USA Tissue Tracker: Operating Rates, Production Increase

The following highlights on the U.S. tissue industry through September are based on data released by RISI:

Converted product shipments 2.3% higher y/y (+2.0% 9 mo. YTD). Total At-Home (consumer) shipments of converted tissue products increased 1.9% y/y (+1.7% 9mo YTD), with toilet paper volumes up 1.6%, towels ahead 3.0%, and facial volumes unchanged y/y. Total Away-from-Home (Fahd) shipments of converted tissue products rose 3.2% y/y (+2.8% 9mo YTD), with toilet paper volumes up 4.3%, towels ahead 2.0%, and napkin volumes 2.4% higher than a year ago.

Parent roll production increased 2.3% y/y (+1.9% 9 mo. YTD). Parent roll production was 723K tons, up 1.9% y/y (+2.0% m/m). Domestic parent roll consumption was 737K tons, up 1.8% y/y (+1.8% 9mo YTD) and 1.8% higher m/m.

Higher operating rates m/m. Operating rates increased from 91.8% in August to 96.8% in September (+90 bps y/y), with monthly capacity up 1.4% y/y (+2.0% 9mo YTD) due to new capacity from Cascades, Double Tree, and Orchids.

Tissue market can support additional capacity (in moderation). As discussed in our latest deep-dive report on tissue, the N.A. industry must increase capacity by ~160,000 metric tons to meet demand growth of ~1.5%/yr. We estimate that industry "creep" leads to ~95,000 metric tons of growth in existing capacity, implying that the market requires at least one new 70,000 metric tpy per year to stay in balance. Factoring in likely capacity shuts, some in the industry believe that 2.5 new 70,000 metric tpy machines per year are needed to meet rising demand. The challenge facing the market is the ~280,000 metric tpy of new capacity we expect to come online over the next three years. While we do expect older, relatively higher-cost capacity to be removed from the market over this period, we do not forecast unannounced capacity reductions in our supply/demand model. As such, we see industry operating rates (on a prod-to-cap basis) falling from 94.0% in 2014 to a low of 87.8% in 2018. In addition to N.A. capacity adds, we see additional imports coming from FPC Tissue's NTT machine in Chile, which plans to sell 90% of its 66,000 metric tons of production into the U.S. market. That said, while PPW reported that Lincoln Paper and Tissue (which filed for bankruptcy on September 28) has a bidder for its assets (tissue paper machines), it is still unclear whether the buyer is interested in operating the machines or if it will remove the capacity (~200 tons of tissue per day). We highlight that on October 13, SCA announced its plans to acquire Wausau Paper Corp. in an all-cash transaction of $513 million (and $174 million of assumed Wausau debt). The deal is expected to close during Q1 2016. 

Parent roll prices higher m/m for virgin and recycled grades. High-quality virgin parent rolls experienced a small increase in September to $1,345/ton, up 0.9% from August (+1.1% y/y). Recycled parent roll prices were marginally higher, with the high-quality grade at $1,115/ton, ahead 0.9% m/m (-3.0% y/y). While converted product consumer prices saw high-single-digit declines in 2014, prices largely stabilized for bath tissue/facial since February 2015. In fact, private label aimed to increase prices by 35–5% earlier this year, and on its Q3 call, CLW commented that the increase was successful. However, we note that some branded producers experienced price declines during the quarter. On the Fahd side, the 65–8% price increase started to take effect in October; however, RISI noted that only a small part of businesses will be affected due to the dominance of longer-term contracts. Von Drehle Corp. is the only producer whose price increase will take effect November 1.

RBC Dominion Securities Inc. Paul C. Quinn (Analyst) - (604) 257-7048.