Demand Be Damned

By: Jim Rosenberg

What publishers do in pennies per copy, papermakers can do in dollars per ton: raise prices for a product in declining demand. Luckily for newsprint makers, newspapers aren’t their only customers, and even dailies’ depressed demand appears to be creeping back. Still, the light at the end of the tunnel appears dim.

Alternately blessing and blaming each other, newspapers and newsprint makers are in any event very much dependent upon one another – the latter supplying a suitable and comparatively inexpensive paper grade that constitutes the former’s highest continuing cost after personnel.

The industries have had much in common in recent years. As publishing profits persisted even as circulation continued to decline, albeit slowly, newspaper groups grew through debt-fueled acquisition, and outside investors took interest in troubled titles. A similar consolidation occurred among North American newsprint producers, with the big becoming bigger and a new No. 2 created when an investor bet on a turnaround that never happened.

In the past decade, as technological advances and economic reverses caused their declines to steepen, many newspaper companies had a hard time meeting obligations on billions of dollars of debt. When publishers resorted to selling copies with fewer and smaller pages, and in some cases fewer editions, their problem became their suppliers’ problem.

Along the way, even as they shed inches, pages, sections, reporters, editors and bureaus, newspapers also recaptured part of their losses by hiking per-copy prices. After all, even where more than one newspaper is available, rare is the market with more than one local daily.

Newsprint manufacturers, in contrast, aren’t selling into a local market, much less a retail market. Their price hikes don’t always stick, and even when they do, they are often only partially and gradually implemented. Production curtailments never kept up with drops in demand, and the market was in constant change, showing the same wide swings in the past decade as in the 1990s, ranging from about $430 to $730 per metric ton.

This fall, as the latest newspaper bankruptcies appeared to draw to their conclusions in Chicago and Philadelphia, the two largest North American newsprint companies emerged from bankruptcy protection in Canada and the United States, where both have operations. By late September, a slimmer AbitibiBowater – a product of the merger of two already-swollen companies, Montreal-based Abitibi-Consolidated and Greenville, S.C.-based Bowater – had won reorganization approvals in both countries, and White Birch Paper Co. was sold at auction to one of its principal high-priority debt-holders.

So after similar history and for much the same reason as newspapers, now may be newsprint producers’ turn to get increased prices in spite of decreased demand. But at least no one expects them to compromise their product or put any less into it, except, perhaps, to the extent that customers called for a lighter product – a move that should benefit seller and buyer.

If paper companies’ cost push does manage to maintain higher prices in the absence of appreciable demand pull, it may break the race to the bottom by demand and capacity – but among the obvious perils is that it may also entirely wipe out whatever modest improvement may lie ahead for advertising revenues.

Summer snapshots, fall forecast

Shipments within North America are down from last year, but only very slightly, while exports have remained strong, according to figures form Canada’s Pulp & Paper Products Council. For all their financial woes, North American newspapers appeared to be doing their part. In her August column for E&P Online, business-intelligence solutions provider Forestweb Inc.’s Debra Garcia wrote: “Total U.S. consumption fell 8.1% year-over-year in June, but consumption for all sailies was up 0.8%, according to Salman Partners. CBIC World Markets Inc. noted in a July 28 research note that demand appears to be stabilizing, even though year-to-date consumption through June was down 6.2%.”

Kevin Conley, senior economist at forest products industry information provider RISI, made the following nutshell omparison a few weeks ago: “After collapsing by a staggering 28% in 2009, North American shipments advanced 11% from year-ago levels in the first half of 2010, as producers redirected tonnage to the export markets of Latin America and Asia.”

But Conley also noted that figures for July no longer showed exports compensating for soft domestic demand, which led to a 3% decline in total North American shipments. He continued: “While continued growth in Asian newsprint demand will likely prevent a major collapse in North American shipments to Asia, capacity expansions in China, India and Vietnam will result in some retreat in North American exports to the region in 2011.”

