Melbourne, 16th October 2015: Published today in the subscriber only Pulp & Paper Edge, from Australia’s only dedicated paper, products and fibre supplies market analysis and intelligence service, IndustryEdge.
ABC Tissue, the manufacturer of Australia’s market-leading Quilton toilet paper brand has announced it will expand, renovate and further integrate its manufacturing base in Australia. Once completed, its development program will make it the largest tissue manufacturer in the region.
Based on the information supplied by the company, IndustryEdge’s estimate is that by the end of 2017, ABC Tissue’s manufacturing capacity will almost triple and will be close to 140,000 tonnes per annum, equivalent to approximately 50% of Australia’s demand and 40% of combined demand for Australia and New Zealand.
In a lengthy and exclusive phone conversation on Wednesday 14th October, ABC Tissue’s Marketing Director & General Manager, Sunny Ngai advised that the company’s expansion plans had changed, accelerated and were more ambitious than had previously been advised.
Mr Ngai commenced the conversation by stating ABC Tissue was announcing it will build a second new tissue machine, at an as yet undisclosed location, to commence operations in 2017. In addition, Mr Ngai advised the company will invest in a rebuild of its oldest tissue machine (Brisbane PM1). This will increase its capacity from <5,000 tonnes per annum to approximately 25,000 tonnes per annum, to come on line in late 2016.
By 2017, the company’s manufacturing profile will include five tissue machines, in at least two and potentially three locations in Australia:
- Sydney PM1 – 30,000 tonnes per annum (currently in operation)
- Sydney PM2 – 35,000 tonnes per annum (2016)
- Brisbane PM1 – 25,000 tonnes per annum (2016)
- Brisbane PM2 – 25,000 tonnes per annum (currently in operation)
- Undisclosed PM1 – 25,000 tonnes per annum (2017)
ABC Tissue already has one tissue machine (Sydney PM2) under construction at its Sydney headquarters. That 30,000 tonne per annum tissue machine will commence operation in 2016. Mr Ngai stated that the company had decided to integrate the new Sydney PM2 with its existing converting operations, to ensure it retained its advantage as the manufacturer with the lowest operating costs in the region. This decision has increased the size of the company’s investment and introduces a short delay to the commencement of operations of the new machine.
Beyond maintaining their domestic competitive advantage, Mr Ngai provided a compelling reason for focusing on keeping production costs low. ABC Tissue sees its main competition in the future as importers of tissue stock and of converted tissue products. Being a lower cost producer is critical to that objective, but it is all the more important if the company intends to export beyond Australasia.
IndustryEdge put this to Mr Ngai who commented that export opportunities are extensive for high quality product. He stated that unlike many companies, ABC Tissue considered that manufacturing in Australia was an advantage that was too often ignored.
Strategic analysis of ABC Tissue’s plans
Despite having little more than a day to consider this major development, IndustryEdge has prepared a brief analysis of what is the most significant news in the Australasian industry in a long time.
At a macro level, ABC Tissue is set to become the market leader, not just by category (it holds the largest market share in the major toilet paper category), but of the entire sector. It has long eschewed participation in most industry forums. Its approach to these activities in coming years will be important for them and for the sector, as a whole.
It is hard to disagree with Mr Ngai’s statement that the company’s major competitors may soon be importers. In the meantime, every other manufacturer will be focused on ABC Tissue. So will the importers.
When it expands from its current approximately 20% of Australasian tissue making capacity, ABC Tissue will become a large tissue manufacturer. However, it is important to note that the company’s footprint is already larger than its approximately 55,000 tonnes per annum of tissue manufacturing. IndustryEdge estimates ABC Tissue converts something close to double that volume each year.
Scale is extremely important in manufacturing, but size also comes with its challenges. Maintaining its capacity utilization will be key for ABC Tissue, which is why it must focus on retaining and extending its status as the lowest cost producer. Its integration investment in Sydney is telling in that respect.
Large though it will be, ABC Tissue will still be dwarfed by giants like Asia Pulp & Paper whose local presence is through Solaris Paper (Australia) and Cottonsoft (New Zealand).
The company’s pulp import approach is well established, but will be all the more critical in future because it will be less able to ‘switch off’ its tissue machines and import tissue stock for domestic conversion. The investment in this rank of paper machines must be fed with pulp, so that it can return its owners the funds they have invested into it. This may reduce the flexibility from which ABC Tissue has flourished.
Certainly, the company will need to ensure it retains existing sales and markets and must, relatively quickly, expand its market opportunities.
How it does that will be critical to its success and to future market dynamics. By the end of 2017, ABC Tissue will need to place what we estimate is an additional 25,000 tonnes of tissue products per annum, or around 8% of the estimated Australasian market in that year. That seems feasible.
