TARNBERG, Germany, Jan. 15, 2009 (Viewpoint) – Among all paper and board grades, tissue has proved to be the one most insensitive to changes in the economic environment of the paper business. Tissue has recorded a continuous global consumption growth rate of roughly 4% per year in recent history, with only slight variation from year to year, but no single year registering a decline. However, in the current situation, with months of financial and economic turmoil that has spread to all continents, many have raised the question: What will be the consequences of the global recession to the tissue business in 2009?

We cannot argue that the global recession does not have any effect on tissue markets and industry. In the United States, where the serious problems with financial institutions and indeed the whole financing system began in September 2008, the effects of weakening tissue demand are now gradually being seen in the marketplace. The average capacity utilization rate in the tissue industry has declined for three consecutive months, and the industry has had to react by taking additional downtime to adjust supply to the new situation. This trend is expected to continue over the next few months.

In general, the AfH sector is more threatened than the At-Home sector. Layoffs and downtime in the industry (such as massive manufacturing cuts by the car industry worldwide during the Christmas and New Year holidays in 2008) directly affect AfH toweling and bathroom tissue demand in the industrial and office applications. The changed economic climate hits the hotel, restaurant and catering (HoReCa) sector particularly hard. Weakened average purchasing power and increased unemployment result in less eating out, struggling businesses means less travel and decreasing hotel occupancy rates and company downsizing and fewer special events substantially decrease demand for catering services. The decrease in HoReCa services can already be seen in the weakened napkin, bathroom tissue and towel sales in this market segment.

The consumer tissue sector is expected to be somewhat more resistant to the recession than the AfH sector. Tissue is an everyday necessity, and basic tissue products belong to the last items to be axed from the shopping list, probably with the exception of occasional napkins or seldom-used specialties. But company sales volumes will likely be negatively influenced by de-stocking at home and purchases of smaller package sizes, as consumers try to reduce the cost of one-time shopping. On the other hand, households could also become more price conscious with squeezing family budgets and may see the cost advantage per roll of bathroom tissue or kitchen towels when purchasing in large bundle packs, so it is difficult to assess which of these two trends in pack sizes will be more effective. Value-for-money products are expected to benefit from the poor economy. Market conditions are certainly not favoring the introduction of new, premium-quality product innovations.

By product category, the napkin sector is likely to suffer most, both in AfH and At-Home applications. Napkin use by both traditional and fast-food restaurants have a close correlation to the number of visitors, and dropping napkins from the household shopping list is more likely than dropping bathroom tissue. Among at home applications, kitchen rolls will also see weakening demand as some households move to the use of cloth towels to avoid discretionary spending. AfH bathroom tissue and toweling will substantially suffer from decreased business activity, although the recession will be less strongly felt by institutional end-use applications.

The above applies mainly to the tissue business in industrialized countries, such as North America, western Europe, Central Eastern Europe, Japan and Oceania plus a few more advanced countries elsewhere in the world. In emerging markets, reflections of the global economic recession may not be as serious. China, which has been the primary motor in global tissue consumption growth in the past few years, is expected to suffer a major slowdown in its GDP growth in 2009. There are different opinions on how much the Chinese GDP growth rate will drop, but some experts foresee a cut of about half of its overheated real growth rate of some 11% in the recent past. China’s tissue consumption has typically grown with a coefficient of about 0.8 compared to GDP, mainly because exports and investments account for a high share of the Chinese GDP and private consumption for much less than in most other countries. But if China’s GDP will grow 5-6% in 2009, it is likely that domestic consumption plays a greater role for the economic growth than in previous years. In this light, the tissue growth versus GDP growth ratio will most likely move from 0.8 to 1.0 or even higher. Based on these assumptions, we expect that tissue consumption growth of 5-6% is fully possible in China in 2009 — somewhat slower than in the best years, but still sound growth for industry expansion.

As a whole, the global tissue consumption is expected to slow down further in 2009, probably to less than 3%. The growth in 2008 cannot yet be recorded in full details, but it will definitely be less than the 4.1% growth recorded in 2007, probably in the range of 3.5%, as not only North American but also western European growth was moderate, and the Japanese market even declined in 2008. However, in 2009 a lot depends on how long the recession will last, not only in the United States, but worldwide.

For the tissue industry, the credit crunch completely changed the financing conditions not only for expansion investments, but also for the routine daily business of borrowing money for financing raw material purchases, employee payments, cash-in of invoices, etc. We are sure that the best projects will still find financing when they are able to show their earning potential, but for some other, less qualified projects by companies with no or little experience in the tissue business, the situation is certainly much more complicated than earlier year ago. The investment issue will particularly hit small- and medium-sized companies with investment plans which are relatively large in comparison their current turnover. Financial institutions will be taking fewer risks and will be less cooperative with sub-financing issues than before the bank crisis.

Although negative consequences dominate, there may be also something good in the current recession. Difficulties in project financing will result in fewer realized investments and capacity will grow in smaller steps than a few years ago. Financing conditions will also oblige some of the weakest players, who have been struggling to remain in the business, to finally leave the playroom. Although sad for those companies or mills who will have to close their doors, restructuring must be seen as a positive sign for the tissue industry as a whole, which continues to be very fragmented (with the exceptions of North America and Oceania). Perhaps the financial crisis will improve the average profitability of the remaining companies. Perhaps the tissue industry needed this shake-up and breathing break to avoid overheating. And perhaps the future of the tissue business will be based more on self-performed results and entirely less dependent on banks and the money they lend to remain in business.

Tissue = pehmopaperi

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