But before then, with North American exports up and imports down, and downtime and closures depleting inventories and pushing mill operating rates well above year-earlier levels (to 89% in the U.S. and 109% in Canada), producers have been encouraged to raise prices.

On the West Coast, a large Canadian producer and a U.S. recycled newsprint supplier set $40-per-ton increases for September.

It’s been a fairly swift climb from a low of $440 per ton for 30-pound (48-gram) newsprint in summer 2009 to $620 a year later, according to data from Forestweb’s Reel Time Report. Garcia noted other sources put prices at just under $600 for 30-pound stock and $635 for 27.7-pound (45-gram) stock.

Newsprint manufacturers must raise prices “just to stay above cost,” says Conley, adding that their “costs have been running high” and are not expected to come down.

RISI’s latest figure for cost benchmarking put the average North American delivered cash cost at $534 per metric ton for the second quarter of 2010. Total cost per ton probably ran to around $650. More recently, AbitibiBowater reported August cash cost was down to $482 per ton.

While the supply-demand balance has managed to support rising prices, especially with exports, Reel Time Report Editor Verle Sutton says “demand will continue to fall in North America,” this year and next. While that ordinarily would weaken prices, he says that remains uncertain. For a longer-term and broader look at the decade ahead, Sutton recently published “Pulp and Printing Papers Forecast 2010-2020: The impact of digital media and e-reading platforms on paper demand,” which can be viewed at http://bit.ly/d3S6Tb.

Conley agrees that newsprint makers “have been controlling their supplier well,” and says supplies will continue to decrease, with any extra continuing to be sold overseas.

But there’s a difference between surviving and thriving – just ask newspapers.

Conley says the AbitibiBowater and White Birch bankruptcies will conclude with further cuts to capacity through closure or, more likely, conversion to other paper grades (see sidebar), and that others may do the same.

Sutton thinks otherwise. “It doesn’t look like anything’s going to happen,” he says. “Abitibi’s not going to do anything else” after having “taken out huge capacity over the years.” In fact, he adds, “Over 50% of the industry in North America was shut down over the last 10 years.”

Some mills are still trying to convert from newsprint production to other paper grades. Sutton cites the Boise Inc. mill in DeRidder, La., (which already has converted one newsprint line to linerboard production) saying it and possibly another may convert in coming months. “If that doesn’t happen, or if the conversions don’t happen quickly, the question is, who’s going to take the downtime?” he asks, noting that Abitibi says it will not.

It may be too soon to know if the same will be true for White Birch, which, like at least one other eastern Canadian producer, has been reluctant to take downtime.

But papermakers will be forced to resort to those further cutbacks and/or conversions, in Conley’s view, because, he says flatly, “The way newsprint consumption is going, there won’t be any recovery.”

 

Lighter weight and waste

In the meantime, many newspapers continue to wrestle with runability and printability issues that come with
moving to 45-gram newsprint. They also continue trimming widths – the Tampa Tribune and Peoria Journal Star among those that most recently joined the slimmer set.

“Most producers find it advantageous to go to the lighter weights,” Sutton says, citing what he calls two key factors: They use less fiber and pay lower freight costs per square foot of paper. The price also “ends up being less” on a square-foot basis.

Producers pass along part of their cost savings “in order to make it attractive to the publishers,” he says. The rolls cost more, but contain more paper for publishers to print more pages. “Now the same thing will go on as producers move to the next lower level,” he says, quickly qualifying the prediction as likely but not a foregone conclusion.

Not surprisingly, “in the last 10 to 15 years, basis weights have fallen from 48.8 grams to 45 grams almost everywhere,” Sutton notes. “Some publishers,” he continues, “have now dropped to 43 grams, but as far as I know that process is not moving quickly yet.”

Noting the Kansas City Star’s and a few others’ move to 26-pound newsprint, consultant and veteran Gannett
production executive Chuck Blevins says, “There’s a point of diminishing returns as sheets gets thinner. I think we’re
revisiting with newsprint some of the problems we had in the ’80s.”

