US Newspapers In 2008 Reduced Newsprint Consumption By One Million Tonnes, But Even So Newsprint Pricing Remains Near December Highs

Philip M. Stone February 17, 2009

The grizzly war between supply and demand has never been more volatile than that between newspapers and newsprint producers. The more newspapers reduce usage the more capacity the producers take out of the market and the higher prices go. And although February 2009 newsprint pricing is now some 5% below the December high the producers seem to be holding the line, and probably will continue doing so for some months to come.

Newspapers have tried just about everything to lower consumption – they’ve cut down the size of the newspaper, they’ve curtailed circulation in unprofitable areas, they’ve reduced sections, even abandoned some print days and in a very backhanded way the huge drops in display and classified advertising has translated into needing less newsprint, too. When all was said and done in 2008 US daily newspapers used 1 million less tonnes of newsprint than they did the year before, that’s a considerable 16.3% reduction.

Yet for all of that, prices hit highs in December at $758  for standard 30lb newsprint and into the first week of February it had fallen only slightly to $733, down only 3.3%, but in the second week it dropped another 2% to $720, according to FOEX Industries. The reason that prices are still near the 2008 highs is that the more newspapers find ways to cut down on usage the more producers restrict supply and last year was their turning point in getting supply down enough to where prices could shoot up – 30lb paper started January, 2008 at $567 and hit a high the week of December 9 at $758 – that’s a 34%  increase.

The newsprint industry expects the North American newsprint usage reduction this year to be as much if not more than in 2008. Paul Leclair, the chief economist for the Pulp and Paper Council (PAPC) in Montreal told ftm, “The advertising situation is extremely difficult right now with home sales, car sales and job creation in the dumps. Add to that struggling retailers and the prospects for ad-driven newsprint consumption dims. The other, more structural reasons for the decline (basis weight reduction, web-width reduction, circulation declines etc.) are also expected to continue in 2009.”

And so how much are newsprint manufacturers cutting back production? Adriana Perez, a PAPC analyst says, “Newsprint production in North America fell 8% in 2008 over 2007 falling 5.6% in the US alone.”

The announced newsprint curtailment for the first half of this year is already staggering. AbitibiBowater is reducing capacity by 830,000 tonnes with more than 70% of that slated for Q1. Then you have the smaller manufacturers like Kruger (25,000 tonnes during the first half of the year), Catalyst (55,000 tonnes in Q1), and across the Atlantic the big Nordic mills are talking about reducing capacity by around 1 million tonnes over the next two years. Newsprint consumption in Europe dropped by 3% last year according to Holmen, although some developed markets. particularly the UK, were far lower.

Catalyst President and CEO Richard Garneau explained the situation succinctly, “The slowdown in newspaper advertising, along with the restructuring by publishers in key paper markets, is unprecedented and conditions are expected to remain very challenging in the foreseeable future.”

The story at AbitibiBowater, North America’s largest newsprint manufacturer, seems to go from bad to worse. Two years ago on the day when Abitibi and Bowater announced they were merging investors bid up Bowater's stock 23.9% to $27.44 per share on the New York Stock Exchange  and Abitibi surged more than 26% in value to $3.33 per share.  Can you believe that the combined company’s shares closed on the New York Stock Exchange December 19 at the all-time low of just 24 cents? They have inched up since to around 60 cents but the New York Stock Exchange has notified the company that it needs to get that price above $1 or face being delisted.

The company is busy selling off assets – and the company has warned that its finances are “severely restrained” because of upcoming debt payments it is struggling to pay. Its debt is classed as really low grade junk (and you thought junk was just plain  junk!) The vultures are also circling with one US hedge fund upping its ownership to 14.8%. The company is trying  whatever it can to handle its $6 billion debt including offering to exchange $1.8 billion of unsecured debt for secured debt. The swap would push back the maturity, albeit at a higher rate of interest, but with the word “bankruptcy” being bandied around as much as it is investors may take the swap  because if there was a bankruptcy at least that debt would be secured instead of unsecured as now.

Having shares worth less than $1 is yet another good example of how both producers and publishers are suffering. AbitibiBowater now shares a similar bed as  McClatchy, the third largest US newspaper chains, that has also been told by the New York Stock Exchange to get its price above $1 or suffer the consequences.

And that goes to show there are no real villains in what is going on. Almost all newsprint producers are showing big losses, almost all newspapers are showing big revenue drops with many having their debt ratings precipitously lowered (even Gannett is just one step above junk). So it’s certainly not that the producers are gouging the users and it certainly is not the users shedding crocodile tears that they can’t afford the high prices. And both desperately need one another to survive.

In Europe, Norske Skog leads the way in trying to get far higher prices. Last November it had announced 15% increases for this year, and although the company  declines today to give the actual prices it is signing business at reports are it is in the 8- 10% increase range. “We closed 13% of our European newsprint capacity in 2008 and are therefore much better prepared for reduced demand in 2009 than what the situation would have been without measures taken in 2008,” said Tom Brat lie, vice president of corporate  affairs.

The company has been talking tough.Their spokesman had made it clear that this year’s terms will not be the same as in the past. “Customers that are not willing to meet us on the new terms will not get paper delivered,” he had rather bluntly said. The company eliminated about 260,000 tonnes of newsprint during 2008 and it plans another 200,000 tonnes reduction this year. The spokesman said back in November, “If we need to take out more capacity to support these prices, we can do that and are willing to do that.”  Hardball, European style!

Newspapers can attest that shrinking their physical size does result in considerable newsprint savings. Canada’s Globe and Mail  reports that when the newspaper was  redesigned in April 2007, it lopped off 1.5 inches from its page width and that turned into $2.3 million in newsprint savings for the year. “We saw cost savings immediately by just reducing the size of the page,” says publisher and CEO Phillip Crawley. “It makes the business more efficient in its use of newsprint because newsprint is a very big chunk of our costs.”

So as producers continue to contract supply to keep prices high what more can newspapers do? They’ve already shrunk the page size, but, you know what, if a good idea works once, then why not twice? The Globe and Mail has announced another redesign for 2010 when it is to shear off another inch of width plus 1.75 inches in depth. “Because newsprint is continuing to be more expensive, and revenues continue to be depressed by global economic issues, more and more papers are going to be looking for those solutions,” Crawley says. “It is a worldwide trend that is gathering taste in recent years.”

Makes one wonder how long it will take until the size of most newspapers in the US is reduced to letter size and in Europe to A4?

And in the ultimate irony Google is buying a newsprint mill – no, not to produce newsprint but rather plans to transform the Finnish mill that Stora Enso has closed into a data center.