U.S. Tissue Tracker: Production Rises Driven by Overseas Shipments

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

Converted product shipments 2.3% higher y/y (+2.0% 8 month YTD)—Total At-Home (consumer) shipments of converted tissue products increased 1.9% y/y in August (+1.6% 8 months YTD), with toilet paper volumes up 1.6%, towels ahead 1.9%, and facial volumes 3.7% higher y/y. Total Away-from-Home (AfH) shipments of converted tissue products rose 3.3% y/y (+2.8% 8 months YTD), with toilet paper volumes up 3.2%, towels ahead 2.9%, and napkin volumes 2.8% higher than a year ago. 

Parent roll production increased 1.9% y/y (+1.9% 8 months YTD)—Parent roll production was 709,000 tons, up 1.9% y/y (-0.1% m/m). Domestic parent roll consumption was 722,000 tons, up 1.0% y/y (+1.8% 8 months YTD) and 0.6% lower m/m.

Lower operating rates m/m—Operating rates decreased from 92.0% in July to 91.8% in August (+30 bps y/y), with monthly capacity up 1.4% y/y (+2.1% 8 months 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 tpy to meet demand growth of ~1.5%/yr. We estimate that industry "creep" leads to ~95,000 tpy growth in existing capacity, implying that the market requires at least one new 70,000 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 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 tpy of production into the U.S. market. That said, we highlight RISI's report of Lincoln Paper and Tissue's bankruptcy filing on September 28, which will lead to the auction of its assets in ~45 days. If the buyer is not interested in operating the mill, it will mean the capacity removal of ~200 tons of tissue per day.

Parent roll prices higher m/m for virgin and recycled grades—High-quality virgin parent rolls experienced a small increase in August to $1,333/ton, up 0.4% from July (-0.1% y/y). Recycled parent roll prices were marginally higher, with the high-quality grade at $1,105/ton, ahead 0.1% m/m (-5.2% 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 suppliers are aiming to increase prices by 3%-5%. RISI highlighted that this hike may face difficulty given no branded products have followed suit. On the AfH side, the 6%-8% price increase will start to take effect in October. 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.

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