Lyocell Market Falters Despite Early Confidence (1998)

• Tencel market collapses.
• Soft Denim accounted for 80% of Tencel sales during expansion.
• Dyeing and finishing problems slow uptake in other fabrics.
• Courtaulds and Lenzing delay further capacity increase (but Courtaulds Tencel plant at Grimsby is ready to start)
• Lenzing cut back R&D and marketing for lyocell.  "Looking for ways to minimise new plant start-up loss".
• Setback for Akzo-Nobel plan to float-off the combined Courtaulds/Akzo Fibres operation (Acordis)

The growth in sales of lyocell, the new cellulosic fiber, has fallen so sharply that Courtaulds and Lenzing, its two manufacturers, have had to put back plans for production increases.  Lenzing has postponed, by at least one or two years, plans to debottleneck its 12,000-metric-ton-per-year lyocell plant at Heiligenkreuz, Austria, and build a second line of similar capacity.  Courtaulds has delayed until next year the full operation of a 42,000-ton lyocell plant at Grimsby, UK, its first European lyocell plant. That facility's start up has already been postponed twice.
The company, which will shortly change its name to Akzo Nobel PLC following its takeover by Akzo Nobel this summer, hailed lyocell as a "wonder fiber" when it was the first to launch the product in 1992 under the brand name Tencel.

Courtaulds predicted that lyocell, the first major new fiber in 30 years, would supplant viscose rayon as the main cellulosic fiber, with global output reaching 1 million tons per year early in the next century and 2 million tons by 2020.

Now the high hopes attached to the fiber have faded, and analysts say lyocell will take far longer to make significant inroads into the man-made fibers market.

Courtaulds pushed up capacity at its first Tencel facility in Mobile, Ala., to 55,000
tons per year after a surge in demand for the fiber, driven by its popularity in Japan and as a blending material for soft denim.

But since late last year, sales have been hurt by the Asian economic crisis and a fashion swing away from soft denim. After accounting for 80 percent of Tencel's sales, denim manufacturers were earlier this year only taking 30 percent of Courtaulds' lyocell output.

Both Courtaulds and Lenzing have had difficulties moving lyocell into new markets outside the denim sector, where the fiber is less easy to process and has to compete against cheaper materials, particularly polyester.

"Lyocell has been unfortunate because at a time when it needed to make an impact on new markets, the prices of competing materials, particularly polyester, have been coming down," says Stan Dobson, fibers consultant with Tecnon UK, London.

"Textile producers are less likely to want to try out new fibers when the prices of existing fibers are falling."

Lyocell's problems have coincided with signs of an upturn in the Western European textiles market. A rise in textile demand has helped domestic fibers producer meet the challenge of cheaper Asian imports by concentrating on high quality products.

Lenzing, Europe's largest viscose producer, has raised its output of specialty viscose fibers in recent years. The company says there has been a strong demand for high quality viscose and modal fibers for blending with other materials this year.

But its new lyocell plant has been running at only 50 percent capacity this year. Sales in Europe have amounted to a few thousand tons on an annual basis, although its lyocell, sold under the brand Lyocell, is being used by well-known designers and retail chains such as Armani, Lacoste, Liz Clairbourne, Gerry Weber, Triumph International and Marks & Spencer.

In addition to postponing planned capacity increases at Heiligenkreuz, the company has decided to cut back on marketing and research into lyocell.

"We are looking at ways to minimize our start-up losses on the new plant," says Mike Stempel, Lenzing's investor relations manager. "We have decided to stop what we regard as non-essential marketing activities and postpone some promotional activities for one to two years."

Lenzing believes the main difficulty with lyocell is that textile manufacturers need to develop new techniques for finishing and dyeing the fiber.

"With soft denim there were no major problems with the finishing and dyeing," says Mr. Stempel. "But with women's blouses, men's shirts and other types of clothing in which lyocell is now being introduced, the finishing and dyeing processes are much more tricky. Our customers are having to learn how to use the fiber."

At the same time, however, the Western European textile sector, particularly Italian companies, have been making improvements to polyester microfibers that have similar properties to lyocell.

Increased use of elastane in fabrics has also helped clothing manufacturers meet the demand among European shoppers for new materials.

"Shoppers do not care whether a new material is made out of a polyester microfiber or lyocell as long as it is appealing and not expensive," says Mr. Dobson.

"Courtaulds' and Lenzing's customers need more time to get downstream processes like finishing and dyeing right. The two companies will also have to put a lot of promoting effort behind the fiber."

Now that Courtaulds' and Akzo Nobel's fibers activities are being combined into single entity, the Tencel business is thought to be in a stronger position than Lenzing to withstand the tougher times ahead for lyocell.

Lenzing is a relative newcomer to the market, with Tencel currently achieving estimated annual European sales of 8,000 to 10,000 tons, three or four times more than Lenzing.

But the setback for lyocell could have implications for Akzo Nobel's plans to float the two newly merged fibers operations in an initial public offering (IPO) next year. It could also delay further the commercial development of a lyocell filament, which Akzo Nobel and Courtaulds have been carrying out jointly.

Despite its problems with lyocell, Lenzing has meanwhile started to recover after suffering a loss last year. In the first half of 1998, it made an operating profit of Sch 271 million ($22 million) compared to a loss of Sch 94 million a year ago. Sales rose 6 percent to Sch 4.2 billion.

Source: ICIS September 1998