10 Tips for Beating the Competition
In this article, we dive deeper into the production of glassine & SCK. There are 44 paper lines manufacturing glassine & SCK in the global market in 2019. The paper line capacities have a huge variation. This is affecting the cost of manufacturing per ton or sqm. Is it possible for every producer to make money with this type of competition landscape?
- Niche offering: There are roughly 40–50 main gsm, color, grade, end-use combinations for this market. Each of these products has a different price position. Low capacity producers must look for the best selection for their offering. The high capacity producers concentrate more on the commodities within this market and can still make a profit.
- High priced segments: Specialty paper markets have much higher prices than e.g. graphic paper markets. This gives an opportunity for older, lower efficiency machine to have a “second life “when converted int specialties. In some rare cases also, the new purpose-built machine is starting in these markets. In the early stages of the life cycle the product prices can be so high that everybody is making a reasonable profit in the business, later prices decrease as the specialties become commodities when markets grow, or the products will be substituted by new technological developments. Recyclability and environmentally sound and different products can also help to achieve better price positioning of the products.
- Optimized output: Paper lines are normally designed so that the bottleneck in the line is the paper machine (the most expensive investment). When the machine’s speed and drying capacity is optimized for the largest market volume e.g. in Europe 56–58 gsm glassine production, one cannot increase sqm output when down gaging to lower substances. This means normally that low-speed narrow machines target higher output and lower cost by increasing the share of high substances in their portfolio. In this market up to 120 gsm. On the other hand, high-speed machines have a competitive edge to serve customers also with lower substance and thickness products. There has been slow but constant development to reduce the thickness of the products due to cost and sustainability reasons.
- Swing production: There are many producers that swing the production between different markets. This can help to compensate for lower profitability in certain markets. This is not a very easy task due to possible negative effects on the efficiency of the machine, which can easily offset the benefits of having several markets to serve.
- High barriers to entry: Some markets are very hard to penetrate and can protect high-cost producers from competition. E.g. there can be market-specific special product and service features needed. Local integrated production with converting. Unfavorable currency conditions and high logistic cost and /or border taxes for overseas producers. Global supplies to the majority of customers need a large portfolio which is adapted also to local needs. This can lead to reduced efficiency if manufactured with limited machine numbers and locations. These above-mentioned conditions can give small local producers still a possibility to stay in the market.
- Quality: The TCO is very important in this long value chain. High-quality products can benefit from somewhat higher prices. Runnability, consistently high product quality, low waste, and use of materials in all steps in the value chain are important.
- Backward integration: There is a large number of producers manufacturing with the so-called nonintegrated model. These producers by market pulp for their production. There is a clear benefit of having pulp supplies from your own sources. If production is integrated at the same site one can save pulp drying costs, logistic costs, and sales and marketing costs. In the case of shipping intercompany pulp, one can save sales and marketing costs and some logistic cost depending on the distance and increase company revenue by selling the pulp out after value-adding production as high-priced liner product compared to sales as market pulp.
- Forward integration: Some producers operate in multiple steps in the value chain. This can make it possible partly to compensate for lower capabilities in paper production due to lack of competition for the producer and overall satisfactory profitability over the value chain. On the other hand, this could become an integration deficit for the converter in the long run. If all steps in the value chain are cost-competitive and positioned well this can lead to very high profitability over the value chain.
- Costs: Some producers have an advantage especially of lower fixed costs due to the location (staff). Large volumes give purchasing power which is normally benefitting the big corporations. Smaller producers can sometimes have partners for purchasing certain materials and also benefit from volume rebates. Building a large capacity needs high CAPEX. The latest investments suggest a rough ratio for a feasible machine conversion is 1:1000, 100 000 t/a year glassine capacity needs 100 M€ investment. Large machine lines have to cover also high financial costs, but these could be offset by lower fixed costs if machines are run with good RO rates and efficiency. Location close to customers gives an advantage for fast deliveries and low logistic costs.
- Production level and efficiency: We can say roughly that a typical paper line net efficiency needs to be > 80 % to make money (4 m line running 1000- 1200 m/min) in this market. One can increase income significantly by increasing efficiency up to 90 % which still could be possible in perfect operation. Below some examples of the effect of production output in case the 3 different lines would serve the market with the exact same products and with the same variable costs and efficiency. Suitable machine width makes it possible to avoid high trimming waste and helps to serve customers better. There is a significant advantage in fixed costs for a paper line having a high production level. Reducing substance can increase the fixed cost share if not compensated fully with product price or higher speed. In the below case speed is limited to the same level as for the 58 gsm production and will increase the share of fixed costs.
Downgrading to 45 gsm when maximum speed is achieved at 58 gsm production does not affect the sqm output of the machine but rarely market is accepting thinner product with the same sqm price. In these cases, the lower sqm price but the same sqm output would lead to a decrease in the revenue stream.
There are 25 companies and a total of 44 machine lines engaged in the production of Glassine & SCK at the end of 2019. The number of these machines is estimated to become uncompetitive gradually when new capacity enters the markets in different regions. Some of these machines are old, narrow, and have low production speeds. Few companies have the financial capability or will to enter the market on a large scale. This is due to a relatively high need for CAPEX related to state-of-the-art paper machines or machine conversions.
The average estimated capacity is only 57 kt per machine, with variance from a couple of thousand tons up to 230 kt. From the total, 26 machines have capacities below 57 kt, together representing 25% of global capacity. This means, that there is a significant opportunity to reduce the cost of production by investing in wider, high-speed paper lines. Looking at the historical development, this should occur gradually, whereby fewer effective producers are forced to redirect their capacity into more niche, higher-priced products. In theory, the capacity of these 26 production lines could be replaced with 2,5 state-of-the-art paper machine lines having a capacity of 250 kt/a. The above means, that in the future many producers will have a low resistance to reduced profitability or price erosion in the market.
