Newsprint Savings Were The One Joy Among All Those Bleak Q1 Newspaper Earnings Reports As Lower Consumption Bites Into Cost Along With Softer Pricing

Philip M. Stone April 25, 2007

Narrowing pages, restricting circulation areas, reducing bulk sales, banning pages of financial tables and TV listings to the Internet, and generally falling circulations have bit strongly into US newsprint consumption, with those savings about the only bright spot in newspaper Q1 earnings reports.

Newsprint consumption in North America this year is down 12% over the same period last year, according to Bowater, and prices are flat to down a bit. And while that’s good news for newspapers, for the suppliers the hard times have become even harder. It’s not enough that consumption is down, but the cost of buying in old newsprint for recycling has gone up 35% since December – one main reason being those Chinese cargo ships coming to American West Coast ports laden with their low-cost treasures are going back to the mainland filled with old newsprint.

As a result of all the price pressures, two of the largest producers, Abitibi-Consolidated and Bowater, are merging, producers are still laying off workers and idling mills, and the financial losses are horrible. The big question for the newspaper industry is how long it will take Abitibi and Bowater, together responsible for about half the North American newsprint production, to get their consolidated marketing plan together to restrict supply even more to push prices up.

So, what’s actually going on out there with consumption?

• Media General owns three metropolitan newspapers, 22 daily community newspapers, and more than 150 weekly newspapers and other publications, in addition to its television and online properties. Overall the company shocked Wall Street by reporting a Q1 loss with the publishing division down 31.3% year-on-year, but it was almost all on the revenue side. Expenses were pretty much flat compared to last year, helped by “a 12% decline in newsprint expense, mostly the result of lower consumption, which decreased 10.7%. The average price per tonne of $576 was down $6 from last year.”
• The Journal-Register Company, owner of 27 daily newspapers and 327 non-dailies, said its newsprint expense in Q1 declined 4%, which was a combination of the unit price actually increasing 4% but consumption down 6%.
• At Dow Jones, the narrowing of The Wall Street Journal from 15 inches to 12 inches (5.9 cm to 4.7cm) has already produced $5 million newsprint savings, according to CEO Rich Zannino. He is looking for savings around $20 million by the end of the year.
• Gannett, the country’s largest newspaper publisher, reported “a 0.2% increase in newsprint expense. The slight increase in newsprint expense reflected higher newsprint prices that were offset by substantially lower usage.”
• The New York Times Company reported, “Newsprint expenses decreased 8.5%, with 6.7% of the decrease resulting from lower consumption and 1.8% from lower prices.”
• Tribune reported, without giving specifics, “decreases in newsprint compensation”. Probably much of that has to do with a reduction in consumption as it reported circulation revenue down 7% for the quarter, with Sundays hurting the most with a 3% circulation decline.

Throw all of that together and there are some publishing groups who said that per tonne they paid less, some said they paid more, but all said they are using much less. Newsprint and its transportation is said to average about 17% of a newspaper’s cost, but it is labor that costs the most and that’s why the likes of the Chicago Tribune and The Los Angeles Times are looking at another 5% reduction each in staff.

The 2006 list price for paper was $668 per tonne, but towards the end of the year prices were being quoted in the $600 per tonne area. Only Media General gave an average figure for its spend -- $586 per tonne – and with the others it probably all depends on how much they were storing – usually publishers hold around 40 days of supply – and whether they hedged prices.

According to Barron’s, US newsprint consumption dropped 7% in 2006, although demand grew globally by 1%. It is outside of North America that newsprint producers are now looking to increase sales with Citibank forecasting a global 7% increase by 2008. Bowater says newsprint demand for this year in North America is down 12% over the same period last year which could well mean the drop in North American consumption this year is going to be far greater than most analysts have figured.

Earlier this year Abitibi-Consolidated and Bowater, North America’s largest newsprint providers, announced they were merging. Together they control near to 50% of the North American newsprint market. The original thought was they would be so busy with the merger that they want completed this year that production would remain stable, especially since the companies don’t want to upset the unions who could be a stong vocal force against the merger. But Q1 results were so bad that already Bowater announced this month it had temporarily laid off 37 workers at its Gatineau, Canada, newsprint mill with probably more job losses to come.

The reason why was pretty clear when Bowater announced that its Q1 operating income was expected to be $15 million to $20 million below Q4, 2006, results. “In the first quarter the company has experienced significant recycled paper fiber cost pressures, with the cost for old newsprint increasing by approximately 35% since December. In light of weak newsprint demand in North America, which has declined by 12% year-to-date compared to 2006, the company has curtailed production of newsprint and specialty papers at its Gatineau, Quebec, mill and selected other machines that are heavily dependent upon recycled fiber.”

CEO and Chairman David J. Paterson issued a veiled warning to the newspaper industry. “While North American newsprint demand…continues to be weak, we will remain strictly focused on containing controllable costs and matching our production to demand.” And the more they match, even constrict, the higher the price.

Although there have been plenty of stories about how newspaper shares have sunk in the past few years, the shares of newsprint producers have really been in free-fall. According to Barron’s, Bowater shares have fallen 61% since their 1999 peak, and Abitibi shares have fallen 89% from the 1997 peak. The merged companies will be looking for at least $250 million in savings.

Publishers may be hoping that the import of Chinese newsprint may keep the merged company at bay, but the US Commerce Department has just sprung a surprise that could possibly burn the Chinese solution. In an about-face, The US has imposed duties on the import of Chinese coated free sheet paper. If coated free paper today, could it be newsprint tomorrow?

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