Newspapers Trim Newsprint Usage So Newsprint Producers Cut Production And In This Classic Case of Supply And Demand It Looks Like Price Increases Up To 30% May Stick this Year

Philip M. Stone July 3, 2008

Usually when advertising takes a downturn newspaper suppliers are understanding and hold their price line, they may even reduce pricing a bit. So now that newspapers are going through one of the worst advertising cutbacks ever, what do the newsprint producers do? Why, naturally, they’re piling on big price increases backed by a drop in supply leaving publishers squirming between a rock and a hard place.

If ever there was a love-hate marriage within an industry it has to be newspapers and their newsprint suppliers. Look at a graph of newsprint pricing over the past 20 years and it is one of huge mountains and deep valleys. There has been very little price stability, one side always looking for the weakness in the other to get a better deal. In years gone by newspapers saw newsprint producers as the villains attacking very lucrative margins, but today it is far more serious as those margins seriously dwindle. 

Just look at the pricing over the past 12 years or so. In 1996 newsprint hit a high of $750 with some publishers then said to have paid closer to $900 fearful the price would go higher. This was a wakeup call and publishers then started the process of seriously reducing the news hole, narrowing column widths and the like – what is being done today is not new, it is a continuation of old tried policies. Publishers at that time also started saying out loud that maybe there should be some sort of price stability pact between newsprint producers and publishers.

But no sooner was that being talked about than the price started softening and in proportional ratio so did publisher talk of price stability. Within six years newsprint prices had sunk to $425/tonne and it was the producers talking out loud about having some sort of price stability.

About a year ago the price was around $570 - $575, close to the median. Peter Appert, then media analyst at Goldman Sachs explained, “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 Wednesday Goldman Sachs’ Paper and Forest Products research team, including Appert, came to the conclusion that for now at least the producers, by cutting back supply as much as they have, are now winning the day in spite of everything newspapers have been doing to reduce newsprint consumption. Their pricing conclusion – by the end of this year prices will have jumped 30%. And this is not so short-term – they predict high pricing will continue through all of 2009.

AbitibiBowater CEO David Paterson said at his company’s annual meeting last month that he expected North American demand for newsprint to drop some 8 – 10% this year, similar to last year’s percentage drop, but even with that usage reduction producers are pushing through $20 a tonne increase this month and also in August that will bring prices to around the $750 mark -- pricing most analysts seem to believe will stick and publishers by their actions seem to agree, too. The big question then becomes what can the producers get away with in the fourth quarter, and the belief is prices will end the year not far from the $790 mark.  Compare that to the $590 a tonne paid during 2007’s deepest valley!

The bottom line, according to AbitibiBowater’s Paterson, “We've just got to make our newsprint business profitable ... or it'll just go out of business." And it’s not that he is being greedy, his company announced a first-quarter loss of $215 million or $3.74 a share on sales totaling $1.7 billion. The company said US newsprint losses were reduced only slightly and there will be more mill conversions to higher-grade, higher profit paper.

Seen from a publisher or editor’s viewpoint, however, the situation is quite different. Dale Bryant of Silicon Valley (yes, that Silicon Valley) Community Newspapers wrote, “Even in a difficult economy, the tides have been mostly calm and mostly predictable. What we didn't count on was a rogue wave out of nowhere that nearly knocked us off our feet.  That wave is the manifestation of soaring newsprint costs…  In response to rising costs, newspapers have cut back on the use of newsprint, trimming the size of papers as well as turning to the Internet. That has caused prices to go even higher.”

So it’s no wonder that just this week, for instance, the Review Atlas in Monmouth, Illinois, announced it was abolishing its Monday paper and would now publish Tuesday – Saturday. The publisher blamed rising newsprint costs (up 45% in just 12 months) and declining ad revenue (down 12.9% from last year). . It is the second Gatehouse Media newspaper in Illinois to make that decision.

And there seems to be a trend across the US that if the Monday newspaper doesn’t disappear then at least the Monday and Tuesday editions are having their pages cut way back.

Other newspapers continue page size reductions. The Tyler Morning Telegraph (Texas) said it expected a $600,000 increase in newsprint costs so it was trimming its page size hoping to save around 25% of that extra cost.  Publisher Nelson Clyde IV said, “Reducing the width of the newspaper is an evolving trend taking place at newspapers across the country.”

Many newspapers seem to be attacking free-standing business sections; it’s not enough that share price listings have been mostly banished to the Internet, now business news is being pared way back, partly because advertisers for some reason seem to shy away from those pages.

Just how much more can publishers cut back? The Pulp and Paper Council’s May report said US newspaper newsprint consumption was down 16% from a year earlier and that for the first five months of the year consumption was down 14%. Yet for all that the law of supply (mills operating at about 90% of capacity) and demand (full year decline expected to be at least 10%) indicates that the upper hand is with the suppliers, and getting stronger.

Oh, and if newsprint price hikes aren’t enough, Flint Ink has announced a surcharge on news inks because of what it calls “rapidly escalating raw material, energy and freight costs.” The surcharge is in addition to recent price increases.

When it rains, it pours!