The Future Is Foggy for Newsprint Pricing
Posted: 5/24/2011  |  By: Gretchen A. Peck

"Shared sacrifice" is the latest political buzz phrase making the media rounds. Economic strife abounds in the U.S. and elsewhere, leading politicians and citizens alike to ponder, "If we all do a little; if we all do our part, maybe - just maybe - we can bring our economy back around."

It's a theme - this so-called "shared sacrifice" - that's particularly apropos to the paper, printing, and publishing verticals, as each segment faces great challenges, including the rising cost of raw materials and energy, the influence of digital media, and the decreasing demand for paper, quality print, and even, sadly, the written word. The codependent nature of these allied industries is forcing each to take a hard-line look at how to be more lean and stealthy, while at the same time working hand-in-hand to control one of the greatest costs of publication - paper.

Newsprint: That was then; this is now
"When the market is soft - meaning, there's not a big demand for product - publishers and printers have the upper hand. And the natural inclination is to take the upper hand to the extreme," said Tony Nanna, president/West, McGrann Paper Corporation in Charlotte, N.C. "What we sometimes forget is that the paper producers have to survive, too. We've all seen the decrease in the number of producers. There's a lot of consolidation that continues to happen in our industry, and we've got to find a way to work together to sustain our health."

In other parts of the world-namely, Asia and Europe-newsprint prices have been consistently creeping up. Fortunately, for North American newspaper publishers, the cost-per-ton has remained flat for approximately the past eight months.

"Prices were very high in 2008, and very, very low in 2009. They recovered toward the end of 2009 and through the first half of 2010. And they haven't moved [considerably] since," said John Lafave, senior vice president, pulp and paper sales and marketing, AbitibiBowater, Inc., Montréal.

"Right now in our marketplace - and throughout the paper industry - everything but newsprint has been subjected to an announcement of increases," Nanna said. "Coated? There was an announcement of a $2 per cwt (centum weight) increase, effective in April. Uncoated freesheet - meaning offset and copy paper - as well as supercalender papers? Those commodities went, effective April 1. But our newsprint numbers in the states for the past six months have been at par. Nothing has changed.

"But we're all trying to figure out when it's going to happen, because it will happen," Nanna said. "Will it decrease? No."

Some of the market stressors are obvious - rising energy costs, for example.

"Paper is shipped by truck, by rail, and by intermodal," Nanna said. "Those costs are going up right now. I was in Los Angeles not long ago, and diesel was at $5 per gallon and climbing. Currently, the suppliers are eating these costs, but sooner or later, they're going to have to pass it along to publishers in, at least, the form of a surcharge. A lot of publishers and printers are going to revolt against it, but someone has to pay it. The suppliers have to pass it along to their customers, and in turn, the publishers will have to pass it along to their customers. Things just aren't normal right now, and no one has the fiscal health to absorb all of these costs and not pass them on. It has to be done."

Another contributing factor to the precarious position paper manufacturers find themselves in is scarcity of ONP - old newspapers that have already been printed, read, and discarded/recycled by the consumer - essential to newsprint production.

Lafave described the "shrinking basket" of North American consumption: "North America consumed 13 million tons (of newspaper) in 2000, but only 5.4 million tons in 2010. And when that basket shrinks - and there is far less ONP - the price of recovered fiber goes up dramatically. It's putting incredible pressures on those relying on it.

And not only has the cost of ONP per ton gone up, but the yield has gone down as we've moved to single-stream collection," Lafave said, referring to what is more commonly called comingled recycling, in which all types of recycled materials are collected and processed together, in a "single stream."

"So there's an additional cost, as you're getting less actual fiber out of your ton of ONP. It's got more contaminants or non-fiber in it, because of the single stream," he said.

Mitigating the Risks
Publishers would be well-served to become intimately familiar with the broad-sweeping market trends and predictions, and equally as familiar with individual manufacturers' adaptations.

Under the direction of new President and CEO Richard Garneau, AbitibiBowater, for example, is striving for better profit margins and fiscal health by overhauling its operations, rather than simply ratcheting up prices.

