RISI Viewpoint: Strong growth of the MENA region is not sufficient to absorb all the new capacity

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RISI Viewpoint: Strong growth of the MENA region is not sufficient to absorb all the new capacity

October 15, 2014 - 19:45
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STARNBERG, GERMANY, Oct 2, 2014 (Viewpoint) - By Esko Uutela, Principal, Tissue, RISI

The first Tissue World Istanbul was organized last week in Turkey, which by the way was a great success with a large number of visitors (congratulations to UBM Asia's organizers!), and now in the aftermath of the event I would like to briefly discuss tissue market developments in the MENA region.

There is no standardized definition for the MENA region; different organizations define the region differently. The World Bank describes the region as follows:

The Middle East and North Africa (MENA) is an economically diverse region that includes both the oil-rich economies in the Gulf and countries that are resource-scarce in relation to population, such as Egypt, Morocco and Yemen. The region's economic fortunes over much of the past quarter century have been heavily influenced by two factors - the price of oil and the legacy of economic policies and structures that had emphasized a leading role for the state.

In this writing, I include five countries of North Africa (Morocco, Algeria, Tunisia, Libya and Egypt) and the Near East countries of Armenia, Azerbaijan, Cyprus and Turkey in the MENA region (Figure 1). This suits well with the patterns of the tissue business in the region as Turkey is a major exporter to some countries in the region (Israel, Iraq and Azerbaijan, in particular).

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Regional growth in tissue consumption has been strong with an average growth rate of about 9% in the past 10 years. However, it can be seen that growth has been below the average in the past four years (Figure 2). Several political turbulences have taken their toll on regional tissue market expansion, and although some of these situations are now quieter following political changes and partial solutions of the problems, the ongoing open warfare in Syria and the unrest caused by the Islamic extremists described as a terrorist group by the United Nations and western media have negatively affected the economic life, including the tissue business, in the Levant region (Syria, Jordan, Israel, Palestine, Lebanon, Cyprus and part of southern Turkey). For example, Syria's current tissue consumption is estimated to be only about half of the level of the best years before the civil war, and reportedly only one of the tissue mills has been operating more or less continuously, albeit with some problems, in the recent months. On the other hand, positive developments include a recovery in tissue consumption in Iraq despite the ongoing disturbances and very strong tissue market growth with new domestic capacity in Iran-the tissue business seems to be in a real take-off phase in this country.

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Based on volume, Turkey is the largest market in the region and has recorded the largest volume growth (30% of the regional growth) in the past 10 years, followed distantly by Iran and Saudi Arabia. Future market growth will partly depend on overall political developments in the region, but one should not be so optimistic as to expect that strong regional growth will continue despite the apparent lack of a short-term solution for the turbulence in Syria and Iraq. Regional tissue demand is expected to almost double from its current level of 1.36 million tonnes in the next 10 years. Turkey, Iran and Saudi Arabia will continue to be the main contributors to this growth.

The building of new regional tissue capacity has recently substantially accelerated and a new investment peak will be seen in 2015-2016. The issue now is that local companies have started to build large tissue machines with capacities of 60,000-70,000 annual tonnes while previously the average new PM size was only half that or even smaller. The market will only grow slightly more than 100,000 tonnes per year in the next five years, so one large and one half-size PM per year would be sufficient to satisfy the regional demand growth.

Between 2010 and 2014, effective capacity additions were slightly higher than consumption growth, but this was not particularly problematic as exports outside the region grew simultaneously. However, the current outlook is different. From late 2014 onward, the investment wave will start to influence the market balance. In 2015 and 2016 the capacity increase will be twice and almost three times the market growth, respectively. In addition, there are additional projects close to commitment, so the situation will likely not improve in 2017-2018 either. The only hope is that regional net exports will continue to grow and ease the obvious overcapacity situation. This will be problematic, particularly as there is also overcapacity in China and Asia Far East (Indonesia), where cost-competitive mills are targeting the global export market based on abundant and partly integrated bleached hardwood pulp supply. Many mills now have Europe in sight, but recently announced new European expansion projects and relatively slow demand growth will make major increases in exports from the MENA region to Europe difficult. It appears that too much capacity is coming on stream in the MENA region in the next couple of years, as it cannot be expected that local market growth would be double that of our forecast. Of course, potential project delays could improve the current supply/demand outlook, but only partly, so the MENA tissue business will be characterized as a buyer's rather than a seller's market in 2015-2017.

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Esko Uutela, Principal, Tissue, is the author of RISI's Outlook for World Tissue Business, the World Tissue Business Monitor, the US Tissue Monthly Data and the new Exploding Chinese Tissue Business - Opportunities and Challenges special report, which will become available in the fourth quarter of 2014. He works out of RISI's EU Consulting office close to Munich, Germany, and can be reached at: Tel: +49.8151.29193 or Email:euutela@risi.com.