Less Circulation, Less News Hole, Less Page Width And All The Other Newsprint Savings That Publishers Have Dreamed Up Are Working – Newsprint Usage And Prices Are Down. But For How Long?

Philip M. Stone March 2, 2007

The one cheer in the newspaper corporate boardroom these days is that the sometimes bitter cost control battle with newsprint suppliers is moving in print’s favor. There’s probably another 10 months for prices to continue falling, but come 2008 it will be another story.

US publishers have been working overtime the past couple of years trying to reduce their substantial newsprint costs. Some have gone from using 30-lb paper to the lighter 27.7 pound (45 gram) paper (New York Times), page widths have been narrowed (Wall Street Journal from 15 inches to 12), many have banished stock agate pages and TV listings to the Internet (Chicago Tribune), the news hole has been reduced (Boston Globe), unprofitable circulation areas dropped (Atlanta Constitution), most have reduced bulk sales that are of no interest to advertisers, and then there is the natural circulation attrition (dailies down 2.8%, Sundays down 3.4% in the last ABC).

Add all that together and it means US newspapers are using much less newsprint than before. The Pulp and Paper Products Council said US newsprint consumption in 2006 dropped 7.1%% from 2005 to just over 7 million tones, and the decline is really a bit more than that if comparing like-for-like since 2006 had 53 Sundays compared to 52 in 2005.

That newsprint consumption drop is pushing prices down. List price in 2006 was $668/tonne but prices are already being quoted this year close to $600 per tonne.

Remember this is big business. Even at $600/tonne and an annual use of 7 million tones it means US newspapers are a $4.2 billion annual market, but even with those numbers North American suppliers say they are not making any money since production costs are so high. Electricity costs, for instance continue to increase and it is the major utility used to power the mills (unlike the competitive Chinese who use “dirty” coal as one reason for being able to keep their export costs down).

In the past to combat dropping prices suppliers have cut back on production, shutting down mills. This time the action has been a bit more dramatic. Two big rivals, Abitibi-Consolidated and Bowater, North America’s largest newsprint providers announced they are to merge. Together they control about 40% of the North American newsprint market.

The merger is based on the continuing operation of their current assets with no further capacity closures for this year, so the likelihood is that newsprint prices will probably continue to fall for the rest of this year, but once the merger is fully in place the manufacturers will again have the other hand in being able to use capacity to determine pricing.

RISI, a leading forest industry forecaster, said in a recent report, “The inability to reduce capacity will prevent the two companies from playing a leadership role in arresting the deteriorating supply/demand balance in 2007. In addition, it increases the possibility that other producers’ highest-cost newsprint mills that have benefited from Abitibi-Consolidated’s and Bowater’s past efforts to balance the market, will not survive.”

So short-term, publishers can expect another year of falling prices. But in 2008 the battle rejoins. “Consolidation of the North American newsprint industry will prove to have a positive impact, creating a leaner, more-efficient manufacturing platform over the long term and the merger of Abitibi-Consolidated and Bowater is another step in that direction. However, any short term benefits will remain unrealized as the North American market balance deteriorates and profitability for newsprint producers remains elusive in 2007.”

The pricing history between producer and consumer is full of hills and valleys. In 1996 newsprint hit a high of $750 with some publishers said to have signed contracts at close to $900 for fear prices would go higher. Six years later it hit a low of $425/tonne. Now some 10 years later it is in retreat from 50% plus increases.

Publishers usually stock around 40 days of newsprint. With those low prices in 2002 they were running all over town renting warehouses anywhere they could so they could increase their inventory to around four or five months supply. With most predictions saying 2007 will see lower pricing but in 2008 it will be on the up side again don’t be surprised if publishers this year copy their 2002 escapades.

What both sides really need is some sort of arrangement that flattens the hills and valleys to a plain. They both need stable pricing that the consumer can absorb and on which the producer can make a determined profit. There was much talk of publishers and newsprint producers getting together 10 years ago when the publishers were really bleeding, but as the pricing started to come down the stability talks became a distant memory. 

Peter Appert of Goldman Sachs recently wrote in a report the importance of such stability, “Our sense is that both publishers and newsprint producers would like to see greater stability in newsprint prices, but neither side knows how to achieve this goal. For publishers, the tug-of-war between the greater long-term cost viability through more stable prices versus the short-term earnings benefit of cyclical depressed paper prices always seems to favor short-term earnings.”

And there’s the perennial problem – short-term vs long-term. It’s really a matter of how much guts publishers and public companies have these days in telling shareholders that their best interests are really served by long-term decisions and not short-term.

Or put another way, newspaper managers need to return to managing instead of keeping an eye on Wall Street. In the end, Wall Street will benefit, too.

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