"Our focus is on reducing cost, so we're looking at our mills differently than we have in the past," Lafave said.

AbitibiBowater's operations include 18 pulp and paper mills and 24 wood-products facilities across Canada, the United States, and South Korea. On Feb. 14, 2011, the company announced the permanent closure of its paper machine at Coosa Pines, Ala.

"We've taken a lot of capacity out, but still, the paper that we're running - we believe it to be produced at some of the lowest-cost mills in North America with good safety records. Low cost mills with strong safety records are a good combination, because safety is among our core values," Lafave said.

A discerning operational restructuring has also enabled AbitibiBowater to make new technological investments. "As we've taken the highest costs out of our operations, our cost-per-ton continues to drop," Lafave said. "(And) now that we've come through Chapter 11, we can start investing in our more competitive mills."

Nanna is a natural proponent of merchant-publisher partnerships, but notes that having a partner of McGrann's ilk can be particularly valuable to publishers in these tumultuous times.

"(As a merchant), I would buy your product and have it shipped, by rail, to my warehouse. I, in turn, deliver it to you, just in time. So, instead of the publisher paying for [newsprint] up front - because the mill would invoice the publisher the minute it's shipped - we take on the billing. We buy the paper from the supplier; we bring it to our floor. We don't inventory it until you need it. And, often, a lot of our customers will take the product from our delivery truck and go right on press with it," Nanna said.

"There's no carrying of any inventory. Years ago, publishers would have inventory of up to 30 days worth of newsprint. They're not doing that today. Even if you have 15 days worth of supply on hand, that represents money that's tied up," Nanna said. "We buy so much paper that I'm able to offer the same price from my floor that a publisher could get if they bought direct from the manufacturer. ... I'm able to negotiate pricing based on my own portfolio of as much as 360,000 tons each year."

AbitibiBowater's Lafave concurs that small to mid-sized newspaper publishers may find that they can leverage volume buys via a merchant or co-op.

"It tends to be the larger publishers that buy direct and the smaller publishers that opt for the distribution model," he said. "Often, they're not buying full truckloads [of newsprint], so they go to a merchant and buy so many pounds of newsprint, and so many pounds of some other type of paper. Size is usually the determining factor in buying behavior. There are pros and cons to both models - direct and distribution."

Empathy as a Strategy
Perhaps the most important trait publishers and newsprint suppliers can embrace right now is empathy - paper suppliers being empathetic to the well-reported challenges that newspaper publishers face, and publishers reciprocating, but obviously not to either's detriment. As Nanna said, "We're all in this together, and communication is essential. If we can create a market that's cooperative instead of feeling as though we're always at war, we can manage through these uncertain times. For example, if the mills or merchants and publishers can get their heads together and talk about increases in the context of scheduling."

Being a merchant and a distributor, Nanna oftens finds that his role is not merely to manage the supply of paper but, in many respects, to be a mediator. It's his challenging role to not only nurture relationships between mill and publisher. But the position enables him to offer some valuable insight into navigating
pricing increases.

"Perhaps the mill or the merchant says to the publisher, ‘Hey, we need some relief. We need to make money, too. So how do we do this? When is your business season? When is your prime time for revenue during the course of the year? Maybe we can implement an increase then, during those months?'" That would enable the supplier to help offset some of its rising costs, without an untimely and profound impact on the publisher's bottom line, Nanna said.

"One of the things that's pushing cost is the Canadian dollar," John Lafave said. "That has had a very negative impact on Canadian mills. We have Canadian and U.S. mills, but there are some companies that have only Canadian mills, and they're under tremendous pressure. "

"So there's going to come a point where rising chemical costs, shipping costs, energy costs, currency exchange rates, etc. could force pricing up.

For more than 15 years, Gretchen A. Peck has written about the business of publishing, printing and graphic communications. She formerly served as editor-in-chief and editorial director for Book Business and Publishing Executive magazines. Her byline has appeared in more than 50 international magazines, newspapers, and online publications. Peck holds a Master's Degree in writing.