The More Newsprint Producers Raise Their Prices The More Newspaper Publishers Cut Back On Consumption – Where Will It End?

Philip M. Stone November 13, 2008

For newspapers, newsprint is a cost center, not a profit center. For the paper industry, on the other hand, newsprint has been a financial bust for the past few years and it has taken a long time to finally squeeze out capacity so it could implement, for instance, this year in the US a $20 a month increase. But for a newspaper industry with huge financial problems of its own, those newsprint increases couldn’t have come at a worse time, so now newspapers are racing one another to come out with additional ways to reduce usage.

Newsprint makes up around 20% of an American newspaper’s cost  -- a considerably lower percentage than the world’s two largest circulation nations,  China and India  where it can be anywhere from 60% up, basically because of the difference in labor costs

US newsprint pricing is currently at  a 13-year high with 30lb paper now at  $740 a tonne – that compares with $567 at the beginning of the year, so that’s a 30% increase. And for newspapers like the New York Times that switched to lighter 27 pound paper to save money, well, the price of that is $790 a ton. If you want to keep things simple, it’s been basically a $20 a month increase this year and AbitibiBowater said just last week it still plans a $20 increase for December. 

This is the second of a two-part series discussing how newsprint price hikes this year are affecting newspapers. Wednesday’s article discussed the effect on China and India, the world’s two largest newspaper growth markets.  

So let’s take a look at some numbers and statements released recently by three newsprint manufacturers. AbitibiBowater, the world’s largest newsprint maker, said just last week that its Q3 quarterly loss increased from Q2. It had actually improved its sales by some 2% from the quarter before but because of costs for closing mills and the like the 3rd quarter loss grew to $302 million, compared to the second quarter loss of $252 million.

Wall Street’s view on that was to price the shares down by more than 18% on the day those figures were announced – they have lost around 90% on the year. Canada’s Mail & Globe newspaper had reported a week before those results were released, “AbitibiBowater is in a pickle, with a $347-million (U.S.) term loan due in March, 2009. Refinancing that debt will be expensive, if it's even possible.”

The company announced a couple of weeks ago it plans to sell three forest areas in Quebec totaling around 190,000 acres or a timber inventory. That sounds a bit like having to sell the furniture to save the house. Wall Street liked that so much that the shares rose 10% on the day, but they have since fallen back even further. 

And then there is Nordic paper maker Stora Enso that for its third quarter lost €119 million ($153 million) still, it was a considerable improvement over the €274 million ($250 million) loss over the same period last year. The company has been actively cutting capital investment, closing mills and reducing workforce and its net sales actually dropped a bit. 

And how does it see the future? “We will continue to defend our margins and safeguard our price levels and earnings capability when necessary through production curtailments. In some segments, such as newsprint and magazine paper, we have informed our customers that we intend to increase prices in early 2009, despite the softening macroeconomic outlook.”

And then there’s Norske Skog that announced it is raising European newsprint prices by 15 – 20% and what’s more it says it has already concluded deals with customers at that higher pricing.  It said newsprint pricing was going up by $100 a tonne in most European markets and by $135 in the UK. European newsprint pricing has really been rather soft in recent years – last month it was around $675 a tonne which is far less than, for instance, for China and India, and less than the $740 a tonne in the US. With the newly announced increases European and US pricing will be quite similar.

The rhetoric from Norske Skog indicates they don’t plan to take any prisoners.  Their spokesman told Reuters, “From January next year we will not deliver on old terms. Customers that are not willing to meet us on the new terms will not get paper delivered.” The company eliminated about 260,000 tonnes of newsprint in Europe this year and the spokesman said, “If we need to take out more capacity to support these prices, we can do that and are willing to do that.”

And why do they feel they have to do this? Because they claim that in the past five years their costs have increased 35% while paper prices remained stable.

So, what you really have on an North American and European scale is a newsprint industry that has been in crisis for several years; it is getting its financial act together by pulling excess capacity out of the market, firming and increasing prices but all of this is happening at exactly the same time that newspapers are going through their own financial crisis. It’s a great example of really rotten timing, but something that newsprint had to do because for the producers, like the newspapers, it is all about survival, too. 

About the only way newspaper publishers know to fight back against higher prices is to use less product hoping that by the end of the day their cost is kept somewhat stable. Last month’s ABC circulation numbers saw most newspapers reporting sharp falls, but many of them said a lot of those losses were of their own making – they had cut back on bulk sales, they reduced distribution areas – and combine that with banishing financial tables to the Internet, even TV listings, just plain cutting back on sections and pages, and the overall North American result through September is, according to the Pulp and Paper Products Council based in Montreal, about a 15% cutback in newsprint usage.

But it’s a never-ending battle. The more newspapers cut back newsprint usage, the less newsprint producers will put on the market in order to solidify prices. Which is why the CEO of Abitibi Bowater, David Paterson, warned, “Based on customer input, we expect a further decline in North American newsprint consumption. In light of these developments, we plan to reduce capacity in 2009 by taking 50,000 metric tons of downtime monthly.''

Which in turn is why, in this advertising recession,  there are companies like Tribune reducing the usual 60:40 ratio between editorial space and advertising down to 50:50. No doubt others will or are following and since there is little evidence of anything getting better in the next 12 months perhaps that ratio will get tightened even more.

Some daily newspapers have already started cutting away on publication days – for those of you with crystal balls just how many newspapers will still be printed on Mondays say five years from now? How many five or six-day-a-week newspapers will be down to three or two days a week? How many will still be printed?