Over the last 12 months, things have definitely gotten better for airlaid producers, but most of them are not celebrating yet. That’s because the hole they were in was very deep and the climb out to profitability is very steep. Most are not there yet. The self-induced overcapacity crisis is abating, with utilization rates back up to near pre-2002 levels. Pricing has not recovered, though, languishing at around 80% of the highs set in 2001. Concert has emerged from bankruptcy, with a new owner and little debt; Buckeye is at break-even; Georgia-Pacific continues to milk its latex bonded, fully depreciated cash cow. These three, representing nearly 60% of the industry, have cut staff, reduced R&D expenditures and minimized capital expenditures. None show any signs of leading this segment back to profitability quickly.rn
How Did We Get Here?rn
In the early years of the new decade, things were good for airlaid. Buckeye had paid $320 million for Merfin and Walkisoft, and still found shareholder support for another $100 million for the Gaston II expansion. Concert found the capital markets so enthusiastic that it started two new lines and bought out the network of partners it had recruited earlier in the process. Rayonier built a “small demonstration” line of 10,000 metric tons using a new patented process built around hydrogen bonding. Their business plan called for a 100,000 metric ton line in three years, once the diaper core market began to materialize.
rnMcAirlaid, in Europe, built a larger 20,000 metric ton hydrogen bonded line. Hydrogen bonded airlaid was touted as a low capital cost, low production cost version of airlaid that would accelerate food pad and diaper core development. Even Kimberly-Clark—stung so badly in 1980 by its first airlaid failure in New Milford, CT that even 20 years later it is rarely mentioned—built a new line at Beech Island, SC to make premoistened toilet tissue, a market they projected would grow to 60,000 metric tons per year in three years. BBA built its first airlaid line in China.
rnNew markets were coming. Premoistened homecare wipes were a new growing market. Both Procter & Gamble’s Mr. Clean and Clorox’s Disinfectant Wipes started out as airlaid. Wet and dry mops used airlaid. FDA approval of superabsorbents for use in food pads made airlaid an attractive product for this application. Procter & Gamble and Georgia-Pacific jumped on the premoistened toilet tissue bandwagon with airlaid entries of their own. China would soon fill several airlaid lines. The large multinational hygiene airlaid users were predicting large increases in their airlaid usage as well. Diaper core, needing anywhere from two to three times all of the airlaid then produced, loomed in the near future.
rnBy the end of 2001, new capacity of 120,000 metric tons was in various stages of startup. This was an increase of about 30% on the total worldwide installed airlaid capacity in 2001.
A Funny Thing Happened On The Way To Profitabilityrn
Premoistened toilet tissue failed miserably, an atypical marketing blunder by master marketeer Kimberly-Clark. Homecare wipes started as airlaid, but soon switched to spunlace. The chance to preempt this switch was missed, first due to lack of capacity, then lack of product development resources. Hydrogen bonded was a lower cost version of airlaid, with severely limited capabilities and flexibility. It appears you do get what you pay for. Diaper core still looms, as it has for the last ten years, but still uses very small quantities of airlaid. The projections of the large multinationals for hygiene usage turned out to be badly off the mark. A combination of extreme optimism coupled with a move to lower weights in feminine hygiene cores resulted in numbers up to 50% lower than predicted. These same multinationals were “punished” for their poor market projection skills with a glut of low priced airlaid products for the near future. The “China” market for airlaid came mainly from U.S.-based multinationals, who replaced imported European or North American airlaid, again at a lower price for them.
rnWhen the dust cleared, the airlaid market grew around 8% in a year when capacity grew 30%. Surprising to only a few airlaid senior managers, airlaid pricing collapsed, many of these new lines operated at a fraction of capacity, and many of the major airlaid producers were in serious financial trouble. Concert couldn’t find a buyer for their Charleston mill, and shut it down. Buckeye didn’t even try to find a buyer for Cork, and shut it down. Kimberly-Clark quietly gave up on any massive premoistened toilet tissue market and today makes ordinary wet wipes on the line in Beech Island. Rayonier, BBA and Duni have all tried to sell off their airlaid assets. Rayonier will succeed within a few months; BBA is still waiting to find a buyer.
rnIn August 2003, Concert, a company that two years earlier turned away lenders after borrowing $100 million, could not make a $1 million interest payment and declared bankruptcy. In 2001, Buckeye made $46 million in operating income; in 2002 they lost $26 million.
