March Newsprint Stats Show Some Positives

By: Debbie Garcia (Forestweb.com) Newsprint shipments from North America rose 4.2% in March compared to a year ago but U.S. consumption dropped 3.6% while inventories by all U.S. users rose 97,000 tonnes. With consumer inventories built up to cushion any long-term strike in Eastern Canada this summer, the market could be in trouble if a contract is ratified without a work stoppage -- especially if consumption does not improve.

According to the Pulp & Paper Products Council (PPPC), total North American shipments reached 1.203 million tonnes in March and were up 1.9% to 3.407 million tonnes in the first quarter. The statistics, released this week, indicate that much of the improvement was due to shipments to overseas markets and to the U.S.

U.S. shipments rose 4% to 863,000 tonnes in March compared to a year ago and were up 8.3% year-to-date. Overseas shipments increased 7.5% in March to 242,000 tonnes, with a 39% increase in shipments to Japan and a 10.7% jump in shipments to Latin America.

Most of the improvement in shipments was enjoyed by U.S. mills, which shipped 449,000 tonnes in March, 8.3% more than a year earlier, while Canadian mill shipments totaled 753,000 tonnes, up just 1.9% during the same period. Total Canadian demand was down 2.2% to 98,000 tonnes, while total U.S. demand jumped 3.6% to 877,000 tonnes. Through the first quarter, Canadian demand is down 5.4% while U.S. demand is up 1.8%.

The PPPC said that the growth in U.S. demand was fueled largely by consumers increasing their inventories. It also resulted in a 36% rise in imports from overseas in the first quarter -- although this only accounted for 51,000 tonnes through the first three months, while the 14,000 tonnes imported in March was a drop of 17.7% from a year earlier.

Total U.S. consumption, however, was down 3.6% in March compared to March 2003 to a level of 823,000 tonnes, and was down 2.6% through the first quarter compared to a year ago. The decline was due to a switching in grades by commercial printers away from newsprint to higher-value papers due to the pricing differential between the grades "continuing to diminish," according to a statement in Abitibi-Consolidated Inc.'s recent sales and earnings release.

Consumption by U.S. dailies fell 1.5% in March compared to a year ago, but that was hindered by one fewer Sunday compared to last March, which taken into account would make the year-to-year comparison approximately flat, according to Mark Wilde, analyst with Deutsche Bank. "While the number is hardly impressive, it represents a slight improvement over the last few months, when the normalized numbers have been down about 2% year-to-year," he noted.

There was good news and bad news in inventories. By the end of March, North American mill inventories shrunk significantly, by 61,000 tonnes from the previous month, much more than the five-year average of 7,000 tonnes, according to PPPC. At 292,000 tonnes at the end of March, mill inventories were 30% below the historical average.

However, total consumer inventories at the end of March were up by 53,000 tonnes from a month earlier. For the same period, U.S. dailies' stocks rose by 22,000 tonnes. "The majority of the increase in consumer stocks represented a transfer from mill inventories," noted Dave Allan, Allan Consulting. He said that with mill inventories dedicated to the domestic market down by 44,000 tonnes and export-oriented mill stock down by 18,000 tonnes, "total system inventories (mills plus consumers) were basically flat." Allan also indicated that mill inventories are low by historical standards. "They have only been lower once in the last five years: in December 2002, in the first months of the current pricing up-cycle."

Taken together, total producer and customer newsprint inventories at the end of the first quarter were higher by 135,000 tonnes, or 9.6%, compared to the previous quarter and higher by 28,000 tonnes, or 1.9%, compared to the end of first-quarter 2003, said Abitibi-Consolidated. U.S. daily newspaper inventories increased from 38 days of supply at the end of first-quarter 2003 to 43 days of supply at the end of first-quarter 2004.

On the bright side, North American producers are getting some relief on pricing despite sluggish demand for newsprint, sources reported. "Newsprint prices are inching upward due to cost pressures from higher raw material costs and a stronger Canadian dollar," said Wilde. "However, the results will be spread unevenly ... if the Canadian dollar remains strong, the industry cost curve could once again favor U.S. mills."

Abitibi said its cost of goods sold in the first quarter of 2004 was $23/tonne lower than in Q1 2003 "mainly due to the impact of the focused downtime announced at the end of 2003 and a stronger Canadian dollar reflected in the costs of the company's U.S. mills." However, the company also realized a $22/tonne gain in its average Canadian dollar realization in Q1 2004 compared to Q1 2003 due mainly to a $50/tonne increase in newsprint prices in the U.S. and in key international markets including Latin America, Asia and the Middle East.

Production by North American mills fell 1.7% in March compared to a year ago. If taken into account the 945,000 tonnes of indefinitely idled newsprint capacity (a little more than 6% of total North American newsprint capacity), this resulted in a 98% operating rate for March and a 97% operating rate for the first quarter, according to PPPC.

Not taking into account that indefinitely idled capacity, however, North American mills ran at 91% of capacity both in March and through the first quarter, not much change in recent months. Canadian mill operating rates were also relatively flat at 93% of capacity in March and 92% through the first quarter. U.S. mills operating rates however moved from 87% in February to 90% in March, and stood at 88% through the first quarter.

North American newsprint production totaled 1.141 million tonnes in March, down 1.7% from a year ago, and was down 0.9% in the first quarter to 3.396 million tonnes. Canadian mill took the hit on production, with March newsprint output of 704,000 tonnes a drop of 5.1% from a year earlier and first-quarter 2004 production of 2.094 million tonnes down 3.2% from first-quarter 2003. At the same time, U.S. production was up 4.2% in March to 437,000 tonnes and year-to-date totaled 1.303 million tonnes, a jump of 3.1% from first-quarter 2003.

The outlook for newsprint, though, is not all bad. Advertising linage was up 2.6% in February 2004 and 3.3% in March 2004, compared to the same periods in 2003. Individually, major publishers also are reporting better advertising linage through the first quarter, with significant jumps in March in certain categories such as help wanted. This bodes well for the economy and, thus, increased newsprint consumption.

Abitibi-Consolidated expects newsprint consumption to be flat in first-half 2004 and gain approximately 2% in the second half of the year. "The key risk factors to a consumption recovery relate to the strength of the U.S. economy, specifically with respect to job creation and consequently in help wanted advertising, as well as continued general strengthening in advertising expenditures," noted the company.

Abitibi said it also believed that capacity reductions in North America would "lead to more balanced supply/demand conditions on this continent, while conditions in Europe should remain under pressure due to recent capacity increases."

However, some analysts believe not enough downtime is being taken. "Abitibi's recent capacity shuts will help, but the industry must work further toward reducing the supply overhang," said Wilde. He expects the $50/tonne newsprint price hike announced in the first quarter will be more fully implemented starting in May. "Demand still remains lackluster and the inventory situation is just OK, but rising costs are imposing a measure of discipline on the producers," he noted.

Allan projected trouble ahead if producers are not willing to take further downtime. "The producers continue to pay a dangerous game, taking just barely enough downtime to keep total inventories flat," he said, "As a result, it's likely they are in for a long, hot summer."

This will become more evident if Eastern Canadian labor negotiations succeed in reaching a contract without labor disruptions, as Allan expects. "What this means for the summer, after a labor agreement is reached, would be for the mills to increase their downtime from present rates, or pricing may come under some (temporary) pressure just as they're starting to talk about the next price hike," he said.