Downward Trend in Newsprint Use Slows

By: Debra Garcia In a market rife with declines, the bright spots were all too apparent in February's North American newsprint statistics, which were released this week by the Pulp and Paper Products Council (PPPC).

While consumption by U.S. customers continued to drop, it was at a slower pace in February than in January. U.S. daily consumption, considered a truer reflection of actual usage, declined year-over-year in February by 6.3%, up from the 8.5% dip in January, and brought year-to-date to 1.15 million tonnes, off 7.4% from a year earlier, according to preliminary figures.

Total U.S. consumption, which includes usage by commercial printers, was down by only 3.8% in February compared to a year earlier. Industry analysts indicated that more newsprint is being ordered by printing shops due to outtages at two Eastern Canadian mills making groundwood printing papers.

However, this boost to newsprint demand from printers will be ?short-lived,? noted Paul Quinn, paper and forest products analyst with Salman Partners. ?We remain pessimistic on any dramatic improvement in consumption in the foreseeable future,? he said, noting that the concern was for second half 2006, when the economy is projected to slow.

Likewise, Mark Wilde, research analyst with Duetsche Bank, pointed out that February's year-to-date consumption drop, which exceeded last year's decline of 5.4%, ?suggest that 2006 could be a weaker year than 2005.?

Publishers still trimming costs. Newspaper publishers continue to reduce their usage of newsprint due to factors that include ?price elasticity, circulation erosion and a shaky advertising market,? noted Dave Allan, president, Allan Consulting Co.

According to Salman Partners, February newsprint ad lineage from a revised top five U.S. publishers dropped 2.2% year-over-year, and was down 1.2% through the first two months. The data analyzed included The McClatchy Co. instead of Knight Ridder as the latter discontinued its monthly summary.

Salman Partners also reported that circulation figures from McClatchy and Gannett Co. Inc. showed a year-over-year decline of 2.2% in February and 2.1% year-to-date. ?With both newsprint circulation and advertising lineage declining, we expect a rough road ahead for newsprint producers,? said Quinn.

Total U.S. demand through the first two months of 2006 dipped year-over-year by 2.4%, with February off 3.7%, according to the PPPC's preliminary statistics. The number of Sundays for February and year-to-date were the same in 2005 and 2006, enabling a true comparision between the two years.

Exports markets no panacea. Overseas shipments from North America remained on a downward track. While offshore markets remain strong overall, North American mills that shipped overseas have shifted to domestic markets or have closed down entirely, analysts indicated. ?Oversease markets are actually still growing, albeit not robustly in most cases,? said Allan.

Total North American offshore shipments fell year-over-year by 22.3% in February and were off 20.0% year-to-date, the PPPC reported. All markets were down sharply in February and year-to-date, with the exception of Latin America, which was ahead of last year by 11.3% through the first two months of 2005.

Verle Sutton, editor of The Reel Time Report, commented that the cost/currency structure for North American producers, particularly Canadian producers, make them uncompetitive in the export market because prices are higher in the U.S. than elsewhere.

Production cuts in high gear. Despite lagging orders, producers remained committed to doing whatever it takes to support further price hikes and improve profitability. In February, North American newsprint production was down 5.1% from a year ago, bringing the year-to-date total to just over two million tonnes, a year-over-year drop of 5.2%.

Due to extensive shutdowns in Eastern Canada in 2005, Canadian mills produced 5.6% less newsprint in February than a year earlier, while U.S. newsprint output fell 4.9%. This brought the year-to-date figures down year-over-year by 5.7%, to 1.2 million tonnes in Canada and by 4.4%, to 792,000 tonnes in the U.S.

Both U.S. and Canadian newsprint operating rates were at 96% in February; but year-to-date, U.S. mills ran at 96% of capacity while the rate for Canadian mills was 95%, according to the PPPC. The total North American operating rate was down 1% year-over-year for both February (96%) and year-to-date (95%).

Claudia Shank, industry analyst with JP Morgan Securities Inc., commented that producers would have to maintain at least a 95% operating rate to raise prices, which she projects will increase through the second quarter, with another $5-$10/ton improvement in transaction levels by mid-year.

?However, we continue to believe upward momentum in newsprint will fizzle in second half 2006 on the back of an expected weakening in the Canadian dollar, as well as some modest input cost abatement,? Shank said.

Inventories still a little low. North American newsprint inventories at both mills and consumers rose by 30,000 tonnes in February, which was in line with the historical average increase of 35,000 tonnes. Total consumer inventories were up 10,000 tonnes compared to the end of January, but were 58,000 tonnes lower than a year earlier. Mill stocks rose 20,000 tonnes during February but were still down 3,000 tonnes from a year ago.

Consumer inventories need to be higher to give newsprint users enough power to resist price hikes, noted Allan. ?In order to turn the pricing battleship around, buyers need to build stocks up to the point where orders can be slashed and that isn't happening yet,? he said.

Looking at days of supply, daily newspapers ended February at 43 days, a day lower than the previous month and a year ago, while all users ended February at 40 days, up one day from January but down a day from February 2005. ?In other words, daily stocks are in the upper half of the normal range, while total consumer stocks are right about normal,? said Allan.

Imports take a nosedive. Newsprint consumers also are not able to secure enough of their requirements from overseas sources to give them an edge in price negotiations. ?Offshore mills are not racing to their rescue,? said Allan.

North American imports from overseas continue to decline sharply. In February, they dropped by 26.8% from a year earlier, and were off 9.0% year-to-date, according to the PPPC.

With only an estimated $14-$15/tonne of the $40/tonne Feb. 1 price increase on 30 lb newsprint in the U.S. implemented so far, industry analysts appear to be less certain of the outlook. Most are expecting that prices will become increasingly more difficult to push through this year and could start to decline later in 2006.

Price improvement slowing. Allan projects that it could take until July to fully implement the Feb. 1 hike, but does not rule out another increase attempt later in the year. However, he cautions that, by July, ?a change in the direction of the market begins to loom on the horizon.?

?We understand that implementation of the February price hike has been slower and more difficult than previous increases, suggesting that we are close to the upper limit,? noted Quinn.

While price erosion would give some cost relief to newsprint users, it would be devastating for North American producers that are operating at near break-even levels.

Even with newsprint prices making impressive gains over the past two and a half years--with the current eastern U.S. price for 30 lb newsprint now at $665/tonne--inflation-adjusted newsprint prices remain only slightly higher than the levels of the late 1980s, according to Wilde.

?Producers will have to continue taking capacity out to maintain robust operating rates, keep inventories in check, and attempt to restore profitability,? said Wilde.

Quinn expects an increase in the rate of newsprint closures and conversions to other grades, but expects the choices to be tougher. ?Now that the low hanging fruit (i.e., high-cost newsprint mills/machines) have been picked--especially by industry leaders Abitibi and Bowater--the future capacity shuts will be more difficult,? he said.