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Chinese Tissue Market is huge but inscrutable

The rapidly improving purchasing power of its citizens, the fast urbanization, relatively higher overall quality of life in cities and non-restrictive cultural habits - differently from many other populous Asian countries - have substantially contributed to the strong consumption growth of hygienic products in China since 1990. The Chinese tissue market is, however, not so transparent: the very fragmented industry structure, continuing local trading patterns and geographical incoherence make it difficult to follow market changes in detail. This is claimed by local experts, and it is all the more so I for a foreign observer.


Esko Uutela, EU Consulting, Germany

 

China is today the second largest tissue market in the world after the USA. Tissue use has grown in line with improving economic standards and higher purchasing power of the urban population, driving consumption to new record levels year after year. The official Chinese figures concerning tissue production, published by China's National Household Paper Industry Association (CNHPIA), total the Chinese tissue production at 2.75 million tons in 2001, exactly two million tons more than 10 years earlier in 1991. Considering foreign trade in both parent reels and converted tissue products, delivered by China Customs, apparent tissue consumption was 2.66 million tons in 2001. Divided by population, this figure results in an average per capita consumption of 2.1 kg/person, Less than one-tenth of the US consumption Level. Chinese tissue consumption shows an overall growth trend of nearly 14% per year from 1991 to 2001. But calculating the average for the past five-year period (1996-2001), growth averages clearly less, at 6.7% per year.

 

SIGNIFICANT INCREASE IN CHINA'S TISSUE EXPORTS.

 

China has traditionally been a small net exporter of tissue products, the export surplus varying between 25,000 and 35,000 tons in most years until 1999. Thereafter, exports have grown strongly and have clearly exceeded 100,000 tpy, bringing net exports to a level of 80,000 tons in 2001. At the time of writing, preliminary Chinese foreign trade figures were available already for the whole year of 2002.

They record imports at a level of 26,000 tons, whilst exports reached 140,000 tons, and net exports 114,000 tons, and the above figures mean that China has developed into one of the main tissue exporters worldwide in recent years. Exports account only for 5% of China's total tissue production, but they are much more important for some individual mills involved in the business. Exports divide among a large number of countries: in the past three years, export destinations include around 120 different countries in all continents.

In 2002, parent reels accounted for 39% and converted products for 61% of total exports. Main export destinations in 2002 were Hong Kong (60%), Australia (17%), USA (6%) and Macau (3%). Hong Kong and Macau are mainly supplied with converted tissue products, whilst the vast majority of exports to Australia consist of parent reels to local tissue converters. Australia has accounted for more than 40% of Chinese parent reel exports in the past three years, and exports to Australia have grown rapidly at a rate of some 40%. Exports to the USA have also grown, including both parent reels and converted products.

 

ECONOMIC WEALTH AND TISSUE CONSUMPTION CONCENTRATE ON THE COAST. China's average GDP was exactly US$1,000/person in 2001, according to Chinese statistics. But economic wealth is not evenly distributed in China. The coastal zone is relatively well developed, particularly the Shanghai region, the southern part of Jiangsu and northern part of Zhejiang provinces.

In Shanghai, GDP per capita has exceeded the level of US$3,500 per year which is 3.5 times above the national average. The capital metropolitan area of Beijing (plus Tianjin) is the second most advanced area. In some rural areas (Guizhou, Gansu for example) GDP per capita is only a few hundred dollars per year, and millions in the population are still non-users of tissue products. It is assumed here that regional tissue consumption depends purely on the level of GDP per capita in Chinese regions. The calculation is hypothetical and may not be accurate in detail. In any event, Fig. 1 illustrates the big differences that exist between the richest (the coastal zone plus the capital metropolitan area) and poorest regions (Southwest and Northwest) of China.

 

Per capita tissue consumption is in Shanghai ten times higher than in Guizhou and six times higher than in Southwest China as a whole, according to our simplified estimation. Some local experts have the opinion that per capita tissue consumption is even higher in Shanghai and approaching 10 kg/capita, but this is difficult to verify. Of the main regions of China, East China consumes the largest quantities of tissue (38% of total Chinese consumption), followed by Central South (26%). The other main regions are of clearly less importance. Summing the autonomous regions in the coastal zone and the capital metropolitan area (Liaoning, Hebei, Beijing, Tianjin, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian and Guangdong), this relatively narrow strip accounts for roughly 57% of total Chinese tissue consumption.

 

TOILET TISSUE DOMINATES, BUT OTHER PRODUCTS IMPROVE.

 

Toilet tissue accounted for up to 95% of Chinese tissue consumption until the early 1990s. During the 1990s handkerchiefs, facial tissue and paper napkins/toweling products have rather rapidly increased their share of consumption. The share of toilet paper declined to 88% of total consumption in 1995; it fell further to 72% in 1999 and is now at around 09% (Figure 2). Napkins and towelling products are recorded in one category in CNHPIA statistics. Toweling products are rather new in the Chinese market, while napkins, particularly napkins made of MG-type paper, are more traditional products. But handkerchiefs and facial tissue have also gained in popularity in recent years.

 

AVERAGE PRODUCT QUALITY RATHER LOW.

