June 6, 2005

SAP shortages, customer demands, pricing pressures make it difficult to do business in diapers

Times are tough for suppliers to the hygiene market. Pricing pressures, skyrocketing raw material prices and the inability to pass off these costs to consumers have created a grave situation for the manufacturers of film, tape, adhesives, fluff pulp, superabsorbents and other materials that comprise baby diapers, feminine hygiene items and other disposable hygiene products.

Despite these dire straits, manufacturers continue to be challenged with making more sophisticated and advanced products to feed consumers’ craving for more advanced diaper designs. From more stretchable waistbands to leg cuffs to thinner absorbent cores to more textile-like backsheets, improvements to diapers, in particular, have been constant in recent years. These new bells and whistles, however, have not garnered higher price points and the cost of a typical diaper has not risen in recent years.

So who then is paying for these improvements? To some degree, the cost has been offset by technological improvements and leaner manufacturing practices, but these efforts have not recouped all of the costs. Component manufacturers across the board are reporting grim conditions with no end in sight. Robert van der Laan, of Mediane International, a manufacturer of films, predicted that 2005 will be the worst year ever for the hygiene market and cited a 25% increase in pulp prices and a near 50% increase in resins as major causes for this situation. These broad increases are attributed to supply shortages caused by strong demand from China.

“The impact on the hygiene market has been enormous,” Mr. van der Laan said. “Every component of the item is being affected—the nonwoven, the tape, the packaging, etc.”

By and large, the hygiene market is dominated by two key players, Procter & Gamble and Kimberly-Clark in North America, as well as, to a lesser degree, SCA Hygiene in Europe. Beyond these branded companies are a number of small and large private label players operating in North America and Europe. Outside of these regions, the hygiene market is much more fragmented with a number of smaller scale companies serving regional and niche markets.

Hygiene items, including diapers and feminine hygiene products, contain many components including fluff pulp, superabsorbents, adhesives and elastics.
The consolidation of the hygiene market in developed regions has created a situation whereby the large companies are dominant forces. P&G and K-C are able to control the market by making product modifications that leave the smaller companies scrambling to catch up. Because of this, component suppliers are at these two companies’ mercy and they spend a lot of time forecasting what the hygiene manufacturers will want or need in the future.

This situation led Eastman Chemical Company, a supplier of resins to hygiene component suppliers, to create a “Toolbox” concept that looks at its products from the standpoint of component suppliers across the supply chain. “We need to make sure that the diaper companies understand our products, and what they can do for them,” explained Ruud van der Eerden, global corporate accounts manager. “The diaper manufacturers are pulling the market in a certain direction, and we need to understand what role raw materials are playing. In short, we are putting a lot of time and energy into what is causing certain developments in the evolution of the industry.”

Chasing Costs
Whether or not diaper manufacturers will reward innovation from their suppliers seems to be the great mystery of this market. While companies like P&G or K-C claim to reward innovation over cost, most suppliers are not actually seeing this happen. In fact, most suppliers feel that there is not a single aspect of the hygiene market that doesn’t focus on cost. Because of the disposable nature of these items, their manufacturers want to keep costs low.

“The market is driven by price and cost savings and smaller and medium sized companies are having trouble achieving the same pricing levels as larger suppliers,” explained Manfred Walker, sales manager of Huhtamaki Forcheim, a Germany-based films manufacturer. Among the developments Huhtamaki is working on are more cloth-like films as well as biodegradable technology.

One bright side in hygiene has been the private label market, which has been growing its marketshare, particularly in Europe, in recent years. These products have been able to gain popularity by offering not only cost savings but also innovative features. Industry estimates put the share of private label diapers at about 20% and with large chains like Wal-Mart in the U.S. or Aldi and Carrefours in Europe putting more gusto into their private label brands, this trend is expected to continue.

Unfortunately, it is the emergence of such retail chains that has created much of the hygiene market’s current predicament. These retailers dictate prices and make it nearly impossible for their suppliers to raise the costs of their goods. Not having shelf space in these mass retailers would be the kiss of death for a diaper brand, so companies will more or less do what the retailer wants.

In its effort to keep costs down, the diaper maker will dictate prices to its suppliers. The diaper maker has the power to do this because in such a consolidated market, suppliers don’t have many partners with whom to do business. Plus, winning a contract with a huge hygiene company like P&G or K-C provides automatic giant volumes for the supplier.

Turning to the tapes side of the business, Germany’s Koester has adopted the strategy of offering a great variety of products to its customers. The company is about to launch a line of products that range from economical items for less sophisticated diapers to highly innovative closures to premium products. “The market is really driven by marketing efforts,” said sales manager Andrea Konrad. “These companies are constantly having to come up with new ideas and concepts to show their customers, but at the same time they have to be constantly aware of their production levels.