A lower Australian Dollar is already holding back imports. Expectations of further depreciation may improve the position for domestic manufacturers compared with importers, but pulp is the major input cost and it is purchased primarily in US Dollars.
In that context, one matter that was not discussed in our conversation with Mr Ngai was whether ABC Tissue would diversify its product range or its supply strategy. One option may be to expand its relatively minor Away From Home (AFH) market.
New machines bought at right time and price
It has been rumoured for some months that when it purchased Sydney PM2 (the machine currently being installed), ABC Tissue had purchased not one, but two tissue machines. Early in 2015, IndustryEdge was advised by a supplier to ABC Tissue that the price of the two machines was ‘very cheap’. The purchase was reportedly transacted at a time when the supplier was very keen to book future work.
Mr Ngai confirmed the dual purchase, but would not specify the actual purchase price. He did state that the total price the company paid for the two tissue machines was below market rates and was much lower than the estimated AUD30M the company paid for Sydney PM1 in 2007. (The total cost of that project was estimated at the time to be AUD65M).
Is Melbourne calling?
The privately owned company is headquartered in Sydney, has a second manufacturing base in Brisbane and conversion capacity in Perth.
Mr Ngai would not be drawn on speculation that the additional tissue machine would be installed into a new facility in Melbourne. He did state that the company has land and real estate interests in Melbourne and provided a reminder that its footprint already included three states (New South Wales, Queensland and Western Australia).
There is no certainty about the future, but IndustryEdge can now reveal it was recently made aware that the owners of ABC Tissue have been actively seeking industrial real estate in Melbourne.
Big changes for the Australasian industry
The significance of the ABC Tissue development program for the Australasian market cannot be under-estimated.
IndustryEdge’s assessment of the combined Australian and New Zealand market was just 334,000 tonnes in 2014-15, plus imports of pre-converted tissue products. Moreover, on a trend basis, tissue demand is very stable in developed economies like Australia and New Zealand, growing more or less in line with population growth. Latest forecasts, contained in the 2015 edition of the Pulp & Paper Strategic Review that will be released in early November, suggest the combined Australasian tissue market will amount to 346,000 tonnes per annum by the end of 2017.
After its developments are fully implemented, ABC Tissue’s capacity of 140,000 tonnes per annum will amount to 41% of regional demand and 39% of regional capacity.
The capacity of other manufacturers to withstand these additional pressures is not immediately clear. Those with higher costs are obviously most under pressure.
If Mr Ngai is right that ABC Tissue will be the lowest cost manufacturer in total and that all of its tissue machines will operate at lower cost than any other tissue machine in the region, capacity reductions from other manufacturers are likely and perhaps inevitable.
As IndustryEdge has regularly reported, prices of toilet paper sold in Australia’s supermarkets have never been lower in real terms, and they continue to fall. In recent months, branded toilet paper has retailed in twenty-four packs for as low as AUD9.00 or AUD0.375 per roll. Few of the manufacturers can sustain those prices. If ABC Tissue’s entire operations operate at lower cost than all other operations in the region, their competitive advantage is almost assured.
Pressure on importers
Being the lowest cost domestic manufacturer is one thing, but effectively competing with the growing volume of tissue imports, both of tissue stock and converted tissue products, will always be challenging.
As the chart below shows, imports of tissue stock for conversion in Australia have grown 6.2% per annum over the last decade.
Australian Imports of Tissue Stock by Country of Origin: 2005 – 2015 (ktpa)
Source: ABS & IndustryEdge estimates
Tissue stock imports will fall as a result of ABC Tissue’s plans. The company has long been one of the major importers of tissue stock into Australia. Its operational strategy has been to optimize its manufacturing, importing tissue stock and converting it when pulp was more expensive. The company would shut its tissue machine as and when required, as outlined above.
Just as important, the value of imports of converted tissue products have been growing at 8.8% per annum over the last decade, as the chart below shows.
Australian Imports of Converted Tissue Products by Grade: 2005 – 2015 (AUDM)
Source: ABS & IndustryEdge estimates
It is important to note that most converted tissue products are measured only by their value. However measured, import growth presents an opportunity for import replacement. That at least is how Mr Ngai describes it.
In the wrap up
Manufacturing in Australia is often described as a difficult gig. The last decades have seen significant declines in Australia’s manufacturing base, including in the paper products sector.
Where demand has increased, as it has done for tissue and tissue products, it has largely resulted in increased imports. These imports are now a mainstay and have a strong place, competing as branded products and in the growing private label market.
ABC Tissue is proving that domestic manufacturing is a viable alternative, despite it going against the orthodox view. Their development plans are little short of stunning for the Australian and New Zealand tissue market.
By 2017, ABC Tissue’s 140,000 tonnes per annum of production capacity will eclipse its competitors, altering the market’s structure and continuing the changes impacting the pulp and paper industry’s most dynamic sector.