 

The average product quality continues to be low in China. Many products manufactured on old cylinder former machines would not count among tissue grades if Western standards applied. Virgin fibre pulp is too expensive for the main part of Chinese tissue production, which limits its 100% use to the rather narrow up-market segment only. The typical raw material base consists of a wide variety of fibre types. CNHPIA now estimate the virgin fibre-based production to account for 15% of the total, up from 10% a few years ago. This is influenced by a number of new large tissue machine investments with equipment imported from the West and dedicated for the use of 100% chemical market pulp. The two best categories, in which the quality level resembles that of Western countries, do not account for more than 35% of production (Table 2). It should also be noted that deinking plants are rare at Chinese tissue mills. An interesting feature of the Chinese paper industry is that pulp and paper rejects (mill broke) are very often not returned into the production flow but handled as a separate fibre fraction and used for the furnish of small Local tissue machines. This means that several mills producing other grades also host a few very small tissue machines adjacent to the main production.

 

VERY FRAGMENTED TISSUE INDUSTRY.

 

The number of tissue mills is vast and their average size is very small in China. But during the past 5-6 years, the large size of the market has attracted a number of new investments mainly by foreign investors, including world-scale tissue machines competing at the upper end of the quality range. In its latest report, (2002), the CNHPIA states that there are now more than 800 tissue paper companies in China. It should be noted that the list of suppliers includes not only tissue mills, but also converters, in some cases also converters of non-tissue grades (such as moist tissues and sanitary pads), and some regional sales offices of larger tissue groups on the membership list. In 2000, the number of members was 155 higher. During the past few years, many small paper mills have not been able to invest in waste water treatment systems and have had to stop production because of new Chinese environmental regulations.

Some companies have changed name and ownership. But international interest is concentrated on the largest suppliers and changes in their capacities.

 

APP THE LARGEST SUPPLIER.

 

The CNHPIA directory also lists the largest producers and their capacities. However, it looks that while in the 2002 edition the list would be partly based on converting capacities, in the 2000 edition reference seemed to have been made to paper making capacities. The Chinese tissue market has already attracted foreign investors (APP/Indonesia, YFY/Taiwan, K-C/USA, Oji/Japan, for example, while PUG recently decided to withdraw by selling their facility to Oji). The largest tissue suppliers in China are shown in Fig. 3. CNHPIA data has been used, which seems to be based on converting capacity in some (K-C, Vinda) but paper making capacity in other (APP) cases.

APP's converting capacity reportedly exceeds their papermaking capacity by 20-25%. APP are currently in a debt restructuring process and their fate is not yet solved at the time of writing. There are strong rumours that APP's Chinese tissue mitts may be sold, but on the other hand, the company has announced plans to even expand their tissue business by installing a net huge tissue PM in China.

 

DEMAND PROSPECTS ARE GOOD.

 

Chinese tissue consumption has in recent years grown somewhat slower than GDP, in a proportion of 0.85 0.90 with respect to real GDP growth. The stilt low penetration levels of tissue products partly explains this. GDP growth is expected to remain high at +7 to 7.5% per year until 2010. In the forecast period, penetration levels wily improve with continuing urbanization but investments are expected to account for an increasing share of GDP. Therefore, tissue consumption is expected to slow down somewhat from the past trend. This research agrees with the CNHPIA concerning the market growth until 2005, but is slightly more optimistic concerning growth thereafter, and forecasts tissue demand in China to grow by an average of 5.6% per year in 2001-2010:

 

Growth Rate of Chinese Tissue Demand 1996-2010

1996-2001 +6,7%

2001-2005 +6,1%

2005-2010 +5,2%

 

ONLY A FEW LARGE PROJECTS ONGOING.

 

As stated earlier, it is difficult to try to record all capacity changes in the Chinese tissue industry. This is mainly because small local PMs are continuously being added, and small mill and machine closures also continue. For this reason, the focus has been on projects of substantial size, and capacity changes at the largest mills/companies only (Table 3). Projects involving foreign equipment tend also to be easier to follow than purely local installations. In addition to projects listed in Table 3, APP have reportedly made inquiries from machinery suppliers for a huge, 7-m wide new tissue PM.

 

SUPPLY & DEMAND SITUATION IMPROVING.

 

In a period of two years -from March 1998 to March 2000-, the installation of 260,000 tpy of new capacity resulted in an oversupply situation, particularly in the Shanghai and surrounding area where most of the new capacity was built. The new capacity targeted the relatively narrow high quality segment of Chinese tissue consumption, which further tightened the competitive situation. Some producers pushed products onto the market without considering costs: prices collapsed and profitability deteriorated drastically. As a result, investment activity largely collapsed during 2001. There was no single important start-up of a tissue machine in China in that year - only small, locally made tissue machines were added. The supply & demand situation improved in 2001-2002 as the market gradually absorbed the new capacity. The next investment wave is already ongoing, with at least five new tissue PMs of international standards coming on stream in late 2002-2004. It is believed that a major structural change in the Chinese tissue industry will continue.

 

Most tissue mills integrated with pulp production based on non-wood fibres such as bagasse, wheat and rice straw, ryegrass, bulrush etc., have a serious environmental protection problem, as they do not have soda recovery facilities and effluent disposal equipment, and several mill closures can be expected. This will help the competitive situation, and strengthen the position of large and medium-sized companies with more modern equipment. There will also be increasing pressures to replace non-wood pulp with deinked pulp at tissue mills. Some companies (e.g. Changde Hengan, Vinda Paper) have prepared for new tissue investments by installing converting lines massively in excess of their paper making capacity, and purchasing parent reels before building new paper machines. This is certainly a wise strategy for securing markets for new capacity coming on stream. All in all, the outlook for the Chinese tissue business is rather bright, mainly because of the strong demand growth and continuing structural change in the industry.

 


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