Stretched To The Limit
One area where diaper manufacturers continue to focus resources is the overall fit of their product and a major way they are doing this is through stretch. The incorporation of more stretchable materials—in the leg cuffs, at the waist band or even through the overall chassis of the diaper—has been ongoing and component suppliers have been eagerly coming up with their own solutions to adding stretch.

Lysac Technologies supplied the superabsorbent agent for Love 'N Sanitary Napkin/Panty Liner, developed by WIP srl (Italy). The natural sanitary napkin and panty liner also uses a mix of eco-friendly PLA fiber from Far Eastern Textile and Mater-Bi biodegradable film from Novamont.

The challenge here is adding stretch to the diaper in both the machine and cross directions. While the use of spandex fibers has contributed to improved stretch in leg cuffs and waist bands, now manufacturers are examining ways to add stretch into the entire diaper, particularly in the topsheet or backsheet, to not only make the diaper more comfortable but also to better control leakage. While there have been some developments in stretchable spunbond nonwovens, the costs of these materials have been prohibitive to date. Still, there are a number of other options out there for diaper manufacturers looking to add stretch.

Conwed Plastics, for example, has used its experience in providing netting solutions to industrial markets to develop Rebound, a stretchable netting that is ideal for baby diapers and pull-on style training pants. Among this product’s attributes are its breathability and its ability to stretch in all directions. “It can replace single-strand spandex fibers, which break and impact the appearance of the diaper,” said Keith Misukanis, strategic business manager. “Appealing to the aesthetics of the diaper is very important.”

Also incorporating stretch are film producers who are hoping these efforts will increase the amount of film used in each diaper. “Everyone is still looking at fit and stretch,” said Mediane’s Mr. van der Laan. “We see a lot of different angles from small diaper producers to large brands.”

All of this interest in stretch could eventually expand the use of pull-on style diapers. Similar to training pants, pull-on style diapers are already popular in Asian markets and already K-C is offering a product that can be pulled on or side fastened, Huggies Convertibles. As this type of product gains popularity, expect to see fewer traditional training pant products and more hybrid items that can serve the purpose of both diaper and pant, industry observers predict.

As increased stretchability continues to change the look, feel and fit of diapers, Invista, perhaps the most well-known supplier of elastics to the hygiene industry, is saying the feature has become banal in the industry. “Now stretch is taken for granted,” said Robert Van de Kerkhof, vice president of stretchable performance fibers for Invista, the manufacturer of Lycra spandex and the former DuPont Textiles & Interiors. “As a consequence, it’s not necessarily considered a premium feature anymore.”

Meanwhile, improvements in Lycra technology have lowered the amount of the material used per diaper unit. Not only is Lycra stronger than it was three years ago, it is also more easily processable and more compatible with diaper production lines. “We have to constantly reduce our customers’ costs to allow them to be competitive,” Mr. Van de Kerkhof explained. “If they are not competitive, then we can’t be competitive.”

While Mr. Van de Kerkhof is witnessing increased competition from stretchable materials such as nonwovens, films and netting, he stated that the refractive qualities of Lycra cannot be matched, particularly at the same price level. Furthermore, diapers made with stretchable films are less breathable than those made with elastic strands and extra production steps makes them more expensive to use.

Still, cognizant that these competing technologies will only improve in the near term, Invista has been developing a stretchable nonwoven material, which it expects to launch this spring at INDEX in Geneva, Switzerland.

Another hygiene component company diversifying into nonwovens production is Tredegar Films. Three years ago, the company began producing nonwovens based on its three-dimensional film technology in Italy through an agreement with Switzerland-based Burkhardt, and this fall it announced a similar agreement with Web Converting in the U.S.

When used as a topsheet, Tredegar’s ComfortQuilt product is able to reduce the amount of superabsorbent polymer in the diaper by 3-4%, according to Jim Cree, director of business innovation. While this reduction may seem negligible, when multiplied over large diaper production run it can reap significant savings. And, with SAP production facing a shortage, any reduction is attractive. Tredegar is also making AquiSoft nonwovens for acquisition and distribution layers.

Both products use a 3-D technology that produces macroscopic, cone-shaped apertures that direct fluid away from the skin, reducing rewet and permitting faster strike-through without compromising softness. “We have diversified by manipulating our knowledge of three-dimensional films and applying them to nonwovens,” Mr. Cree added. “We have been approaching the hygiene market from the standpoint of taking an idea and then validating it with the end user.”

And, while Tredegar believes that the diaper market will reward innovation, Mr. Cree does recognize the value of cost consciousness. “It’s important to look into new areas of innovation,” he said. “It can be difficult to pass on costly improvements to customers, but when it works, the benefits are great.”

Other recent innovations from Tredegar Film Products Corporation include StretchTab laminate, a combination of elastics, nonwoven and hook-on-one roll for closure systems, and ForceField and UltraMask surface protection specialty films.

Diaper tabs are increasingly incorporating stretch.

