Nuqul Group’s Fine Hygienic Holding is one of the major players in the tissue business in the MENA region, operating four tissue mills in Jordan and Egypt with a combined annual tissue capacity of 155,000 tons. In 2016, the Holding announced a $90 million investment in a new tissue production line at Al Nakheel mill in Abu Dhabi, UAE. PM5 is expected to come on stream in the 3rd quarter of 2017.
Salim Karadsheh, CEO of Fine Hygienic Holding, updates METissue on the progress of the project and shares his insights on the tissue market in the MENA region.
Could you give us a short description/scope on your new project in Abu Dhabi, Al Nakheel?
Al Nakheel Paper Mill will produce over 50,000 tons per year of jumbo reels to supply the bulk of FHH operations in the GCC markets while Jordan operation supplies the Levant and the remaining needs in the GCC. Egypt operations supply FHH needs in Africa and serves our exports clients that have for years entrusted FHH to provide them with the quality and volumes of tissue they need for their operations. Those clients are spread over several continents inside and outside the MENA region. The project will also be integrated with FHH converting operation in the UAE that supplies FHH consumer products in the UAE, Kuwait, Qatar, Bahrain and Oman.
– Why did Fine hygienic decide to invest in a new tissue mill?
FHH consumer product specifications are unique to FHH brands and as such FHH needs to maintain control over the volumes needed, the quality standards and the product development to stay pioneer in its markets. The current size of FHH and the forecast growth mandated an investment to build capacity owing to the lead time it takes from concept to market in such large projects. Having said that market dynamics soured since the decision on the investment and it will thus start-up a little bit too early.
– Is there any delay in the project?
The project started later than planned due to changes in the legislation and permitting procedures in Abu Dhabi and its time schedule was shifted forward from the outset. Since then the project is proceeding as planned. FHH is not impacted by the delay.
– Why was the UAE chosen as a location for the new mill?
FHH needed to build capacity in the GCC to become local to its markets; a study of available options, costs, freight from the centers of gravity of demand, legislation, labor considerations, investment environment and energy needs favored Abu Dhabi over other locations in the case of FHH and the project location was confirmed through a detailed concept study for FHH that was commissioned to 3rd parties confirming our choice.
– What is your view on the current market situation in the MENA region?
The MENA region has surplus capacities today and will likely continue to have surplus capacities in the coming 3 years. The regional demand growth has slowed down significantly since the turmoil started in some markets (most notably Libya, Yemen, Iraq and Syria), while other markets’ growth has slowed down post drop in oil prices. In general consumer sentiment in markets that are directly or indirectly influenced by petrodollars has plummeted. The Saudi consumer for example is demanding lower prices and shifting towards lower cost options following the change of strategy by the Saudi government on matters like subsidies and investments. This state of affairs will pick up pace as KSA announces the second round of reform expected post Ramadan, as expatriates send their families to their original countries following the government decision to increase residence fees dramatically and as the GCC sales tax becomes a reality in 2018. Jordan enjoys a saving from oil price drop but pays a heftier price for the drop in GCC tourism, employment opportunities in the gulf, investment and aid from the oil rich countries such as KSA. Lebanon sees similar impacts. Egypt on the other hand suffers from inflation, drop in tourism, reduced FDI and stagnant Suez Canal traffic. Iraqis consumer spending is also dropping as less income is derived from oil exports and more share of the country’s income goes to fund the fight with ISIS.
At the same time the number of firms supplying the markets has increased with small players and informal suppliers producing basic products. We see forged imitations of our brands in more than one market encouraged by the anarchy in some markets due to the aftermath of the Arab Spring and growth in terrorism. We see unorthodox imports from countries that suddenly found a cost advantage from their currencies devaluation in markets that have local currency peg to the USD, aided by lower freight cost on cheaper oil prices, while exports to Europe are challenged by the devaluation of the Euro and GBP.
To put the balance in perspective, the MENA markets growth is about 1 full size machine per year while the announced new projects will bring at least 3-years’ worth of growth by the end of 2018. This means that the market balance, already in surplus, will deteriorate over the coming years and prices will be further depressed while the commodities prices are heading North at this time.
FHH decisions are driven by internal needs and demands. The bulk of FHH production will be internally supplied to FHH own converting operations. Being the largest player in the MENA region allows FHH diversity, brand positioning and economies of scale to weather the storm. As for other investors in the field, they must know of something we do not know about, or have export markets that eluded us.
– Many projects are starting up during this year; what would be the impact on the market?
The rules of supply and demand have never changed. An oversupply means that prices will drop towards zero. Along the price drop journey, new demand may come when a consumer that did not consume suddenly finds the price encouraging enough to start consuming, Along the same journey supply would shrink when one supplier is unable to sustain operations due to high cost, lack of cash or inability to invest in improving product quality to meet the new demand. Competition will become fiercer and margins will drop. New investment will take a break until the market finds its balance. We maintain close contacts with several competing companies in the region and can confirm that a few are really struggling to stay in business, while some have disappeared altogether. Most of those compete on price only and do not have consumer and market research, brand power, cash flow, product development vertical integration, talent, patents and economies of scale to compete otherwise. When the market balance is in over supply, competing on price can only head in one direction- South; to some players this means moving from profit to loss and then to negative cash flow. We expect that such a scenario will last 3 more years, yet with every announcement of new capacity we are pushing the forecast one more year. The latest news in March was of a Kuwaiti investment in Egypt- which if confirmed will push our forecast by another 1/2-1 year. Egypt already has about 300% overcapacity and recently received new investments from Handy and Hayat. Saudi will receive new capacity soon. The UAE is in huge overcapacity and is receiving some three new paper mills. North Africa is also in overcapacity while market growth in Libya, Tunisia, Algeria and Morocco is challenged by a mixture of war, terror, oil revenue loss and failing economic performance. GDP per capita in the Levant is negative meaning lower disposable income per person.
This can all change if terror and wars stop, governments succeed in reform, oil prices recover, tourism and investment return, closed borders open, and the economic cycle improves. Unfortunately, we have no facts on the ground to support such a scenario.