No Matter How Much Newsprint Capacity The Producers Have Withdrawn The Price Still Goes Down – Now Below $450 A Tonne!

Philip M. Stone September 3, 2009 Follow on Twitter

North American Newsprint producers already hit with a 30% drop in demand this year and European newsprint producers seeing a 16% decline believe they may just have withheld enough capacity to finally hold prices steady for the rest of the year and even see them edge up a bit. But the North American marketplace tells a different story with the price continuing to fall and it now stands at the yearly low of $445.89, according to FOEX Indexes.

It seems no matter how much the producers cut newsprint capacity, newspapers continue using less and less product. From the beginning of the year when newsprint was at $749.63 a tonne until this week the price has dropped a whopping 40%.

No wonder the newsprint operators continue to report huge losses. Catalyst Paper Corporation, for instance, reported a $1 million Q2 loss while in Q1 it had net earnings of $21 million. “We are seeing a deep cyclical downturn in our industry as well as demand shifts and structural changes that have a lasting impact on our business model,” said Richard Garnea, President and CEO. In Catalyst’s case that means a 29% decline year-on-year for newsprint.

And as if buyer decline wasn’t bad enough, Canadian producers like Catalyst in particular are battling a strong Canadian dollar that has appreciated this year 10% against the US dollar, the currency used for sales.   

Newspapers, meanwhile, continue to make a science on how to use less and less newsprint – cutting out unprofitable delivery areas, cutting out editorial sections, reducing paper size and the like -- and add that to the pages that advertisers are not using and it’s little wonder that most North American newspapers in Q2 reported better than expected results – still huge revenue downturns but earnings not as bad as expected because costs, human and otherwise,  have been cut so savagely.  Lee Enterprises, for instance, said its newsprint and ink costs dropped 41% in Q2 compared to the year earlier. At E.W. Scripps it was 37%.

So the producers have been doing about the only thing they know to do to find a bottom for falling prices and get them moving up again and that it is to withhold capacity. The Canadian Scotia Capital brokerage estimates that that Canadian producers have withheld some 750,000 tonnes of capacity in Q3 alone, yet still the price continues down.

European newsprint demand in July was down 96,000 tonnes (11%) in July compared to the year before but there was a bright spot – exports to Asia and Turkey saw a 6.9% improvement. Norske Skog says it has cut permanently its newsprint capacity by 23% in less than two years. “The newsprint sector probably needs cuts of 15 – 20% compared to 2007, and it remains to be seen how much our competitors are doing,” said Chief Executive Christian Rynning-Toennesen.

North American newsprint producers tried to raise prices by $50 in August but the effort came to nothing when AbitibiBowater, in bankruptcy, refused to go along. Analyst Dave Hillman of the Gerson Lehman Group believes there is still too much capacity out there for prices to rise. “If price increases are to be successfully implemented then a number of additional paper machines must be shut down,” he said. “There must be a favorable balance between supply and demand and right now it is very difficult for producers to try and get ahead of declining demand.”

And the prognosis for producers is not very encouraging. In a recent report RISI, which specializes in reporting on the forest industry, said that newsprint usage will never return to pre-recession times. “Newsprint demand growth will moderate in developing countries like China as consumers and advertisers turn to the Internet for future information and advertising needs. When combined with the collapse of printed newspapers in North American and Europe, world newsprint demand will never return to previous levels,” RISI said in an August report.

Which is probably why producers are taking an ever harder line with employees as they try to get their cost structure in line with new realities. Thus Tembec actually locked out employees at its Pine Falls newsprint plant this week after failing to come up with what it called an acceptable collective bargaining agreement. And with newsprint prices as they are the company will probably be in no hurry to start it up again.

"The newsprint industry is in the most challenging period it has ever faced. While current pricing levels and the higher valued Canadian dollar have aggravated this situation, the principal and critical issue is the dramatic oversupply of newsprint relative to current and foreseen demand," said Chris Black, Executive Vice President and President of the Paper Group. "Simply put, there will be additional mill closures and sites must be cost competitive in order to survive." No mincing of words there.

And the prognosis for increased newsprint usage? Newspapers probably figure the classifieds are gone. Once the recession is behind will real estate, auto and retail display come back to newsprint? At what level?  Publishers, having found they can give their readers far less editorial then they were getting before, probably won’t make any great efforts to ramp up editorial again, so if there is to be increased newsprint usage it will probably come from the advertising side.

Which probably reinforces the belief that newsprint usage is never again going to return to those times of just a few years back.

See also in ftm Knowledge

The Paper Its Printed On

Newsprint, printing presses and page design are the basic components of the print media. The ftm Knowledge file tells the story. Includes 21 articles. 47 pages PDF (November 2008)

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