Could Things Be Looking Up for Newsprint?

By: Debbie Garcia (Forestweb) Despite negative newsprint statistics released last week by the Pulp & Paper Products Council (PPPC), analysts remained somewhat positive about the newsprint industry.

Industry forecasters indicated factors that could bolster the newsprint industry, including further reductions in North American capacity, continued healthy markets in key regions outside North America, and the positive outlook for grades that substitute for newsprint in some end-uses.

The PPPC's latest statistics, from the last week of January, showed further declines in nearly every facet of the newsprint market. A key factor, consumption, continued to drop throughout 2004 and ended the year down 1.7% from 2003, which itself was not a banner year.

"On a 12-month rolling average basis, total U.S. consumption is down another 25,000 tons month-to-month in December and remains over 16% below 1999 and 2000 levels," noted Paul Quinn, an analyst with Salman Partners.

Mark Wilde, an analyst with Deutsche Bank, noted that total North American newsprint consumption fell by 1.9%, to 11.013 million tons, in December, making it the lowest consumption level since 1978.

Chances for price hike

However, negative consumption is not expected to doom the industry's slated March 1 price hike of $30/ton for 30-lb standard newsprint, analysts indicated.

"Despite this bad consumption news, we continue to see newsprint prices rising as long as the overall paper industry pricing upcycle continues to unfold," said Chip Dillon, an analyst with Smith Barney.

In fact, cost pressures within the newsprint industry itself help justify a March 1 price hike. "The financial case for higher prices is clear, particularly as the Canadian dollar seems to have settled around $0.82," said Wilde.

"Over 60% of all North American newsprint is produced in Canada, and the rise in the Canadian dollar is creating an intense margin squeeze," he noted.

Quinn commented that with Canadian production accounting for over 50% of U.S. consumption, "we would normally expect a rise in the price of newsprint as the Canadian dollar appreciates."

Among the major North American newsprint producers, Abitibi-Consolidated Inc. is considered to be the most exposed to a rising Canadian dollar, followed by NorskeCanada Ltd. Bowater Inc.'s exposure is greatly reduced because most of its capacity is in the United States.

Dillon indicated that U.S. newsprint price increases of about 30% since their low point in the summer of 2002 have mostly been reflected in U.S. dollar terms, while prices in Canadian and european currencies are still near cyclical lows.

However, Smith Barney projects that newsprint prices will soon rise in all major currencies, with an increase in Europe expected this month. "We see this grade participating somewhat in the unfolding paper industry upcycle," said Dillon. He said that newsprint demand growth had been healthy in both Asia and Europe in 2004, and that the strength was continuing.

While the North American operating rate edged higher, from 93% in November to 94% in December, and would be 97% if idled capacity were excluded, Quinn noted that the operating rate would have to be over 100% to achieve significant price increases in newsprint.

Newspapers cutting costs

Moreover, Quinn believes that price increases will cause consumption to fall further as newspapers attempt to offset their higher newsprint costs with such conservation measures as lowering basis weight.

Newspaper publishers will remain under pressure to lower their costs and improve their operating margins, which are being squeezed by continued competition from other media vying for advertising revenue.

Even though the Newspaper Association of America projects that ad spending will increase 3.9% in 2004 and another 4.1% in 2005, Quinn does not expect this to lead to higher newsprint consumption. "Newsprint, as an advertising medium, will continue to suffer with the growth of Internet advertising," he said.

Advertisers also continue to question the effectiveness of newspaper advertising as readership drops. Circulation scandals in 2004 also eroded advertiser confidence in newspapers as an advertising medium.

Export markets, long seen as an outlet for lagging U.S. newsprint demand, are expected to shrink rather than grow as overseas capacity expands to meet that demand. "We continue to believe that newsprint will face secular challenges of slipping North American demand and gradually declining exports as overseas demand is gradually supplied indigenously," said Dillon.

While North American newsprint markets are not growing, demand for alternate grades is expected to improve this year. George L. Staphos, an analyst with Banc of America Securities, expects that tightness in coated papers and uncoated groundwood would help newsprint. As prices for these grades increase, consumers are expected to use more newsprint in certain end uses.

Capacity reductions likely

With lower demand in both domestic and export markets, newsprint producers will be under mounting pressure to further curtail production in order to firm up markets sufficiently to pass through further price increases.

"We think further conversions or permanent closures are still required," said Quinn, noting that he expects Abitibi to make a major announcement soon on the "permanent closure and write-down of its Sheldon, Port Alfred, or Kenora newsprint mills."