AbitibiBowater's Bankruptcy Means Lower Newsprint Pricing To Come

Philip M. Stone April 21, 2009

AbitibiBowater filing for bankruptcy protection in the US and Canada will have the knock-on effect of already dipping newsprint prices falling even more. In bankruptcy AbitibiBowater will want to bring in as much cash as possible as quickly as possible and that should mean a greater fall for newsprint pricing and competitors will have little choice but to match.

And that’s into a market where newsprint usage continues to drop dramatically as publishers employ more and more means to reduce usage. They are so far along in their quest, let alone those that have gone out of the print business and are now available solely online, that supply and demand is shifting ever more in print’s favor, even though producers have been cutting supply savagely.

North American newsprint pricing has steadily declined this year. From the high in December at $758 for standard 30lb newsprint, the price now stands at $674 – that’s an 11% drop. Although manufacturers are ever tightening supply the users are outpacing them in dropping demand -- witness last week’s announcement by the New York Times, for instance, that it was eliminating several weekly sections “in a bid to save millions of dollars.”

Although prices are declining they are still a long way from the January, 2008, level of $567, but unless supply really drops dramatically there are very few reasons out there for why prices should not sink that low again, especially with AbitibiBowater being even more “competitive” on its pricing now and other manufacturers will have to keep pace in a declining usage market.

The state of play was summed up neatly by Gracia Martore, chief financial officer for Gannett, the largest US newspaper publisher that is also a major UK regional publisher, who said in a conference call last week detailing Gannett’s bleak Q1 results that one shining star was a 30% drop in Gannett’s newsprint consumption, although that had been countered somewhat by price increases of more than 20% from the same period last year.

“Focusing on the current news print situation, 200 news print market prices weakened throughout the first quarter because of a global decline in demand,” she said. “Despite production cuts by producers, this downward price pressure continues into the second quarter and we believe beyond. Companywide press reductions and the use of lighter basis weight newsprint will have a positive impact on our newsprint expenses. Given market conditions, we believe the interests of paper makers and publishers are best served by focusing our efforts on eliminating regional price variances and achieving improved cost efficiencies at the producer level.”

AbitibiBowater, which owns 23 pulp and paper mills and 30 wood mills in the US, Canada, UK, and South Korea, just plain could not keep up with payments on its $6 billion of debt. It had already closed down several mills  and since the Abitibi  Consolidated of Canada 2007 merger with Bowater of the US some 4,000 jobs have disappeared (one side effect of the bankruptcy is a stop to severance payments – those former workers now become creditors with all the hardships that entails.)

Of its 15,800 employees, 11,268 are in Canada, with 7,500 of those in Quebec which is probably good reason why the Quebec government has offered a $100 million loan guarantee which should assure Quebec communities that supply Abitibi that they will continue to be paid. Of course, nothing in life is easy and thus the US Coalition For Fair Lumber Imports says it will seek US government help to get that guarantee overturned – the US group sees it as an unfair Canadian government subsidy.

Gannett’s announcement that its newsprint usage has shrunk by some 30% over the past year is mirrored in statistics by the Pulp and Paper Products Council (PPPC). It says that US daily newspaper newsprint consumption has fallen nearly 25% this year, compared to the same period last year, with total US newsprint consumption, including commercial printers, down by near 30% in February over the year before. Total US newsprint demand was down a third for January-February this year over same period the year before.

And whereas in the past year exports, particularly to Asia not including Japan and South America, had helped pick up some of the slack that appears no longer to be the case. North American newsprint exports in February plunged 30.6% from February 2008 (non-Japan Asia down 53.3% year-to-date and Latin America down 31.1% year-to-date.)

Studying US consumption trends for the past 20 years must be somewhat horrifying to newsprint suppliers. US newsprint consumption in 1990 stood at 12.1 million metric tons of which three-quarters was used by daily newspapers and the rest by commercial printers. But that 8.9 million metric tons of 1990 daily newspaper usage had dropped to 5.2 million tons by 2008 – that’s a 42%reduction and there are analysts out there who believe that by the end of this year the annual US daily newspaper usage will be closer to 4 million tons.

And the problem facing newsprint producers even more is that even if one were to accept the current print problems are cyclical – that the economy will get better and advertisers will return – there is no guarantee that newsprint usage will increase very much because many of the changes publishers are making today – less sections, reducing paper size, fewer editions, more limited circulation and all the like – will likely remain even after the cycle has reversed.

And don’t forget that newspaper groups are suffering the same malaise as AbitibiBowater – difficulty in handling huge debt. In addition there is no guarantee that even if advertising does pick up that much of it will go to newspapers – digital still looks enticing.

So the outlook is really for reduced newsprint usage to continue with no guarantee of increased usage once the economy turns. That means more and more mills will have to close – not just temporarily but permanently  -- and producers, if they were to make the savage cuts really necessary to be profitable, should probably cut output by about another 25%. That will probably be easier for AbitibiBowater to do under bankruptcy court protection since the courts have the power to toss aside current union agreements. Until supply is diminished even more sharply, it is going to be a buyer’s market and the big question is really just how long it’s going to take for prices to drop back into the $600s.

Meanwhile the ideas on how to use less and less newsprint grow with readers themselves offering suggestions. A San Francisco Chronicle reader wrote, “I have an idea for reducing your printing costs, although I'm not sure if it would work with the way the paper sections are assembled, but here goes anyway. There are some sections on Sundays that go straight to the recycling pile unopened in our house - Jobs, Travel and Real Estate.

“I would gladly pay the same subscription costs and leave out those sections. Your advertisers wouldn't be losing anything because we never look at those sections anyway. Maybe you could offer two or three versions of the Sunday paper for subscription, with just the sections readers want. I love Home & Garden and Food & Wine, but there are probably other people who never open them but couldn't live without Travel.”

There we go with the ultimate print solution – newspaper sections à la carte.