Dealing With Crisis
Beyond stretch one of the most major issues facing the diaper market today is the shortage of superabsorbent polymers, the agent that has allowed diapers to become increasingly thin. Caused by a shortage of acrylic acid, which can be attributed to increased demand from China as well as an overall failure among manufacturers to bring more capacity onstream, this shortage has created an overall feeling of pessimism on the market. It has reportedly even led to lower production yields and could eventually drive prices up in the diaper market.

True to form, however, diaper component suppliers are trying to ease this situation by developing technology to lessen the amount of SAP needed per unit. As already mentioned, Tredegar’s Comfortquilt product can reduce SAP use by 3-4%, and, while no testing has validated this claim, Aquisoft can reportedly do the same in adult diapers, a growing market for hygiene.

Likewise, superabsorbent producer Lysac Technologies has introduced Lysorb for feminine hygiene items and Actofil for baby diapers. Both products enhance the diffusion of superabsorbents in hygiene items to reduce the amount of polyacrylates needed. “People need the superabsorbents in their production.” said Vladimiro Nettel, business development executive for Lysac Technologies. “This is a great alternative during the SAP crisis.”

While industry experts don’t expect the SAP shortage to go on forever—like the fluff pulp shortage of the 1980s, all things in hygiene are cyclical—they do recognize the importance of giving customers a variety of options. “You can’t be too dependent on just one raw material supplier,” Mr. Nettel said. “To achieve good business, you should have two to four suppliers.”

Also commenting on the acrylic acid shortage and its impact on the hygiene market was David Hill, business manager of Technical Absorbents, a U.K.-based manufacturer of superabsorbent fibers primarily for food packaging and feminine hygiene applications. A smaller producer, this company has been hit hard by this crisis, forcing it to cut back on its capacity. Superabsorbent fibers are more expensive but more stable than powders, which has hindered their use in many hygiene applications. “If a product can handle superabsorbent powder, they will use it. Fibers are a much more niche area, which is why we have gotten hit so hard by this crisis.”

Like his colleagues, Mr. Hill described this crunch as temporary and said more capacity should come onstream next year to remedy the market.

China, Friend or Foe?
The rapid development of China’s disposables market has by and large been blamed for current problems in the hygiene market. Because China is not a self-sustaining economy, it is gobbling up resources from Europe and North America, driving up raw material prices and tightening supply chains.

While component suppliers are complaining of this situation, this has not stopped them from targeting China, either as an area ripe for market growth or a haven of lower manufacturing costs. Tredegar Films, for example, in June acquired Shanghai Yaheng Perforated Film Material Co., Ltd., a manufacturer of apertured nonwovens used primarily in personal care markets. At the time of the acquisition, company executives said it signified Tredegar’s commitment to profitable growth in China and other emerging markets. The deal created Tredegar’s third manufacturing site in China; the company has another plant in Shanghai and one in Guangzhou.

For its part Invista is set to open a facility in Singapore in May to target Chinese manufacturers, many of which are currently using natural rubber instead of Lycra in hygiene products.

In fact, for a company to participate in the Asian market, it is nearly imperative that it has an operating base there. The high volumes of this market make transport to the East cost prohibitive. Therefore, down the road industry experts are expecting more hygiene players, both on the supply and manufacturing sides, to establish bases of operations within Asia. As this happens, we will see the Asian hygiene market move away from rudimentary technology to become more sophisticated.

“It only makes sense to ship special, high-value products to China,” said Mediane International’s Mr. van der Laan.

Still some suppliers are reporting more favorable conditions beyond the developed regions in Latin America and China. RadiciSpandex, for example, has been selling its elastic threads beyond the U.S. “We have seen more reception of our products in Latin America, Europe and Asia,” said the company’s Marty Moran. “The U.S. has already focused on addition of elastics in diapers. Elastic threads are now on the backburner.”

These developing markets present a wider customer base than the U.S. and Europe, where market consolidation has narrowed the playing field in recent years. While there are only a handful of companies making hygiene products in the U.S., Turkey, a much smaller market, has between 25 and 30 hygiene companies, according to Huhtamaki’s Mr. Walker. A market with this many players offers component suppliers many more opportunities to sell innovative new products.

The Next Step
Executives interviewed by Nonwovens Industry overwhelmingly pointed to cost pressures as the key problem facing the diaper market. During the past decade, the diaper market has seen a tremendous amount of innovation that has not been rewarded with price increases. In fact, the average price of a diaper has dropped from 22 cents in 1990 to about 15 cents today. As raw material prices continue to climb, however, industry experts are predicting that this could change in the near term.

“The cost per unit of a diaper is going up, but the overall price of diapers is not,” said Tredegar’s Mr. Cree. “This will have to change.”

As component suppliers hope that diaper manufacturers, their customers, follow through with their promise to reward innovation, they will continue to streamline their practices to be able to provide the best prices possible to their customers.

“In the future, innovation will depend on capacity within the nonwovens industry. If capacity starts crunching up, prices will increase,” said Conwed’s Mr. Misukanis. “Diaper companies will feel it."

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