Spunmelt Polypropylene – A View of Supply and Demand in North America

David Allan, Editor, Nonwovens, RISIJanuary 28, 2014

INDA Vision Consumer Products Conference, Dallas, Texas, USA

1

2

Agenda

1. Demand history, forecast and drivers.

2. Evolving issues and forces behind

supply growth.

3. Issues with supply and demand.

4. Conclusions.

3

Our View• North American SM PP demand in 2010-15

growing modestly (CAGR of 2-4%/year in tonnes).– Roughly flat demand in baby diapers in tonnes; area

usage up slightly.– Mid-single digit growth in inco, medical, some smaller

uses, in tonnage terms• Current modest supply excess will be tamed.

– Addition of new capacity likely to slow down.– As newer lines are depreciated, older equipment will

begin to lose competitiveness.– Market should be in rough balance by 2016.

4

Global NW Demand Forecast

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

2000 2005 2010 2015

Source: INDA, EDANA, RISI

000 tonnes

Other NWOther SpunlaidSM PP

5

North American NW Demand Forecast

0

600

1,200

1,800

2000 2005 2010 2015

Source: INDA, RISI

000 tonnes

Other NWOther SpunlaidSM PP

6

US/Canada Demand by End-Use (INDA; 2010)

356

92

N.A. SM PP End-Uses by Sector(000 tonnes)

Disposable Durable

168.5

26

40.5

56

23

Hygiene Coverstock (All NW fabrics)

(000 tonnes)

Baby Diaper Train. PantsFem. Hy. Adult Inc.Underpads

7

What Has Been Growing Recently?

• Adult incontinence is only major sector showing big unit sales growth.– Inco growth is under-

stated: excludes online, institutional.

• Even 52-wk numbers can be skewed by timing of product intros, pricing and inventory movements.

• IRI includes Walmart, Sam’s Club.

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

Dia

pers

Trai

n. P

ants

San

. Nap

kins

Adu

lt In

c.

US Retail Unit Sales (IRI; 52 weeks ending

12/1/13)

YOY % Change

8

$ growth: +5.6%

Where Nonwovens are Used in the Diaper (INDA; 2010)

Top sheet, 26%

Barrier leg cuff, 21%

Back sheet, 31%

Other, 23%

% of Total Baby Cover Stock

• Average NW weights declining e.g. in top sheet, barrier leg cuff and core wrap.– Core wraps below 10

gsm have been made.– Other components could

get to 10-12 gsm. – Some NW

producers say they are already making them for a few customers.

9

US births: return toward trendline, then slow growth

• US ‘crude birth rate’ was at 14.0/1000 in 2008.– Projected 2013: 13.66– Projected 2015: 13.4– Projected 2020: 13.2

• Fewer births happen in recessions; births now returning to more stable level.

• Birth rate will not return to levels of previous decades.

3,7003,8003,9004,0004,1004,2004,3004,4004,500

2007

2008

2009

2010

2011

2012

2015

2016

2017

2018

2019

2020

Source: National Center for Health Statistics; US Census Bureau

US Births (000)

10

US Population by Age (from CIA World Factbook)

11

Meltspun Development for Hygiene Products

ProductBenefitsContainment

Skin wellness

Sustainable

Sensory

Fit and Closures

Value

Benefit Perception

MeltspunFocus

Web uniformity

Lighter weight

Green polymers

Reduced equip. cost

Cloth-like aesthetics

Higher through-put

Laminate processing

New benefit additives

Recent Developments

Benefit agent deliveryLow cost/energy, more uniform melt process.Natural, renewable and biodegradable fibersSoftness; tactile and

visual properties Better barrier, thru put micro and nanofibersPolymers and blendsLower cost, enhanced

stretch laminates

12

12

Nonwovens Market R&D Investment*

ContinuousImprovement

(41.8%)

Other(3.4%)

ProductDifferentiation

**(10.3%)

New Benefits and Uses(28.5 %)

Cost Reduction

(8%)

New Technology

Push(8 %)

• Largest R&D effort targeted at improving existing technology

• New benefits and product uses also a key focus for investment

*Based on issued patents and applications during 2012

** Differentiation = product made distinctive with consumers (printing etc.)

13

New Technology and BenefitsNote: drawn from 2012 and 2013 patents and applications

Technology CompanyFreshness sensation active for hygiene products Procter & GambleHigh active loading (80%) functionalized particle attachment, functionalized coatings; superhydrophobic

P&G, Cellresin Tech., various institutes, etc.

Modeling and simulation (3D product softness, graphics, topsheet aesthetics, absorbent system, SAP addition process)

P&G, First Quality

Smart, responsive nonwovens – BM responsive diaper, tampon capacity indicator, triggered agent delivery, dehydration indicator, liquid crystals, color change etc.

Unicharm, P&G, Kent State University, SCA, Dow

Higher yield nanofiber production, functionalized fibers

Nissan, UC, 3M,PGI , Toray

Micro and macro-texturing of nonwovens and films –puckering, zones, protrusions, ridges and troughs, shape memory polymers

P&G, K-C, Unicharm, Tredegar, 3M

14

Getting lighter; more ahead?• Most coverstock basis weights are in 12-17 gsm range,

depending on element of the diaper – often 14.5-14.8 gsm.– Move to 10-12 gsm: in the cards or a ‘sea change’?– Trade-offs: quality; throughput on some lines; price.