“Basically, it’s going to be harder to have the top-quality newsprint we had when we started printing USA Today,” he concludes, adding that it is difficult, for example, to get colors to snap on lower basis-weight paper.

For the accountants, 45-gram newsprint costs 6.75% more than the 48.8-gram sheet, while the 43-gram product costs 10.4% more than 48.8-gram.

When performing well on press, the lighter-weight newsprint’s higher cost is more than offset by the greater number of pages that can be printed from each roll. Through better practices and/or equipment, some sites’ control of lightweight newsprint reportedly has yielded pressroom performance superior to their earlier experience with 30-pound stock. But when web breaks and show-through or other print problems increase, savings can turn negative.

So as prices go higher, paper gets lighter and newsrooms write tighter, the pressure is on to make every inch of newsprint count. The Cincinnati Enquirer’s operations vice president, David Preisser, could easily have been speaking for production managers everywhere when he remarked, “We continually are looking for ways to reduce waste by improving our start-ups,” preventing paper damage in printing, packaging and distribution, and “accounting for every copy.”

 

Recession, recycling, recovery

Twenty years ago, newspapers, their readers and paper suppliers were well along in what would soon be an early success in raising recycling rates. The value of recovered newspaper fluctuated, but the upward trend continued. With changes in recovery practices and the newsprint business, however, that trend may end.

Mills using some or all recycled fiber have seen the same downtime and closures as virgin-fiber-only mills. Most recently, Catalyst Paper Corp. said it is closing its Paper Recycling Division. Like AbitibiBowater’s two Texas mills before them, Catalyst’s British Columbia paper-recycling operation and the mill it supplied were regarded as high-cost operations. “Modest market recovery will not be enough to stem our losses” at the sites, Catalyst President Kevin J. Clarke said this summer.

“Most of the newsprint machines that have been shut down recently have been recycled machines,” owing to high costs largely related to their fiber source, says Verle Sutton, editor of Forestweb’s Reel Time Report.

Analysts and newspaper printers seem to agree that it’s quality, not availability or price, that makes recycled newsprint objectionable. Still, overseas markets seem happy to take whatever North American publishers aren’t buying.

Whether using only recovered fiber or a mix, recycled newsprint machines – usually the more efficient ones – are still in operation. “There’s a lot of recycling going on,” says Sutton, but for a quality recycled newsprint product, “there simply doesn’t appear to be any hope.” A “cleaner” recycled product, he continues, would require “some technological breakthrough,” however unlikely, allowing waste haulers “to do a better job.”

Poor fiber quality is directly attributable to a “very dramatic trend” toward single-stream recovery, says Sutton, echoing remarks by printers, papermakers and environmentalists.

When municipalities require no separation of recyclables, many paper types wind up together, along with metal, glass and plastic. Beyond separation costs, de-inking headaches and an unsatisfactory fiber mix, the resulting newsprint will contain non-fiber contaminants.

Sixty percent or more of North American newsprint is recovered, but Nicole Rycroft says she hears de-inking facilities must now discard a quarter or more of their recovered paper, with waste and restarts driving up costs. Founder and executive director of Canopy, a non-profit advocating environmentally sound publishing practices, Rycroft says single-stream recovery “undermines the original goal of recycling,” deceives the public, and ultimately “cancels out any benefits.”

Rycroft says she is trying to “set up a leadership working group” of publishers, printers and producers to “engage unicipalities” and begin reversing the move to single-stream collection.

Ironically, Catalyst Paper’s home, British Columbia, is Canada’s lone holdout against single-stream collection. Rycroft notes that although Catalyst closed its Coquitlam recycling operation early this year, it’s still sitting there, even though the company already decommissioned some virgin-fiber capacity. Despite Catalyst’s announcement, she hopes the facility will survive to see the day when it can benefit from pre-sorted old newspaper.

