As inflation has eased, producers have maintained relatively elevated margin returns. Report by Mathieu Wener, Senior Economist, Numera Analytics.
Tissue demand in mature markets – North America, Europe, Japan, and Oceania – rose at a steady pace of 1.3% per year over the 2010-2019 period. This is not surprising for a staple household product with high penetration rates, for which demand growth is mainly driven by labour market factors such as employment and real wage gains.
From 2020, however, the pandemic set demand on a volatile path (see chart 1). At the onset of the outbreak, consumers depleted retailers’ toilet and towelling stocks, and demand in mature markets rose 4.2% in 2020. It then corrected by 4.6% in 2021 as households consumed their reserves.
Demand only partially rebounded in 2022 as inventories normalised and supply chains recovered. From that point on, macro factors took over, as rising inflation halted the rebound and kept volumes below the pre-pandemic trend.
Adjusting to a sudden loss in purchasing power, demand in mature markets stagnated in 2023 (+0.2%) before rebounding sizably in 2024 (up 3.6%). This robust gain largely reflects easing inflation and strong wage growth allowing households to regain lost ground.
It is also remarkable to note how purchasing power has guided demand in each respective region since 2022. In Europe, we estimate that purchasing power, as measured by real wages, fell by 6% in 2022-23, three times as much as in the US, which recorded a drop of roughly 2%.
The steeper drop in spending power in Europe of course reflects the additional impact of spiking energy prices following the outbreak of the Russia-Ukraine war. Yet this only delayed the rebound in demand towards its long-term trend. With wage growth remaining strong, purchasing power in Europe has also been recovering as inflation has eased.
While North American tissue demand recorded a 2.1% gain in 2024, Europe saw an eye-popping 5.4% increase over the full calendar year. As a result, we estimate that demand in mature markets realigned with the pre-pandemic trend by the end of 2024.
Rising demand, lower cost inflation has boosted tissue profitability
As tissue demand clawed its way back after the inflation shock, publicly traded tissue producers’ margins improved significantly. Our seven-company composite EBIT margin highlights the strong rebound in industry profitability over the past two years (see chart 2).
Improving margins, however, were not solely a dynamic driven by improving sales volumes. For one, on the cost side, pulp prices have largely remained below 2022 levels, while energy costs have also eased.
In addition, tissue producers have been able to maintain relatively elevated prices. Numera’s modelled pricing series show that the gap between parent roll prices and pulp costs – a crude estimate for gross margins – has surged (see chart 3).
In Europe, for instance, it has risen from roughly €500 per tonne during 2014-2019 to an average of over €800 per tonne since 2022, only part of which can be accounted for by the pass-through of higher energy and distribution costs. This helps explain the strong upward move in EBIT margins over the past several quarters.
With as much as 5.4m tonnes of extra hardwood market pulp capacity coming online in the next five years, a compression of the price-cost differential from the raw material cost side seems unlikely in a context where producers are increasingly favouring hardwood pulp in their grade mix.
