Analysts Vary at Mid-Year on Outlook for North American Newsprint

By: Debra Garcia

Forecasts for the North American newsprint industry ranged from cautious to upbeat as industry analysts assessed current market conditions, along with industry statistics and other factors, according to recently released research reports.

While the trend in consumption by U.S. daily newspapers continued to decline in May, falling 8.5% year-over-year, to 577,000 tonnes, according to the latest statistics from the Pulp and Paper Products Council (PPPC), industry forecasters noted offsetting factors. The most obvious of these was the additional Sunday in May 2005 vs May 2006.

“Adjusted for the loss of a Sunday, consumption was down just about the same as the year-to-date decline of 7.4%,” noted Mark Wilde, research analyst with Deutsche Bank, in a June 21 report. He estimates that an extra Sunday adds 1%-2% to consumption.

Lower North American newsprint grammage also hinders the comparability of the year-over-year and year-to-date consumption figures, indicated Paul Quinn, paper and forest products analyst with Salman Partners, in a June 21 report. “On a 12-month rolling average basis, total U.S. consumption was down another 57,000 tonnes month-to-month in May and is now 23% below 2000,” he said.

Chip Dillon, analyst with Citigroup Global Markets, believes that the basis weight decline is almost over and expects the rate of decline in consumption should moderate. Adjusting for the factors of lower basis weight and one additional Sunday in May 2006 vs a year earlier, Dillon estimated in a June 22 report, that the year-over-year drop in consumption by U.S. dailies was flat.

Total U.S. newsprint consumption of 3.7 million tonnes during January-May 2006 was down 5.3% from a year earlier, with one-fourth of this decline attributable to reduced grammage, noted CIBC World Markets, in a June 22 report. Circulation accounted for another 45% of the drop, with the remaining falloff tied to advertising lineage (20%) and other factors such as conservation measures (10%).

Circulation decline steady? The CIBC World Markets report noted the decline in May newspaper circulation figures reported by Knight-Ridder (off 5.0%) and Gannett Co. (off 1.8%). Salman Partners indicated that, although the decline in circulation continues, the drop stabilized at 2.3% (weighted average of daily and Sunday newspapers) year-to-date at The McClatchy Co. and Gannett.

Quinn projected that negative circulation trends would continue to adversely affect the newsprint industry, with other media — particularly the Internet — capturing more advertising revenue and readership. However, recently compiled ad lineage from a revised top five newspaper publishers increased 1.9% year-over-year in May, bringing the year-to-date figure just 0.1% below a year earlier. On the list, data from McClatchy replaced Knight Ridder, which is being bought by McClatchy.

Among the five newspaper publishers on Salman Partners list, Tribune Co. showed the highest gain in ad lineage year-over-year in May (up 7.6%), although Media General Inc. had an impressive gain of 2.3%. The only company with a drop in May compared to a year earlier was The E.W. Scripps Co. (down 1.2%). However, Scripps leads the others in year-to-date gains, showing 4.3% growth in ad lineage from a year earlier. With the exception of Tribune (up 2.7%), the other publishers all show slight decreases in January-May 2006 ad lineages vs a year earlier.

Not only is U.S. domestic newsprint demand dropping, export markets for North American newsprint producers are also declining. PPPC statistics indicate the 177,000 tonnes exported in May were14.3% lower than a year earlier and the year-to-date total of 892,000 tonnes was off year-over-year by 16.9%.

Export trend explained. However, not all analysts are dismayed by the decline in North American export orders. Dillon noted that the U.S. market was the only one in the world with declining consumption. With global newsprint demand expected to grow 2%-3% in 2006 — due to strong demand increases in Europe, Latin America, and Asia — and global capacity flat to down due to closures in North America more than offsetting additions in Asia, Dillon expects world newsprint markets will be robust. However, George Staphos, analyst with Bank of America, noted recently that long-term world demand for newsprint was expected to grow by 1% but that capacity growth would be closer to 2%, “making it more difficult for U.S. exports over time.”

Other analysts pointed to Canadian newsprint mill shutdowns that have reduced the tonnage destined for export markets. On a June 22 report, Staphos attributed “some portion” of the decline “may be due to the permanent shutdown of the export-focused Stephenville mill,” a 200,000 tonnes/year newsprint mill in Newfoundland owned by Abitibi-Consolidated Inc.

Quinn observed that Howe Sound Pulp & Paper Ltd. in Port Mellon, B.C., had “dramatically reduced sales in Japan,” a trend which he expects to continue in 2006.

“The Stephenville closure and Howe Sound repatriation account for most of the reduction in exports but the relatively lower prices available overseas have also discouraged exports,” said Verle Sutton in the June issue of The Reel Time Report. He also linked the decline to the fact that U.S. pricing is “roughly $40-$60/tonne” higher than the rest of the world.

Prices and profit margins. However, North American newsprint mills — particularly those in Canada — needed the price increases to cover rising operating expenses. In addition, the strengthening of the Canadian dollar relative to the U.S. dollar has greatly reduced, if not eliminated, any gains in pricing for Canadian producers. “U.S. pricing has increased by $105/tonne since January 2003 but, in Canadian dollars, producers have netted only a $14/tonne increase,” according to Sutton.

FOEX Indexes Ltd. shows that newsprint prices have increased by $29.65/tonne since the start of 2006. With the spring newsprint price hike of $40/tonne on 30 lb newsprint in the U.S. recently failing to make any more gains, Abitibi recently announced another $40/tonne increase to take effect Aug. 1. Current estimates of the price for 30 lb newsprint in the U.S range from $660/tonne to $675/tonne, according to various analysts.

Quinn expects that other producers will follow with similar price hike announcements “given the continued rise in the Canadian dollar,” but, like other recent attempts, he projects that no more than half the posted increase is likely to be implemented.

“The strong Canadian dollar remains a huge issue since 60% of North American newsprint is produced in Canada,” said Wilde, noting that most Canadian newsprint is sold in U.S. dollars. Wilde said the Abitibi hike would bring 30 lb newsprint in the U.S. to $715/tonne, “an impressive increase from the mid $400’s level of mid-2002; however, with the sharp rise in the Canadian dollar and other input costs, margins remain unsatisfactory.”

Capacity shuts expected. Given that Canadian newsprint producers need further price increases to ensure profitability, the industry is expected to continue to reduce capacity if necessary to keep markets tight. “We do not foresee any change to this long-established trend, only an increase in the rate of closure/conversion,” said Quinn. “However, we anticipate that now that the easy pickings (i.e., high-cost newsprint mills/machines) has been made, especially by industry leaders Abitibi and Bowater, the future capacity shuts will be more difficult.

North American mills operated at a strong 96% of capacity in May, bringing the year-to-date operating rate to 95%. The high operating rates led to slight increases in inventory during May, with mill and publisher inventories growing by 8,000 tonnes (up 0.6%), to 1.254 million tonnes. However, they remained “lean no an absolute basis,” noted Wilde.

On a year-over-year basis, total inventories at the end of May dropped by 94,000 tonnes (down 7.0%) “due in part to capacity closures and efforts by producers to keep output levels in line with demand,i reported Quinn.

North American newsprint production during January-May 2006 reached just over five million tonnes, a decline of 6.3% from a year earlier. Canadian newsprint output in May was down by 8.9% from last May, bringing the year-to-date total to just over three million tonnes (down 8.0%, year-over-year), while U.S. newsprint production fell just 2.7% in May, reaching just under two million tonnes year-to-date (down 3.5%, year-over-year).

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