Three leading tissue makers have made major cutbacks worldwide, most of them in Europe. This is surprising because the tissue makers closely track consumer trends and they normally get it right. So what's happening?

by David Price

It's a relief not to have to write about China's immense growth or the US's lack of competitiveness. However, I am surprised to be writing about a sector—tissue—which produces about 23.7 million tons per year (tpy) on about 2,100 machines worldwide, directed at a market that the producers track and target in forensic detail.

But machines are being shut and there are redundancies. Europe's production and consumption of tissue are almost in balance at 6.1 million tpy and 6.5 million tpy, respectively.

Yet, Italian mills could lose up to 30% of their existing exports markets for parent reels and finished goods as a result of upcoming new capacity in Spain, UK, Germany and Poland. What's gone wrong?

Tissue products are directly linked to standards of living. Where they're high consumption is high. Where they're low so are sales.

The details are that Kimberly-Clark, Georgia-Pacific and SCA have each decided to cut global capacity.

KC will reduce global capacity by 17%.This year, its second quarter costs increased by $95 million. The new program, which will have a particular focus on Europe will: (a) consolidate and streamline manufacturing plants, (b) improve operating efficiencies and (c) reduce administration expenses.

By the end of 2008 the program will have achieved:

• The closure of 20 manufacturing plants
• The streamlining of another four facilities
• The reduction of the workforce by 10% or 6,000 employees
• The relocation of production and equipment to seven plants which are planned for expansion.

The European operation will be heavily affected by the plan since there is serious overcapacity in the tissue sector—due mainly to new Italian and French start-ups. Two mills in Germany and Italy will be closed by 2006, yet two mills in the UK will be expanded as the UK is a net importer of tissue.

GP's plans for its North American tissue business have already been reported by this magazine. In its European operations four plants will be closed in Greece, UK and France with the loss of 250 jobs.

Sweden's SCA plans to phase out 100,000 tpy of tissue and eliminate 3,600 jobs, 75% of which will be in Europe. Four mills in Sweden, Norway and Netherlands will be closed. SCA's CEO Jan Astrom said that the UK, which is one of SCA's most profitable markets, "...has seen very steep price drops in consumer tissue since 1999, with prices falling 20%. There are several reasons for this, such as aggressive pricing by our competitors, and the deep discounting in the UK by German retailers Aldi and Lidl have added to the pressure."

Astrom added, "We are unable to grow much further in Europe as we have reached a level that makes it difficult to get approval from the competition authorities. So growth will be in different product such as the hygiene sector and different markets, such as the U.S. But we also see growth prospects in Eastern Europe and Russia."

What went wrong? The Europe-wide problem is the state of the economies. Apart from the UK every country is struggling with weak growth. France and Germany, normally the drivers of Europe, are suffering from rising manufacturing costs, foreign competition, high unemployment, massive welfare provision, and falling birth rates. The optimism over Eastern Europe's rapid growth was misplaced-these emerging economies will need more aid and for much longer than was predicted.

All this means that consumers have less money to spend and they shop more thriftily. In this atmosphere, a deep discounting retailer is more likely to sell more of its tissue products than the better quality-but more expensive-lines of KC or SCA. Certain tissue lines have peaked in mature markets. And a falling birthrate means fewer diapers.

What has also ambushed the industry and its forecasters is the inflationary pressure from higher fuel and energy costs. KC listed its increased costs as follows:

• $50 million from oil-based materials costs
• $10 million in fiber costs
• $15 million in energy costs
• $20 million in distribution costs

These inflationary costs have more than offset the $55 million in gross cost savings which was generated by KC for the second quarter of this year.

What will happen? Much depends on economic growth. All papermakers in Europe hope that times will get better and money will start to wash through the region. There's not much more consolidation the tissue sector can pursue, competition from retailers is relentless, some product markets are mature so "tweaking" the product will be essential, the birth rate is falling, but an ageing population is living longer so diaper sales will slow but incontinence products will improve.

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