Tissue and the Fiber Cost Factor

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This report by Pöyry Management Consulting is the latest in an on-going series that draws on expertise from Pöyry’s global offices to update readers on opportunities and challenges facing tissue producers today. These reports by Pöyry experts will appear in Over the Wire Tissue Edition on a bi-monthly basis.

The cost of fiber is a key value driver for both recycled and virgin producers of tissue. At current price levels for both virgin and recycled fiber, tissue profitability margins are being squeezed. As virgin pulp prices begin to fall from peak levels, the cost differential between virgin and recycled tissue producers may narrow. In this From the Experts report, Pöyry analyzes the current pricing environment and estimates how much sorted office paper (SOP) prices need to increase by for recycled tissue producers to approach the cost of manufacturing for virgin producers. Finally, Pöyry takes a look at the impact of declining uncoated free sheet demand on sorted office paper prices.

 Historical SOP Prices

After falling rapidly at the end of 2008, sorted office paper prices have since dramatically recovered to levels that are higher than they were before the economic recession.

Figure 2. Historical SOP Prices Source: Official Board Markets, Pöyry Analysis

Historically, there has been a strong correlation between prices of SOP and market virgin hardwood pulp. However, as virgin pulp prices have begun to fall from peak levels and SOP prices remain high, there may be a decoupling effect. As the gap between virgin and recycled fiber costs narrows, manufacturing costs may drive a shift in fiber furnish in favor of virgin pulp.

Manufacturing Cost Perspectives: Recycled vs. Virgin

At current price levels, North American virgin tissue producers’ costs are estimated to be almost $300/short ton higher than for recycled tissue producers (on a weighted-average basis). Despite myriad manufacturing process differences between the two, the cost of fiber accounts for more than 90% of this differential. As such, changes in furnish cost and wastepaper quality will be the main drivers in closing the gap between the two. Given current trends for virgin pulp and SOP prices, the gap between virgin- and recycled-tissue manufacturing costs will likely narrow in coming years.

Figure 2. Weighted-Average Manufacturing Costs for AFH Bath Tissue

For example, Mill A produces virgin and recycled bath tissue on a crescent-former tissue machine. Equipped with a deink plant, their pulper-to-reel yield is approximately 65%. At current fiber price levels, the cost of producing tissue at Mill A is 50% higher for virgin tissue than for recycled tissue. But what might the cost differential look like in 2015?

If all input costs are held constant with the exception of the cost for SOP, an average increase of 18%/yr would be sufficient to push the manufacturing cost of recycled tissue above that of virgin tissue. Given that SOP prices have increased at an average rate of 20%/yr over the last five years, this scenario is not inconceivable.