Norske Plans A Big Newsprint Production Cut In Europe and AbitibiBowater Announces Huge Cuts in North America And There’s Consolidation Galore -- The Perfect Recipe For Higher Newsprint Prices

Philip M. Stone December 6, 2007

One saving grace for North American newspapers is that newsprint pricing actually dipped in 2007 but those days are now over. Price increases have already been announced and production is being cut on both sides of the Atlantic.

In Europe, Norske Skog, had previously announced it was going to reduce European newsprint capacity by 200,000 tonnes in 2008 but this week it said it is now looking at perhaps doubling that to around 400,000 tonnes.

And across the Atlantic AbitibiBowater says it is going to close down several mills, reducing its newsprint and commercial-printing paper production capacity by about 1 million tonnes a year during Q1, 2008.

In September Finland’s Stora Enso got out of North American production by selling its operations for $2.5 billion to NewPage Holding, and now NewPage says it is holding a “strategic review” of all its assets with a view to closing down less efficient mills and that probably will include an old mill producing newsprint. And Catalyst Paper Corp announced last week it was extending the shutdown of a paper machine at its Elk Falls newsprint plant until the end of March.

While all of this has been going on North American publishers have been busy cutting down their newsprint usage – narrowing the width of pages, using thinner paper, cutting out unprofitable circulation but they have also been hit by unwanted economies of less advertising and therefore less editorial space, too, Put it all together and in October they used 11.4% less newsprint than the year earlier and for the first 10 months of this year the usage is down 10.1%, according to the Pulp and Paper Products Council.

Those numbers translated into lower newsprint pricing, -- around $560 a tonne – kept somewhat stable because the likes of Abitibi and Bowater were concentrating on bringing their two companies together for most of 2007 and they did not want to cause any pricing concerns with regulators. But now the merger is complete and AbitibiBowater has announced a whopping $60 a tonne increase, to be phased in during Q1 at $20 a tonne per month.  Will it stick?

Newsprint producers tried imposing a $25 a tonne increase in September and for all their trouble they ended up with prices slipping by $10 a tonne. But they tried again in November and this time it seems to be holding. CIBC World Markets, a leading investment bank to paper and forest products companies, said in a November report that the drop in newsprint usage and the rising Canadian dollar means that many Canadian mills are operating at extremely low margins, if not breakeven. It said things won’t get better until “aggressive supply discipline” takes hold.

It’s not that suppliers haven’t tried to limit production to increase prices, but customers have also been aggressive in reducing demand. Some 3.7 million tonnes of capacity has disappeared from North American production during the past seven years but newsprint consumption declined by 3.1 million tonnes – about 5% a year.

One way the North American producers have been trying to make up for the North American losses is by exporting to Europe where newsprint is running at about $200 a tonne higher. Shipments to Europe are up by more than 50% this year and they are having their effect on European producers. Norske Skog, really feeling the heat, says it is looking to reduce newsprint production by 400,000 tonnes, and Stora Enso has announced plans to cut its magazine paper and newsprint capacity by 500,000 tonnes of paper annually.

Norske shares have been on a  roller-coaster recently, getting a 13.5% one-day increase when AbitibiBowater announced its production cuts, only to drop more than 10% a couple of days later as analysts had second thoughts on what it all means for the company. Norske Skog's Chief Executive Christian Rynning-Toennesen said the Canadian production decreases “will decrease exports to Europe,” but the more analysts thought about it  the less they believed  that Norske Skog alone could stop the overcapacity rot.  

A Credit Suisse report said, “'Newsprint market fundamentals are bleak. European prices are high in a global perspective and we believe will fall by 6 pct in 2008 contracts.”

The $200 a tonne difference between Europe and the US cannot continue for too long, according to analysts. So how much does Europe go down and how much does the US go up? Something has to give with most agreeing with Citigroup that with global capacity forecast to fall 3% in 2008, “We find it difficult for the new US price to remain nearly $200 a tonne below levels in Europe.”

And back in North America analysts are also divided on AbitibiBowater’s capacity announcement, some thinking it should be enough and upgrading the shares while others think more needs to be done and have downgraded the shares.

RBC Dominion Securities has raised the company to “outperform” from “market perform” saying it believes the bottom in pricing has been reached and that removing some 5%  capacity will restore balance to the market in the near-term. But D.A. Davidson reduced the share from “neutral” to “underperform”. The brokerage said in a statement, “We have long been cautious on newsprint due to the undeniable secular decline in demand, and believe the recent drop in AbitibiBowater’s share price reflects the potential for refinancing difficulties.”

So the newsprint suppliers have their problems, but let’s not forget so do their customers. With US newspaper print advertising down some 9% in Q3 alone, with major US automakers saying they are cutting back production and the real estate credit problems still very much in play, revenues remain under pressure.

Of course less advertising means less newsprint need, but that is not exactly how publishers would like to resolve that particular cost center!

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