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Tissue: A Growing but Challenging Australasian Market

In a recent column, I noted the development in the Australian tissue sector of a significant push-back against the surprisingly large market share of imports, which has been steadily increasing over a number of years. Subsequently, ABC Tissue Products has announced the installation of a new tissue machine due for start up by the end of this year. ABC is a privately owned company and does not share a lot of information about its activities, so the proposed capacity of the new machine is not known. But the consensus of speculation seems to be for an annual capacity of at least 30,000 metric tons, and most likely 50,000 metric tons. If the capacity reaches toward the latter estimate, ABC would become the largest tissue manufacturer in Australia. The fall-out from this could be significant. Already in recent years, Kimberly-Clark Australia (KCA) has reduced net capacity by progressive closure of three smaller machines after commissioning a 50,000 tpa through-air drying machine at ITS Millicent Mill in South Australia in 2004.

For a grade that constitutes a relatively small portion of the worldwide pulp and paper industry, tissue seems to be disproportionately prominent, perhaps because it remains a strong growth sector worldwide. Tissue represents less than 8% of the 400 million metric tons of paper manufactured annually, according to RISI. It has been seen as a discretionary product traditionally associated with advanced economies and high standards of living. In fact the European Tissue Paper Industry Association has produced a reasonably compelling chart correlating life expectancy with per capita tissue paper consumption. Other factors, of course, contribute to consumption and Japan, which has the world's highest longevity, has a per capita tissue consumption of only about half that of the USA.

In the USA, the biggest economy in the world, tissue represents about 10 % of production (interestingly, exactly 10% in 2012) and nearly 11% of consumption. In China, the world's number one producer of paper, total tissue production is fast approaching that of the USA. The difference is that the per capita consumption in China is about 7 Kg, whereas in the USA it is more than 24 Kg. The US consumption rate is by far the highest of any country, even though some other countries have a higher overall total per capita consumption of paper (Austria, Belgium and Germany). The rest of the world can only wonder how so much tissue can be used, although Canadians are not far behind the Americans!

Australia and New Zealand consume tissue at a lower rate than many countries, for reasons that are not immediately evident. Because data for imports is mainly limited to value, there is some uncertainty about actual tons sold. Australia and New Zealand have an apparent consumption rate of about 12 Kg per capita, effectively half that of the USA, and below the average rate for Western Europe, which is about 15 Kg per capita. As in Western Europe, demand for tissue products continues to grow, but rather modestly. For Australia, at least, a noticeable factor in the difference is Australia's very low rate of paper towel consumption. In away-from-home washrooms, the overwhelming dominance of hot-air hand dryers partly explains the difference.

Despite the apparent success of a push-back against imports, they nevertheless still supplied about 36% of "down under" overall tissue demand last year. This is a surprising market share given the bulky nature of the product, but a significant turnaround from the nearly 50% of supply in the previous year. This partly reflected currency exchange impacts and some increased capacity from ABC (through rebuilds), but was probably also a signal of a more aggressive strategy by Asaleo Care, the reconstructed company previously operated as a wholly owned subsidiary of SCA Hygiene. This company has enhanced its supply capability with significant investment of more than A$100 million in its converting facilities in Australia and New Zealand in 2014.

As with most of the paper industry in Australia, there are only a small number of manufacturing participants in the tissue sector and the market share of the companies is difficult to quantify.

Specialized tissue manufacture in Australia and New Zealand has a relatively short history. Australian Paper Manufacturers, which later became Amcor, manufactured flat and creped tissues from the 1930s. It then established Australia's first dedicated tissue mill in South Australia in 1960, as a short- lived joint venture with another paper company (Cellulose Australia). After a short period of independent operation in 1963, Amcor sold a 50% equity in the facility to Kimberly-Clark Corporation, which traded as KCA and operated the mill. In 2001 Amcor sold its remaining equity to KCC, which continues to operate the business. Bowater Scott had similar objectives and started a greenfield tissue mill in Melbourne in 1961, with a second machine installed in 1964. Bowater Scott was acquired from New Zealand about twenty years ago by Carter Holt Harvey and integrated with their Caxton Tissue business in New Zealand. Caxton was actually the pioneer in Australasian manufacturing of bathroom tissue from 1954. So, in a short space of time, Australia joined the 20th century with manufacturing facilities operated by the inventors of bathroom tissue as we know it (Scott) and of facial tissue (KCC). In 2004 the CHH business was sold to SCA, which then sold 50% equity to a private equity firm before listing on the Australian Stock Exchange in 2014 as Asaleo Care. SCA retains about one third of the issued shares.

ABC Tissue was established by Henry Ngai, who emigrated from Hong Kong in 1985, and ABC is still operated very much as a family business. ABC began as a tissue importer but became a converter in 1986, as one of a number of tissue converters selling mainly into the private label and away-from-home markets. ABC became a manufacturer in 2004 through the acquisition of a company in receivership in Brisbane with a capacity of 20,000 tpa. In 2007 ABC established a tissue manufacturing facility on the outskirts of Sydney with a machine supplied by A. Celi. Whatever the origin of the name, ABC is now promoted as an acronym of "A Better Choice". According to IBISWorld the company is ranked 816th out of the top 2000 companies in Australia - a significant achievement in 30 years.

KCA and Asaleo Care are estimated to have in excess of a third of Australian capacity each, with ABC having more than 20% and a fourth manufacturer (Encore) holding less than 10%. The real story however is about capacity utilization, which for the last decade has been mainly below 80% and has at times fallen to less than 70%. For apparent consumption, the statistics are even more challenging, with less than two-thirds of sales manufactured locally in the most recent year.

In the year to June 30, 2014, Industry Edge, in its Pulp and Paper Strategic Review for 2014, estimates that capacity utilization has increased to just below 80%, with ABC now likely to have the second largest market share. In this context the prospect of a new machine will be causing palpitations elsewhere in the manufacturing sector but probably is being relished by the retailers for whom it seems a win-win situation. Extra capacity probably equates to lower prices at a time when imports would ostensibly increase in price due to Australia's depreciating currency exchange rate.

Readers will not be surprised to learn that China is far and away the largest supplier of imported tissue stock (more than 60%) with Indonesia the other significant supplier (in excess of 15%). A large proportion of the rest of imported stock is inter-company supplies for Asaleo Care from its New Zealand operations.

A significant trend has been the growth of imported converted product, but determination of the actual quantity is challenging due to import classifications. What is clear is that over the last decade the monetary value of converted products effectively doubled and if imports from New Zealand are excluded, have increased more than four-fold. Overall, converted products probably represent at least half of the imports. Perhaps in anticipation of the new domestic capacity coming on line, Asia Pulp and Paper has been heavily promoting a new super-premium 4-ply tissue, which is fully imported, to complement its range of other imported converted and locally converted products offered by its local subsidiary, Solaris Paper, which has been significantly growing market share and driving imports.

The year 2015 is shaping up as a very interesting year for the Australasian tissue sector.

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