Forecasting the paper chase

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By: Lucia Moses

Slowly but surely the economy is recovering, while papermakers have been curtailing their supplies. With murmurs of an increase in paper prices coming as early as Feb. 1, the question for producers and users is not if prices will go up in 2004, but when, and how much.

While 2004 ad revenue percentage growth is expected to rise by 4% to 6%, some newsprint analysts say it will only take a slight increase in demand to support higher paper prices. Looking to save tonnage wherever they can, some publishers are shortening their cutoff and trimming more off their page widths.

The average price of newsprint stood around $490 per metric ton in 2003, its lowest in nearly a decade. But market leader Abitibi-Consolidated Inc.’s decision in December to permanently shut down two machines and indefinitely idle several thousand metric tons would further a seven-year trend of declining paper supply and bring the supply/demand equation close to where it stood three years ago, when the price surpassed $600 per metric ton, writes Andrew J. Battista, senior economist with Resources Information Systems Inc., a forest-products forecaster.

With Canadian papermakers’ labor contracts expiring this spring, publishers also will be following labor relations to gauge their potential impact on supply.

Producers have already shown that newsprint prices aren’t dependent on increases in consumption, as evidenced by three (however muted) price increases in the past 17 months. “At one time, we would question whether that was possible,” says Verle Sutton, a veteran newsprint sales executive who now edits and publishes the industry newsletter The Reel Time Report in Schaumberg, Ill. “Even though demand was in the tank, prices still moved higher. Whether that happens this year is still a question.”

Taking a more conservative view is Bernard Bottomley, a Breckenridge, Colo.-based newsprint trader and consultant to newsprint buyers. “In the overall marketplace, they’re very manageable,” he says of the sort of moves just announced by Abitibi. “?the global supply of newsprint is quite adequate right now.”

In the past, publishers have been able to control their usage by cutting less profitable circulation and converting to narrower-sized paper. But publishers today seem committed to circulation growth, the basis for raising ad rates. And many have already cycled through web-width reductions.

“What they’ve done with web width I think has pretty much played out now,” says Peter Maier, a consultant to Media Procurement Services, an E.W. Scripps Co. subsidiary that buys newsprint for Scripps, Freedom Communications Inc., and nine other newspaper companies. “I would say that the vast majority of newspapers have made some web-width reduction, and are unlikely to make further reductions for the next couple of years.”

Bottomley says some publishers are quietly taking an additional quarter-inch off their page width to save a bit on tonnage: “It’s barely noticeable, but it’s eating into their white space.” Other publishers, including Scripps, are shortening the cutoff, and some have been switching to paper of a lighter basis weight, although Bottomley says few suppliers can make such paper without sacrificing quality, which will limit its adoption.

But the benefits of such changes are debatable, Battista says. He points out that a 5% reduction in paper height won’t necessarily translate into a 5% reduction in consumption, and that the lighter paper costs more per ton than standard 30-pound newsprint, which could cancel out any savings.

A pickup in newsprint demand has been a long time coming for producers that have weathered a 14% drop in U.S. consumption over the past three years and a weakened U.S. dollar that stripped them of much of their gains from rising paper prices last year. The producers “are in such bad condition. I don’t think most of the publishers recognize how bad it is,” Sutton says. “I’m surprised [publisher] inventories have not gone up. The bottom line is, they’re not convinced they’re going to have to pay more.”

Still, he says, the weak price of value-added grades and increasing imports from overseas could limit price growth in the year ahead.

There’s another limitation: Each time the big papermakers curtail supply and enact a price increase when demand is flat or down, they lose market share. “It doesn’t come inexpensively,” Bottomley says. “Each time they do it, they’re losing a different piece of their market.”

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