Consumption Down, But Newsprint Prices Inch Up

By: Debra Garcia With the exception of deliveries to some overseas markets, demand for North American newsprint continued to decline in October, according to data released Nov. 22 by the Pulp and Paper Products Council (PPPC).

Overseas shipments fell 11.8% year-over-year in October, bringing the year-to-date total to 2.1 million tonnes. While January-October offshore deliveries were 3.7% higher (+75,000 tonnes) than a year ago, it does not come close to offsetting the 5.9% year-over-year drop (-454,000 tonnes) in January-October shipments to all destinations.

Newsprint deliveries overseas to all but Western Europe fell in October compared to a year earlier, according to PPPC statistics. Western Europe was up just 2.4%, while shipments to Latin America (-18.2%), Japan (-31.4%), non-Japan Asia (-1.3%), and "other" markets (-64.8%), all fell.

Dave Allan, president, Allan Consulting, considered October's drop in exports to be "in part a timing issue; we believe exports will continue rising for the time being, albeit not as fast as in some months this year." Allan does not project a weakening in exports, although offshore sales are not expected to become a major force in the market for North American newsprint in the near-term.

On a year-to-date basis, only offshore newsprint shipments to Western Europe (+11.7%) and non-Japan Asia (+23.1%) remained ahead of a year ago, while deliveries to Latin America (-2.2%), Japan (-25.4%), and "other" markets (-9.6%) were all down.

Consumption still falling. Key to the depressed market for North American newsprint, however, is the continuing slide in domestic demand. Consumption by U.S. daily newspapers has been in a tailspin since last year. In October, it fell year-over-year by a steep 7.2%, the PPPC reported. This exceeds the year-to-date trend, noted Mark Wilde, industry analyst with Deutsche Bank.

However, Wilde indicated that another trend, that of publishers switching to increasingly lighter basis weight newsprint, is "exaggerating the consumption drop, since the consumption numbers focus only on tonnage, not on surface area," he said.

The PPPC reported last month that year-to-date newsprint grammage was 47.5 g/m2 through September versus 48.2 g/m2 a year earlier. Wilde said this could account for 1.5% of the drop in consumption.

With newsprint prices inching up this year and newspaper circulation declining, publishers continue to reduce costs where possible, including conserving on newsprint by reducing grammage, shrinking page size, and eliminating some editions.

However, Paul Quinn, industry analyst with Salman Partners, noted that "despite publishers' complaints about the rising cost of newsprint and slow growth in print advertising, it should be noted that most of the publishers we looked at have much stronger profit margins than the newsprint producers."

Daily newspapers are not the only customers cutting orders; declining usage by other consumers are also effecting demand. The PPPC reported that total U.S. consumption fell 6.9% in October versus a year ago, bringing the year-to-date total to 7.8 million tonnes, which is 5.4% lower than in 2004.

Inventories still low. Inventories remained lower than a year ago at both the producer and consumer levels in October, but total North American mill stocks grew by 33,000 tonnes during the month. However, this was 29,000 tonnes below a year ago.

Considering that autumn is a time of peak consumption, it was not surprising that all U.S. users inventories dropped by 59,000 tonnes, but that was still 85,000 tonnes lower than a year ago, according to PPPC data. This was the equivalent of zero days of supply, down one day from a year earlier.

A decline in "total system inventories (26,000 tonnes, with "all users" stocks being down 59,000 tonnes and mill inventories rising by 33,000 tonnes) was fairly close to normal," said Allan.

Despite the dismal demand data for North American newsprint producers, they managed to keep operating rates relatively high, at 95% for both October and year-to-date, due to widespread cuts in capacity. However, this is still 2% below the operating rate for October 2004 and 1% lower than the January-October 2004 rate, according to PPPC statistics.

Allan indicated that the impact of capacity removed by Abitibi-Consolidated Inc. during October was not yet reflected in the operating rates, and additional shutdowns (a small machine at Grand Falls, Nfld.) by the company are anticipated in first quarter 2006. In addition, Bowater Inc. is expected to convert the remaining newsprint capacity at its Calhoun, Tenn., mill in the second quarter, he noted.

Prices improving slowly. "Producers will have to continue taking capacity out to maintain robust operating rates, keep inventories in check, and restore profitability," said Wilde. "To date, supplier discipline has led to a surprising amount of price improvement."

Prices have increased gradually throughout 2005, with three price increases posted since January 1. Of the latest increase, a $35/tonne hike slated on 30-lb newsprint in the U.S. for Oct. 1, less than a third of the hike has been implemented so far, sources said.

Wilde estimated that producers have realized only $10/ton of the Oct. 1 price increase, bringing current transaction levels to $635/tonne. Some of the smaller customers, however, are paying the full increase while large buyers are able to push back the hike to a later implementation date, he said.

The November price posted in The Reel Time Report is $635/tonne, while Quinn indicated in a recent report a current price of $630/tonne. ?Producers have taken 2.3 million tonnes of newsprint capacity out since 2001, but more is needed to support the $35/tonne October price hike,? said Quinn.