China’s tissue oversupply drives investments to alternate regions

The rapid increase in capacity in the last few years has become a growing concern for the tissue industry in China. The capacity growth has clearly outpaced the demand growth and has led to oversupply flooding the Chinese and South East Asian markets.

The demand growth during the 2009-2012 period touched 10 percent which was attractive enough for existing producers, other business groups and new investors to invest in tissue industry. This resulted in excess investment in tissue industry leading to excess capacity and intense market competition. The scenario has now changed with investments drying up and investors looking at alternate markets.

The rise and fall

2012-14 was the period when the investment in new tissue capacity gained momentum and close to 1 MMT (Million Metric Tonnes) of new capacity came online during the time. The domestic and export markets could accommodate only lesser than 500,000 MT during the period. The capacity in 2015 was around 10.2 million tonnes, while the demand was only about 7 million tonnes. So, the producers were able to achieve only 76 percent operating rates.

Lower profit margin

The reasons for lower profit margin are all interlinked. New entrants and additional investments from existing players have increased the supply in the market causing the tissue prices to tumble. As a result, producers are unable to maintain healthy bottom line in their books.

Anti-dumping duties

The anti-dumping duties (ADD) levied on Chinese tissue exports have discouraged producers from investing in China. The U.S. upheld its ADD on Chinese imports of certain grades of tissue. Other countries might also come up with similar ADD which could affect the exports and sales of Chinese tissue producers.

Environmental protection regulations

Chinese environmental protection sector has been highly cautious about new mills entering the market. The sector has been facing immense pressure from the government to tackle the industrial pollution in the region. Hence any new investment in plant machinery will go through high levels of scrutiny from this sector and there has been a significant shutdown of mills to tackle pollution.