Grade Profile

Tissue: Industry outlook positive,
capacity growth remains strong

With among the highest profit margins and most stable growth rates in the paper industry, the $8 billion U.S. tissue business is intensely competitive, and has undergone major consolidation in the past few years. 1995 saw the $9.4 billion merger of consumer products giants Scott Paper Co. and Kimberly-Clark Corp. (K-C), as well as acquisitions by Chesapeake Corp. and Canadian conglomerate Cascades Inc. In mid-1997, Fort Howard Corp. and James River Corp. completed a $5.8 billion merger to create a new tissue and paper giant, Fort James Corp.

Tissue paper is used in sanitary products such as bath tissue, paper towels, facial tissue, and napkins, and is sold to consumer and commercial/industrial (C&I) customers. Also called the "at home" market, consumer tissue accounts for 63% of the entire tissue trade and is purchased at retail outlets such as supermarkets and drug stores. C&I tissue products, also called the "away from home" market, represents the remaining 37% of shipments, and is sold wholesale to janitorial supply companies, hotels, offices, restaurants, factories, schools, and government installations.

Bath tissue represents about 41% of total volume, followed by paper towels (33%), napkins (14%), facial tissue (6%), and other tissue (6%). In the roughly $4 billion U.S. commercial market, domestic tissue shipments accounted for about 2.2 million tons in 1996 and have risen an average of 2.3% a year since 1984. Towels account for about 44% of shipments in the C&I sector, followed by bath tissue (30%), napkins (24%), and facial tissue (2%).

After rising 8.3% and 3.7% in 1995 and 1996, respectively, the U.S. producer price index for tissue is forecast to increase only 1% in 1997, creeping up 3% in 1998. However, P&G surprised the market with an announced 4% to 6% increase in consumer tissue prices last month, despite continuing unstable pulp prices. K-C and Fort James are expected to follow with increases.

Major C&I tissue producers announced price increases between 5% and 10% toward the end of 1996 and early 1997. In Canada, Perkins Papers planned to increase commercial tissue prices in late 1997, but opted not to due to an expected lack of market acceptance.

OUTPUT/CAPACITY. The U.S. tissue industry operated at an estimated 94.2% of capacity in 1996, producing 6.6 million tons, an increase of 1.4% from the previous year, according to the American Forest & Paper Assn. (AF&PA). By comparison, capacity increases in 1994 and 1995 were a fraction of a percent. However, a series of expansions announced by major producers, due onstream between 1997 and 2000, will result in estimated capacity growth of 2.5% in 1997, 2.3% in 1998, and almost 4% in 1999, according to the AF&PA's latest figures, the highest rate of increase since the early 1990s. Operating rates are expected to remain around 93%.

In 1997, K-C added around 100,000 tons of new capacity with machine rebuilds and a new paper machine, while P&G plans to add 130,000 tons of new capacity between 1998 and 2000. Before their merger, Fort Howard and James River announced plans to add roughly 60,000 tons of capacity each in the next two years with a new paper machine and rebuilds respectively. It is not yet clear how these plans will be affected by their merger. Other major producers adding capacity in the coming years include Georgia-Pacific and Marcal Paper Mills.

OUTLOOK. Little movement in pulp prices during the first half of 1997 helped tissue prices remain steady for much of 1997. Upward pressure on prices was expected in late 1997 and early 1998 in line with pulp prices, but the market pulp situation remains unclear going into 1998. K-C's sale of its pulp mills will increase the company's exposure to market pulp price fluctuations, which could lead to more volatile tissue pricing. The merger of Fort Howard and James River is expected to be the last major tissue consolidation for a while due to antitrust concerns, and large companies are expected to increasingly turn to overseas markets for future growth.

BY PHILIP GOLDSMITH

News Editor

FORECAST (000 tons)

* Based on 1997 capacity estimates from AF&PA and CPPA. 1. Fort Howard Corp. and James River Corp. merged in 1997. 2. Includes former Scott Paper Ltd. capacity. 3. Perkins Papers Ltd. is 77.5% owned by Cascades Inc. 4. Jomar Management owns Shelby Tissue Co. and Shepherd Tissue Co.