Learnings from the European tissue market turbulences

Written by Hampus Mörner, Christoph Euringer and Tino Mäkelä

At first glance, an instant reflection might be that the tissue industry is on its way to a critical turning point. In fact, data suggests that the industry has navigated this turbulent environment very strongly and seems to be in solid shape. Figure 1 illustrates the evolution of EBITDA margin for a significant amount of tissue producers in Europe.

Reading from this, there is little that would suggest that the industry is heading to any critical point. On the contrary, a broad margin improvement was observed during the last year.

What key events has the industry successfully addressed, and what lessons and reflections can be applied moving forward?

Volatile energy and fibre cost:

Energy and fibre are the most crucial inputs when producing any paper product, and their cost development has been a roller coaster ride. For example, German and Italian gas prices were up by 160–450% respectively in 2022 (year-on-year). At the end of 2022, energy price outlooks were sky-high and a significant burden for any energy-intensive industry. Yet fortunately, prices started to decrease in early 2023. Although long-term price outlooks point towards a more stable situation than two years ago, many uncertain factors remain.

While energy prices were exposed to an unseen dynamic, pulp is a cyclical commodity. For virgin fibre pulp, publicly listed gross price indices were at rock bottom when the pandemic started in early 2020. Like with other commodities, they remained low and flat throughout most of the year, only to surge when economies and supply chains sparked up in early 2021.

Since then, consecutive “all-time high” levels have been registered with a few short breathing moments, e.g. H2 2023. If last year’s price movements are put in a longer historical context, it becomes apparent that pulp prices have become more volatile, with the cycles tending to be steeper and shorter. It is worth noting that price discounts have continued trending upwards.

China's expanding presence as a pulp end-use market is a significant factor fuelling this volatility, currently accounting for over 40% of global demand. Moreover, market dynamics in this region diverge significantly from those in the Western world, with factors such as more speculative buying, shorter contract periods, recurring negotiations and aggressive inventory management with less focus on working capital.

Changing consumer behaviour and demand recovery: 

For the past three years, inflation above the target of 2% has been the default in most countries, resulting from disrupted supply chains and rising energy prices due to geopolitical events.

With reduced spending power, consumers tend to think twice about what finally goes into their shopping basket. Of course, articles considered “a must-have” enjoy some protection (e.g. toilet paper) that other articles do not (e.g. napkins). The market has observed continuously raised penetration of private label (PL) in consumer tissue (CT).

However, PL has not been growing above the trend or perhaps as strongly as many would have expected, despite the inflationary pressure, which is now diminishing. This indicates that brand loyalty has stood up well against inflation. While overall tissue consumption decreased in 2023, actual consumption data for the first half of 2024 already indicates a broad recovery with a total demand of ~5.5% (Figure 3), owing much to the Away-from-Home segment (AfH).

Notable tissue capacity pipeline:

For any outside observer, there appears to be a massive project pipeline of new tissue capacity in Europe, which is correct to some extent. Currently, numerous announced projects collectively total over 1.2 million tonnes of capacity. Many of them are located in Western Europe, particularly in the UK and France.

However, a closer look reveals that many of these projects are pending a formal investment decision (Figure 4). About 200 kt of new capacity has already been decided, while around a million tonnes belong to any of the categories still to be confirmed (planned and intended).

Current supply and demand can be considered balanced, but a hasty entry or overabundance of projects materialising could easily destabilise markets. The continent clearly seems to be moving more towards self-sufficiency, making it more challenging to accommodate volumes from outside sources.

However, there is a sizeable amount of cost-efficient capacity with established routes into Europe, ready to take on the competition. Regardless of where the production will take place, the importance of cost competitiveness will only increase.

Future competitiveness will be built on multiple pillars, and cost-efficiency is key, but not the only important factor. For institutional buyers as well as retailers, the sustainability impact of tissue becomes more relevant. Not only for their reporting needs due to new legislation on green claims, but also to satisfy their brand-building efforts.

Furthermore, as the decarbonisation of the European energy system is progressing and machinery suppliers are providing multi-fuel and fully electric tissue machines, the bar is about to rise. Shifting the buying criteria of customers – not necessarily yet the consumers – is about to create an actual competitive advantage for the European industry. From the mid- to long-term perspective, this may well protect European producers from low-cost imports that might benefit from lower sustainability in fibre, health and safety or fuel choices.

This article was originally published on the Tissue World Magazine website on 29 October 2024.