USA Tissue Tracker: New Capacity Starting to Impact Market

Tissue production and converted product shipments in June 2016 increased 1%–2% y/y (and 6 mo. YTD) while operating rates declined over the same period. Parent roll prices inched lower m/m but were still up on a y/y basis, according to RISI (Boston, Mass.) U.S. tissue stats.

Converted product shipments 2.1% higher y/y (+1.9%  6 mo. YTD) – Total At-Home (consumer) shipments of converted tissue products increased 1.7% y/y in June (+1.6% 6 mo YTD), with toilet paper volumes up 1.3%, towels ahead 1.8%, and facial volumes up 2.9%. Total Away-from-Home (AfH) shipments of converted tissue products rose 2.7% y/y (+2.6% 6 mo. YTD), with toilet paper volumes growing 2.6%, towels rising 1.7%, and napkin volumes up 3.6% from a year ago.

Parent roll production up 1.4% y/y (+1.3% 6 mo. YTD) – Parent roll production was 746,000 tons, up 1.4% y/y (-0.8% m/m). Domestic parent roll consumption was 766,000 tons, up 2.4% y/y (+2.4% 6 mo. YTD), but down 1.0% m/m. 

Higher operating rates m/m – Operating rates increased from 95.1% in May to 97.4% in June (-1.1% y/y); monthly capacity was down 3.2% m/m (+2.5% y/y).

Tissue market can support additional capacity (in moderation) – As discussed in our latest deep-dive report on tissue, the North American industry must increase capacity by ~160,000 tpy to meet demand growth of ~1.5%/yr. We estimate that industry "creep" leads to ~100K tpy growth in existing capacity, implying that the market requires at least one new 60,000 tpy machine per year to stay in balance. Factoring in likely capacity shuts, some in the industry believe that 2.5 new 70,000 tpy machines per year are needed to meet rising demand. 

The challenge facing the market is the ~280,000 tpy of new capacity that we expect to come online over the next three years. While we 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 production-to-capacity basis) falling from 94.0% in 2014 and 2015 to a low of 89.7% in 2018. In addition to North American capacity adds, we see additional imports coming from FPC Tissue's NTT machine in Chile, which plans to sell 90% of its 66,000 tpy production into the U.S. market.

Parent roll prices slightly lower m/m for virgin and recycled grades – High-quality virgin parent rolls inched down in June to $1,355/ton, down 0.4% from May (+1.9% y/y). Recycled parent roll prices were marginally lower, with the high-quality grade at $1,121/ton, behind 0.4% m/m (+1.7% y/y).

 

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