• Would take several years to get to 10-12 gsm; how much lower can it go? (Some lines have already made 10 gsm.)– Converting issues.

• One view: bsw will continue to drop at 1-2%/year for next five years.

• Some diaper makers could chose heavier weights to differentiate themselves.

15

Sustainability issues

• It is unlikely sustainability will hurt underlying demand trend in near term.

• Pressure from retailers will continue.• What is the answer?

– Bio-based polymers?– Using less material per disposable product.– Will a recycling approach ever take off?

• K-C diapers-to-compost deal with OCS.

16

Evolution of NA inco market• Quality evolution:

– Discretion (underwear-like fit and appearance due to esthetics and stretchable/elastic materials; odor control).

– Health (breathable film/NW laminates; ADL materials selected to promote skin dryness).

• Segmentation by degree of incontinence; ambulatory/non-ambulatory; institutional vsindividual purchase.– Retail sector: Will continue moving into mainstream

distribution channels; losing ‘ick’ factor.• Average material per unit fairly stable because much

of market’s growth is in light incontinence sector.

17

Diapers and Inco – Growth Implications

• Baby diaper unit sales likely to remain flat for many years.

• Inco unit sales probably growing 4-6% a year now and for foreseeable future.– US population 65 and over in 2009 = 40 million, or 13% of

total.– Forecast for 2030 is 72 million or 19%.– Inco penetration in US is probably not at 50% of potential.

• Diapers and training pants are a $4.8 billion business in USA today; inco is $1.4 billion at retail.– Inco expected to pass diapers in Japan by 2020 – when

will that happen in USA?18

Two Perspectives On North American Capacity

24 SB; 33 SM

05

101520253035

Before2001

2001-5 2006-10 2011-

When Installed

11 of 3.5 M; 8 of 4.2 M; 7 other

0123456

0

5,000

10,000

15,000

20,000

25,000

Wider Sometimes = Higher Capacity

Capacity (Tonnes; Left Axis)Width (Meters; Right Axis)

19

Capacity issues• Overcapacity is often a temporary issue.

– Pig-in-the-python.– Also, capacity numbers tend to be nameplate.

• Looming obsolescence of some lines.– Older lines may offer lower throughput, less light-

weighting capability.– As new lines are depreciated, some older lines look

less advantaged.– It is easier for big multi-line companies to rationalize

capacity.• Smaller companies more likely to specialize where

possible, hold on to existing business where necessary.

20

Projected Demand Increase vsCapacity Added or Planned in 2010-15

40,000

20,000

37,000

16,000

100,000

0

20,000

40,000

60,000

80,000

100,000

120,000

Capacity Increase (000 tonnes) Projected Demand Increase

21

New Capacity vs ExistingNew Lines

• Flexibility.– BSW range.

• Throughput; lower cash cost/unit.

• Better able to adapt to customers’ evolving new technology needs?

Existing Lines

• Known quantity.– ‘Well-run R3s quite

competitive with R4s.’

• May be fully depreciated.– Can be operated

economically at lower operating rates.

• If already upgraded to make specialty products, don’t require additional capital.

22

Consolidation or new suppliers?• ‘The trend of tomorrow – and always will be’ –

view of one participant.– In a technology-intensive market, is it better to buy an

older line that isn’t ideal for your needs or build a new one that is?

– Big customers like competition.– On the other hand – PGI/Fiberweb/Providencia.

• Impact of globalization.– Invest capital following your customer to China or

upgrade technology in mature market with minimal growth potential?

• Risk of getting over-extended.

23

PP resin costs – stable since economic recovery ($/lb)

0.0000.2000.4000.6000.8001.0001.2001.4001.600

Jan

2006

May

200

6S

ep 2

006

Jan

2007

May

200

7S

ep 2

007

Jan

2008

May

200

8S

ep 2

008

Jan

2009

May

200

9S

ep 2

009

Jan

2010

May

201

0S

ep 2

010

Jan

2011

May

201

1S

ep 2

011

Jan

2012

May

201

2S

ep 2

012

Jan

2013

May

201

3S

ep 2

013

$/lb

Source: Nonwovens Markets

PP Resin 14 gsm SB Gap Linear (Gap)

24

Future issues• Margin squeeze.

– Diminishing returns on new capacity?• Sustainability.• Ability to deliver enhanced attributes and

economic value.– With margin pressures; need to invest to

follow customers overseas.• What happens when adult incontinence

achieves full penetration?

25

Conclusions• Demand growth will be driven largely by

adult incontinence penetration rate increases.

• Innovation will continue to focus on features, economics, sustainability.– Present research effort appears focused on

improving existing technology – fundamental innovation is still possible.

• Capex likely to slow down; increasing focus on improving existing assets?

26

My heartfelt thanks to:• The staff at INDA.• Keith Osteen and Rob Johnson of Smith,

Johnson & Associates.– Supplied slides 12-14 based on their definitive work

on Nonwovens Innovation and Technology Review 2013.

• The people who agreed to be interviewed in the research phase of this presentation.

27

Nonwovens Markets

Nonwovens Company Profiles

Nonwovens Markets Price Watch

Nonwovens Innovation and Technology Review 2013

Thank you for your attention!For more information:

www.nonwovens.com

28