Another Bad Month for Newsprint Producers

By: Debbie Garcia (Forestweb) October was another in a series of bad months for the North American newsprint industry, according to the latest statistics released this week by the Pulp and Paper Products Council (PPPC). Nearly every number was down -- with a few exceptions including mill inventories and imports from overseas.

?To put it in a nutshell,? said Dave Allan, president of Allan Consulting, ?U.S. consumption and offshore demand continued to slump, pushing mill inventories up slightly.? However, the market remains balanced because consumer inventories fell by more than the increase in mill stocks, he noted.

Total North American demand dropped 3.3% year-over-year in October (936,000 tons) due to ?consumer destocking,? said the PPPC. Year-to-date, the total was 9.235 million tons, down 1.4% from the same period a year ago.

This decline in demand was ?roughly 85%? responsible, the association noted, for a 2.3% decrease year-over-year in total North American newsprint deliveries through the first 10 months (11.095 million tons); while October's shipments (1.132 million tons) fell by 2.7%.

The largest North American consumers, U.S. daily newspapers, used 1.5% less newsprint this October (730,000 tons) than last October, and year-to-date was down 1.3% compared to a year earlier. Total U.S. newsprint consumption of 910,000 tons in October was off 2.1% from a year ago, while year-to-date was down 1.6% compared to a year earlier.

One extra Sunday no help

The numbers are even more depressed when considering that last October had four Sundays while this October had five Sundays. ?Removing the benefit of this suggests an underlying number in the range of a 3% decline,? said Mark Wilde, an analyst at Deutsche Bank.

The only bright spots in an otherwise dismal statistical performance for October were overseas shipments to Latin America and Asia (excluding Japan). On a year-over-year comparison, North American newsprint shipments to Latin America were up 4.8% for both October and year-to-date compared to a year ago, while shipments to Asia (excluding Japan) rose 5.4% for October but were still down 5.7% year-to-date.

The October gains in these two overseas markets, however, were canceled by declines in other markets, noted the PPPC. So far this year, North American exports have decreased 5.2% overall to 2.057 million tons. In addition to the above-mentioned drop in year-to-date orders to Asia (excluding Japan), shipments to Western Europe are down 16.8% and to Japan they're off 3.4%.

Meanwhile, imports from overseas decreased year-over-year by 20.1% in October, but were still 5.3% ahead year-to-date. However, the volume of newsprint imported into North America was still small, at just 196,000 tons through the first 10 months.

Production at North American newsprint mills reached 1.168 million tons in October, a drop of 1.3% from last October, and year-to-date was down 2.5%. U.S. mill production of 453,000 tons in October was down 2.1% from last October, while year-to-date was a relatively flat -0.1%. Canadian production was down just 0.8% in October (715,000 tons) but off 3.9% year-to-date.

While total newsprint shipments from North American newsprint mills declined 2.7% in October and 2.3% through the first 10 months (see above), shipments from the U.S. were flat in October (444,000 tons) and up slightly (+0.7%) year-to-date. Shipment from Canada, however, were down 4.4% in October (688,000 tons) and off 4.0% year-to-date.

Newspapers depressed also.

October was not a good month for newspapers either. According to a report released this week by Goldman Sachs, newspaper companies reported that their ad revenues increased by just 4.2% in October. This was the worst performance since January, and January only had four Sundays.

Goldman Sachs also indicated that major retail, national, and classified advertising categories all showed signs of a slowdown in October. The most alarming trend was in classified revenues and, specifically, help wanted. While classified-ad revenues were up 6.4% in October, they were down from the jumps of 9.3% in August and 7.5% in July, and did not help offset September's paltry 2.9% increase.

Meanwhile, the PPPC noted that the ad linage it tracks dropped by 0.3% in September, the first monthly decline this year. This left the year-to-date figure unchanged at just 1.7% higher than a year ago.

Earlier this month, the Newspaper Association of America reported disappointing circulation figures for the six months ending in September. Two-thirds of the 841 U..S. daily newspapers reporting indicated that average daily circulation fell 0.9%, and Sunday circulation dropped by 1.5% -- with some of the Top 20 papers showing much larger declines.

Time to get real.
Commenting on these circulation numbers, Paul Quinn, an analyst at Salman Partners, said it might be time ?to seriously consider the possibility that consumption is not coming back and that these consumption levels are the best newsprint producers can get in a 'bull economy'. Which leads to the question of what happens to newsprint consumption when the bull economy turns bearish.?

Newsprint inventories also reflect the dynamics playing out in the market lately. Consumer stocks are falling while mill inventories are rising. ?We think part of the explanation is the current battle over prices ? producers are trying to raise prices and publishers are running down their inventories instead of replenishing at higher prices,? said Wilde.

In October, all U.S. users' stocks fell by 66,000 tons to 1.034 million tons, while inventories at U.S. dailies dropped by 50,000 tons to 898,000 tons. North American producer inventories, however, grew by 35,000 tons in October, to 347,000 tons at month's end. Stocks at U.S. mills rose by 8,000 tons to 58,000 tons, while Canadian mills shot up 27,000 tons to 289,000 tons.

Historical comparison better.

The PPPC said that, while North American mill stocks had risen back to levels reported two months earlier, they were still 17% (or almost 70,000 tons) below the historical average.

Also, with total mill inventories rising by 36,000 tons and publishers' dropping by 66,000 tons, the net 30,000-ton decline was less than the typical October decrease of 56,000 tons, noted Wilde.

Given the rise in mill inventories, it is not surprising that operating rates rose slightly in October. For Canada and total North America, the operating rate was up year-over-year by 1%, to 93%, but both were also still trailing by 1% year-to-date, at 92%. The U.S. mill operating rate dropped 1% in October, to 94%, but was still 1% ahead year-to-date, at 93%.

The PPPC noted that, if the approximately half a million tons of indefinitely idled North American newsprint capacity were excluded from production numbers, the operating rate would be 97% for October and 96% year-to-date.

Production curtailments are definitely helping. ?Even though usage shows no signs of recovering -- even to the seriously depressed levels of a year ago -- aggressive downtime continues to keep the market in rough balance,? said Allan.

Price increase still wavering.

However, downtime may not be enough. Many industry analysts, consultants, and other observers all have noted in recent months the industry's need to reduce capacity on a more permanent basis if current and future price increases are to be more firmly implemented.

Several newsprint mills have already been idled indefinitely and may ultimately be shut down permanently, but costly conversions from newsprint to other groundwood grades are also being considered. Earlier this month, one producer decided to go ahead with its plans. Irving Paper Ltd. told the Bangor (Maine) Daily News that it will convert the St. John, New Brunswick, newsprint mill to ?groundwood specialties or value-added papers,? but did not provide specifics.

North American newsprint producers are currently trying to implement a $50/ton increase in newsprint prices that was initially to take effect September 1. However, the fate of the hike remains ?unresolved as producers and publishers continue to jockey,? said Wilde, noting that Canadian manufacturers are particularly in need of the increase to help offset the rising Canadian dollar.

FOEX Indices Ltd. reported on Nov. 23 that U.S. newsprint prices had slipped 15 cents to $553.98/tonne last week. The changes in the index for U.S. newsprint prices have been minor since early October, when there was a jump by $6.80/tonne to $552.63.

Goldman Sachs recently predicted that newspaper expenses would increase this year, but not as sharply as previously forecast. It now expects newsprint costs to rise 8% instead of the 10% previously projected.