A Closer Look at Key Dynamics in the NA Tissue Market

Thematically, tissue paper is an attractive industry. In our view, it is one of the most “staple” of staple goods with very consistent demand trends. That said, it's no secret that the NA tissue paper industry has been seeing considerable headwinds over the last two years. In this report we aim to step back and take a closer look at what has been happening in the industry and how the outlook for the coming few years has been impacted. Given our coverage of some of the key public players focused on the US private label tissue market, we pay particular attention to the dynamics in this space in the context of the broader NA tissue industry.

Overall, we think a convergence of the following will result in a tough medium-to-longer-term outlook for tissue producers: (1) The private label vs. branded competition looks like it will be a long drawn out war. (2) Demand is solid but increasing supply (particularly capacity geared towards US retail private label) looks to be an issue. (3) The run-up in pulp prices over the past 2 years has essentially been the opposite of what almost everyone expected and the industry has been reluctant to try to push product pricing in response. (4) All of this comes at a time of “unprecedented” changes and challenges in the retail world.

On the surface, the industry supply and demand dynamics do not look overly worrying: Roughly speaking 1.8 percent demand growth in NA (i.e., long-term average) should keep the industry operating rate healthy with a bit of help from capacity rationalization. What worries us is the vast majority of the ~675,000 tons of net nameplate capacity coming online from 2018-2021 is aimed at the US retail private label market. Over the same timeframe, US retail private label tissue consumption will move up an incremental 300,000 tons (from 30 percent market share to ~32 percent). Taking into account machine ramp ups, the impact of the new capacity adds is spread out into 2022. Still, over the same period, US private label demand would be up only an incremental 400,000 tons. While private label tissue in the US is seeing relatively strong growth (~4 percent annually), it looks like competition will remain heightened to say the least (private label producer vs. private label producer in the backdrop of a broader private label vs. branded war).

A defensive space? Maybe in the short term as pulp pricing has started to pullback (finally!) but relatively high pulp pricing looks supportable given the pause in the pulp capacity cycle. While the medium-to-longer term outlook for tissue producers is still decidedly cloudy, we do see the opportunity for near-term defensive positioning. With “late-cycle” concerns and escalating US-China trade tensions, economically sensitive pulp prices could see a much further than anticipated pull back.

Competition in the tissue industry is likely to remain fierce given the significant amount of capacity additions in 2018 that are still ramping up plus sizable adds through 2021. That said, we see 2019 as a year of transition for our tissue producer coverage as pulp pricing pressure abates and price increases start to flow through.

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