markets, and additional capacity is still being installed.

It can be expected, that pressure on margins will remain high.”

TWM/3: The greater pulp, paper and packaging industry is slowly consolidating. Does this trend also apply to the tissue industry?

“Over the past two years, consolidation in the tissue peer group has been limited, and we rather believe that we have more of a fragmentation, than consolidation.

A smaller and opportunistic M&A event was the acquisition of the Orchids assets by Cascades.

Consolidation in the tissue industry cannot really be observed.

We notice small-scale and small-volume tissue producers operating in emerging markets.

Overall, Asia is doing well, catching up in consumption per capita and continuing to profit from population growth in some markets.

However, growth is also slowing there.”

TWM/4: What trends do you see?
“Tissue remains under pressure from private labels and the fragmentation is helping this trend.

Most capacity investments stem from smaller and privately-owned companies.

Compared to other paper grades, the installation of a tissue machine and converting equipment is relatively simple and less capital intense, consequently the barriers to market entry are comparatively lower.

“The major global trends impacting tissue are increasing standards of living, increasing urbanisation and rapidly changing lifestyles.

Further, the overall ageing population, and a strong demand for economically sustainable solutions are important future drivers for tissue
markets.

These trends provide significant opportunities for the tissue industry.”

TWM/5: What are the key opportunities and key challenges for tissue companies in 2020?

“A big opportunity is to translate global trends into value through digitalisation.

Benefits from increasingly digitalised businesses are in the areas of customer relationship management, cost reduction, supply chain improvements, energy efficiency and business process efficiency.

On the risk side, we see a lack of internal awareness about digitalisation, and resistance to changing existing processes as the biggest challenges.

While the topic is omnipresent, we see relatively few specific transformational digitalisation projects in the tissue industry.

Where digitalisation is a topic, it is mostly related to production assets.

Aspects like lean and digitised business processes, the management of global supply chain networks, or new levels of supplier-customer interaction deserve more attention and focus in our opinion.

Those aspects are especially valuable during tougher economic times as they serve differentiation in commoditised markets and can help reach next level competitive advantage.”

Steve Peters, sales and business development manager, Bedford Paper

TWM/1: How have events in the tissue industry in the last year impacted your business and the global tissue industry?

“Raw material supply and price variations were more volatile in the last 18 months.

In past years there has more stability.

Still, availability can be overcome by maintaining a diverse supply chain, always working to maintain and build relationships.

Pricing is a matter of supply and demand and will always be driven by market need.

The same is true of tariffs which have had a short-term impact, the industry will learn to adapt.”

TWM/2: What main tissue trends are you expecting to see in 2019/2020?

“Focus on quality materials and quality of finished products will be more important.

I expect that we will see more innovation toward improved substrates and increased demand for higher quality products.”

TWM/3: How are the shifting economic conditions around the world impacting Annual Report your business and the tissue industry at large?

“Tariffs have had a short-term impact, the industry will learn to adapt.

I believe that US domestic manufacturing will continue to increase and imports become less important.

Lead times for imports is becoming more of a challenge and customer are looking for faster response.”

TWM/4: What are the main challenges and opportunities facing the tissue market in the immediate future and how are you tackling them?

“Labour is the biggest challenge facing the industry.

Attracting and retaining personnel will become more of an art.

Smaller companies may be more versed to adapt and manage this than larger corporations by being more personable.

“Automation will play a larger role in capacity growth and maintaining operating rates at the expense of staffing challenges.”

TWM/6: What do you make of the Trump/China trade wars?

“While tariffs are intended for long term negotiations and balance between countries, the industry will learn to adapt.”

Fernanda Accorsi, founder, F.A. Retail

TWM/1: How have the events in the tissue industry in the last year impacted the tissue sector?

“Acquisitions and company mergers were strong this year and because of that we see companies aiming to re-organise their portfolios, brands and teams.

Marketing and retail strategies play an important role during the process of rearranging the internal structure in order to deliver to shoppers a more consistent offer, with a clear positioning.

Additionally, sustainability has undoubtedly been the big trend forcing companies and mills to re-think their products and processes to try to keep their costs stable, with very little increases in the final price.

High investments in technology have brought several inspiring projects regarding sustainability – it was an exciting year!”

TWM/2: What main tissue trends are you expecting to see in 2019/2020?

“We will continue to see most growth in the emerging markets – Latin America, Asia and Africa – now more and more driven by added-value products.

Countries like Turkey bring expertise and innovation, delivering very high-quality SKUs.

I expect to see more solutions focused in our circular economy need: reduction of carbon footprints, water use, supply chain efficiency and, of course, packaging reduction – which impacts AH and AfH markets.

Private label will continue to grow and not only with cost-benefit options but also with added-value products – retailers believe that having their own label brings them exclusivity and keeps them out of a “price war” with national brands.

TWM/3: How are the changing economic conditions around the world impacting the tissue industry?

“Political conflicts such as Brexit and China vs USA will keep encouraging local suppliers and manufacturers, and due to the high competition in this sector, companies will avoid increasing the final price of their products despite increases in their costs and import fees, which might force them to end up with lower profits.”

TWM/4: Are you seeing demand for tissue products in new geographical areas, and if so, where and why?

“Demand is still growing in all the emerging markets and they are the ones that will drive the little growth forecasted for the sector.

On the other hand, I do also see a slight contraction of consumption in some mature markets, driven by the ecological movement fighting waste and climate change.

Consumers are re-thinking their purchase habits and establishments are also engaged in reducing the waste and educating users – which may also reflect on the AfH volumes.

Establishments are already replacing paper towels with electric “hand-dryers”, for example.”

TWM/5: What are the main challenges and opportunities facing the tissue market in the immediate future and how are you tackling them?

“I see the e-commerce channels emerging as a powerful point of sales (POS) for the tissue categories and this reduces the chance a brand has to personally interact and engage with shoppers.

These are already saving their ‘shopping lists’ on their favourite online retail platforms, to reduce the ‘shopping time’ and therefore achieving a faster and easier experience.

This is quite a challenge for tissue brands, since the SKUs are considered commodities.

And of course, “circular economy” and “cradle-to-cradle (C2C)” are ecoming famous concepts and transforming production processes in order to comply with political and ethical requirements can become an important opportunity in the immediate future.

I consult companies that want to rethink their portfolios and their brand-positioning in order to meet these requirements.”