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U.S. Tissue Tracker: Leap Year Pushes up Shipments, but Production Remains Steady

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Converted product shipments 2.2% higher y/y (+2.0% 2 mo. YTD). Total At-Home (consumer) shipments of converted tissue products increased 1.4% y/y in February (+1.6% 2 mo. YTD), with toilet paper volumes up 1.4% y/y, towels ahead 1.8%, and facial volumes unchanged y/y. Total Away-from-Home (AfH) shipments of converted tissue products rose 3.7% y/y (+3.0% 2 mo. YTD), with toilet paper volumes growing 4.2%, towels rising 3.1%, and napkin volumes up 2.6% from a year ago.

Parent roll production unchanged y/y (+0.2% 2 mo. YTD). Parent roll production was 670,000 tons, unchanged y/y (-5.9% m/m). Domestic parent roll consumption was 685K tons, up 0.9% y/y (+1.2% 2 mo. YTD), but down 6.0% m/m.

Higher operating rates and shipments. Operating rates increased from 91.8% in January to 92.3% in February (-470 bps y/y); monthly capacity declined 6.4% over the same period (+3.1% 2 mo. YTD).

Tissue market can support additional capacity (in moderation). As discussed in our latest deep-dive report on tissue, the N.A. industry must increase capacity by ~160,000 tpy to meet demand growth of ~1.5%/yr. We estimate that industry "creep" leads to ~100,000 tpy of growth in existing capacity, implying that the market requires at least one new 60,000 tpy machine per year to stay in balance. Factoring in likely capacity shuts, some in the industry believe that 2.5 new 70,000 tpy machines per year are needed to meet rising demand. The challenge facing the market is the ~280,000 tpy of new capacity that we expect to come online over the next three years. While we expect older, relatively higher-cost capacity to be removed from the market over this period, we do not forecast unannounced capacity reductions in our supply/demand model. As such, we see industry operating rates (on a production-to-capacity basis) falling from 94.0% in 2014 and 2015, to a low of 89.7% in 2018. In addition to N.A. capacity adds, we see additional imports coming from FPC Tissue's NTT machine in Chile, which plans to sell 90% of its 66,000 tpy of production into the U.S. market.

Amendment to capacity improves market fundamentals slightly. According to RISI, Nippon Paper's 20,000 tpy mill in Port Angeles, Wash., did not come online as expected in 2015 (produced less than 1,000 tons), so we have removed it from our capacity model. Considering this and the reported sale of one of Lincoln Paper's machines (which makes it unlikely for its 76,000 ton mill to ever restart), we now estimate a net of 87,000 of new supply online in 2015. Further ahead, Tranlin's $2 billion paper manufacturing mill will start partial production in 2018.

Parent roll prices steady m/m for virgin and recycled grades. High-quality virgin parent rolls inched up in February to $1,357/ton, up 0.2% from January (+4.5% y/y). Recycled parent roll prices were marginally higher, with the high-quality grade at $1,127/ton, ahead 0.4% m/m (+5.2% y/y).

RBC Dominion Securities IncPaul C. Quinn (Analyst), (604) 257-7048. 
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