Sutton sees the supply-demand balance still tipped toward shortage and remaining so, saying that although it will cycle up and down, it will do so at a high level. Much of the supply will continue to be exported to Asia, where “demand has increased because of machines that take the recycled fiber,” he says.

R&D vs P&L

Newsprint producers may not face quite the same raw-material cost increases sustained by ink and plate manufacturers, but they feel the pinch for quality recovered fiber, the pressure to protect ancient forests and waterways, and the distinct droop in demand among their largest customers.

As other consumables suppliers invest to make their own and their customers’ operations more efficient, many newsprint producers are barely still in business — with North America’s two largest just emerging from bankruptcies. It’s hard to tell what their research and development looks like. Of several contacted, only one offered any response.

Among industry watchers, Forestweb’s Debra Garcia is brief and blunt: “I’ve heard nothing from any newsprint companies that have invested anything back into their mills. They’re trying to stop losses. They’re shutting down mills.”

She then touches on the related matter of companies converting to other, profitable grades. As she puts it, “They’re getting out of the newsprint business, rather than investing in it.”

But even that — depending on the new product — can require investment in development. It’s a point made by RISI Senior Economist Kevin Conley. “I’m seeing them do a lot of research in shifting into other grades,” he says.

AbitibiBowater, for example, can now produce coated papers, specialty paper, lightweight containerboard and sack kraft paper at a couple of its Southern U.S. mills. Boise Inc. also figured out how to convert a newsprint line at its DeRidder, La., mill to lightweight linerboard production.

Catalyst was able to make “what is really close to SCA grade” through its own R&D efforts, says Verle Sutton, editor of Forestweb’s Reel Time Report, referring to the thin, smooth supercalendered paper — a groundwood grade, like newsprint — used for some magazines and inserts. What’s more, Sutton says, with its suppliers’ help, Catalyst also now has come up with a No. 4 coated grade.

“We’re looking to develop products that are not of the newsprint sector,” says AbitibiBowater Inc. Newsprint Product Quality Vice President David Keenan, citing, among other things, non-publishing grades and tissue.

“Even the poorest newsprint manufacturers are looking to improve their products and maybe cut cost at the same time,” says Sutton.

With the sometime exception of recycled products (see p. 24), newsprint runs “much more consistently and uniformly” than 30 years ago, Sutton says. Mills and their suppliers, he adds, “are always doing things to improve performance.” And while newspapers aren’t exactly clamoring for whiter, brighter newsprint, he notes opacity is one optical quality that matters more as basis weight decreases. What customers want, he says, is reliable performance.

Acknowledging that newsprint is under greater pressure than other consumables, consultant and former Gannett production executive Chuck Blevins says quality is likely more an issue for newsprint than for inks or plates. Citing pinholes and other blemishes, he says, “The effect on reproduction becomes more significant.”

“The industry really has no money except to fight and survive,” says AbitibiBowater’s Keenan, who outlines a research focus similar to that described by plate and ink suppliers (September E&P). “The actual level of quality and commitment,” he says, is not so much the labs as in day-to-day operations. “We do a lot of baselining, benchmarking” to drive mills to required quality levels, he says. “We’re more optimizing our processes to deliver that.”

The same is true with customers, whose pressrooms can achieve widely different results from the same newsprint, and who sometimes ask for higher-quality newsprint to compensate for poor printing. “We’ve been into about 175 pressrooms around the world,” Keenan says, benchmarking and baselining for quality. “That’s my whole world — partnering with publishers to understand their needs.” His “discovery” process ranges from comparing practices in different parts of the world to finding ways to reduce waste.

A new dimension of R&D is especially evident at family-owned Kruger Inc. While sharing a research emphasis found
elsewhere — process improvements, energy savings, effluent reduction, residue recycling — it also invests in a host of
conservation efforts undertaken on its own and with the Northern Wildlife Fund and Laval University.

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Published: November 1, 2010

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