No Quick Fixesrn
There are no quick fixes to the situation the airlaid industry is in. A hundred thousand tons of diaper core or premoistened toilet tissue will not mysteriously appear to change things overnight. Nor will Concert or Buckeye or Georgia-Pacific graciously shut down their own multimillion dollar airlaid investments in order to restore supply and demand equilibrium.
rnNew markets are needed; a counter to spunlace in wipes, new uses in automotive, filtration, food pads; increased utilization in diapers and adult incontinence. Product development and research resources are the catalysts required to convert these possibilities into reality. Unfortunately, there are not many research or product development resources left in airlaid. Most were shed in 2002 to save money. So now, the airlaid producers wait for their customers and suppliers to develop new uses for them.
What About Poland, Russia And China?rn
There are new airlaid companies in Poland, Russia and China that are inventive and aggressive. They may be the future of airlaid. But they are not the present. They currently have neither the experience nor the resources to advance the airlaid industry. It is too soon to expect them to improve the process or discover a big new application. They lack critical mass to affect pricing or supply and demand. In fact, by adding capacity to an already oversupplied market, by taking business that could have filled in-place underutilized lines, they have contributed to the weakened market and pricing.rn
And The Solution Is…rn
Is there any way out of this mess? Certainly. The airlaid substrate and process is strategic to many products and has properties unattainable with any other nonwoven. It has been the management of this business that has been at fault. Too many egos, too many changeable business plans, too much greed and not enough business sense have always dogged this nonwovens segment. But there is hope.rn
New Effective Managementrn
For the first time in several years, new, emotionally detached, non-ego driven business managers control major airlaid producers. Concert emerged from bankruptcy under the control of Brascan. Concert now appears ready to make the hard decisions necessary to run this business as a business. They appear unwilling to produce products that are not profitable just to fill lines. Buckeye, as well, now has airlaid managers who have fewer emotional ties to the massive airlaid investments of the past, and can view this segment more dispassionately. Expect price increases and/or further capacity reduction if needed.rn
No Announced Expansionsrn
The immense problems of this segment with overcapacity have finally kept speculators on the sidelines. Despite continuing sales efforts from the equipment manufacturers (who, after all, sell equipment, not airlaid) and Machiavellian encouragement from large airlaid users, currently there are no takers. Unfortunately, this won’t last. Even if Concert and Buckeye have learned their lessons (and BBA and Rayonier and Kimberly-Clark and Duni), there will be somebody out there who will be convinced that diaper core is minutes from realization.rn
New Products And Marketsrn
Despite the dearth of resources invested by the airlaid companies in new products and applications, the inherent value of the product continues to find niches. Airlaid food pads prosper, and if not for a shortage of acrylic acid-based superabsorbent fibers, would grow further. New, heavier weight composite wipe structures in homecare find airlaid products superior to the lightweight spunlace structures dominating the commodity segment of this market. Heavy weight, high synthetic content airlaid structures are battling needlepunch and other structures in building products, automotive and filtration markets. Diaper core is not dead, just growing very slowly in swim diapers and some training pants.rn
With new, tougher management and with end users still worried about further capacity reductions or worse, pricing has crept upward. In 2002, pricing had dropped to about 62% of 2001’s high water mark. This has steadily improved, modestly to 68% in 2003 and 80% in 2004. Airlaid consumers will fight this by continuing to set the major producers against each other or, as in the case of wipes, by bringing up the spectre of alternatives, like spunlace. Between Walmart and OPEC, there is very little profit left to split among the nonwovens raw material suppliers, the nonwovens producers, and the nonwovens convertors/marketers. Expect airlaid producers to increase average price by continuing to “trade” lower price commodity business for higher margin products when and where they can.rn
In the preceding sections, the solutions to the airlaid situation as it is today were outlined in simple terms as: better management, better pricing, no additional capacity, more and better markets and new products. If these steps can be realized, the airlaid industry will return to profitability, most likely in a year or two, but not this year. The level of profitability will be modest, and profitability crises, similar to 2002, can be expected again.
rnThe real long-term solution to the airlaid industry’s struggles is an industry champion. An industry champion would be a well resourced, well managed company that would drive the industry, optimizing process and equipment, investing in new product development, both long and short term, negotiating on an equal basis with multibillion dollar customers. A company such as Dupont and Ahlstrom in spunlace, or Freudenberg in spunbond, for example. A company that can invest millions in festooning, pilot lines, diaper core development, and an airlaid answer to spunlace, without risking bankruptcy by doing so. A company that can shut down a $100 million dollar investment if it isn’t profitable. A company that doesn’t have to wait for its customers and suppliers to find new products and markets for it. A company with financial and personnel resources to develop technology that it owns. A company that can attract and keep experienced personnel in management, production and research. A company that will consider its airlaid business strategic.
rnUntil this happens, the airlaid industry will continue to experience a “boom or bust” profitability cycle, at the mercy of irrational capacity changes and caught between powerful suppliers and customers.