Newsprint Inventory and Capacity Down, But Exports and Prices on the Rise

By: Debra Garcia September's newsprint data released last week by the Pulp and Paper Products Council (PPPC) seemed to indicate a market declining as demand remains on a downward trend, dragging production along with it.

However, the newsprint industry might be inching out of its trough, albeit slowly, and the outlook appears a bit brighter due to a combination of growth in global demand and flat to declining capacity -- particularly with the many newsprint machine closures and conversions occurring in North America.

North American newsprint mills continued to see orders drop in September, causing production levels to decline year-over-year by 4.1% for the month and 4.4% through 2005's first three quarters, the PPPC reported.

Shipments were also down, especially in the U.S., where 7.1% less newsprint was shipped in September than a year earlier, while Canadian shipments were about flat with a year earlier (-0.5%). Overall, North American newsprint shipments fell by 2.5% in September and by 3.9% through the first nine months.

Inventories Dropping

North American suppliers' stocks of newsprint declined by 48,000 tonnes in September, bringing them to a level 19,000 tonnes lower than last September. Meanwhile, U.S. dailies' inventories fell by 60,000 tonnes in September, to a level 81,000 tonnes lower than a year earlier, according to PPPC data. This left newspaper publishers with just 40 days of inventory on hand at a time when newsprint demand is typically peaking.

Total North American newsprint stocks dropped another 79,000 tonnes month-to-month by the end of September, reaching 1.31 million tonnes, according to PPPC. While this decline was steeper than the five-year average for September, the five-year average for consumption was 11.0% higher, noted Paul Quinn, paper and forest products analyst with Salman Partners.

Consumption was still sluggish in September, with U.S. dailies' usage down year-over-year by 4.7% for the month and 4.9% year-to-date. Total consumption was worse, dropping year-over-year by 5.0% for September and 5.2% through the first nine months, the PPPC reported.

Quinn, however, stated that the current data ?offered producers some hope, with the year-over-year decline in consumption ... up from August's disastrous 8% year-over-year plunge.? He noted that the decrease in North American grammage levels -- which have steadily dropped this year -- effectively reduces the year-over-year and year-to-date consumption comparisons by approximately 0.5%.

Newspapers have been reducing the basis weight of the newsprint they buy and using other conservation measures to save on newsprint costs. Earlier this month, The Wall Street Journal announced it would trim the size of its newspaper by about 20%, to be phased in through January 2007. Other major newspapers have done likewise in recent years (Forestweb, Oct. 13).

Exports Growing

Overseas shipments, though, were positive, with total North American offshore deliveries up 8.6% in September from a year ago, bringing year-to-date 5.5% higher than in the first nine months of 2004, according to the PPPC. Key overseas markets for September's orders were Western Europe (+18.7%), Latin America (+21.0%), and non-Japan Asia (+7.8%).

Quinn expected that North American shipments to Japan would decline next year, however, as Howe Sound Pulp & Paper Ltd. plans to discontinue selling to Japan after 2005. Likewise, he projected a further drag on the North American market as the company sells more newsprint domestically.

However, Chip Dillon, paper and forest products analyst with Citigroup, forecasts that exports will buoy North American newsprint markets.

?Net demand growth in the non-North American countries is more than offsetting North American demand,? he noted in a recent report, adding that global capacity growth is flat to down due to ongoing closures that are more than offsetting any capacity additions in Europe and China.

Capacity Contracting

North American capacity is set to shrink by the end of October, when Abitibi-Consolidated Inc. was slated to permanently shut down a 194,000 tonnes/year newsprint machine at its Stephenville, Nfld., mill -- Newfoundland's premiere this week outlined a proposal to keep it open, so its fate isn't entirely clear -- and a 90,000 tonnes/year newsprint machine at its Kenora, Ont., facility.

In addition, the PPPC said this month that it had removed a Port Alberni, B.C., newsprint machine from its capacity estimates retroactive to when the machine was shut down earlier this year. Catalyst Paper Corp. (formerly NorskeCanada Ltd.) indefinitely idled the 140,000 tonnes/year machine in February.

Excluding indefinitely idled capacity, the PPPC reported that North American newsprint producers operated at 95% of capacity through the first nine months of this year, down 1% from the same period in 2004. For September alone, the operating rate was 94% versus 96% last September.

Despite lower operating rates, though, producers have implemented two price increases this year. According to The Reel Time Report's October issue, Abitibi and Bowater Inc. have both been able to fully benefit from two $35/tonne increases so far this year. Smaller producers have only been able to push through $25/tonne of each of those increases, setting them behind by $20/tonne, said Verle Sutton, editor.

Prices Increasing

Sutton said he expected Abitibi and Bowater would both be able to implement a third $35/tonne price increase this year, previously announced to take effect October 1 (Forestweb, Sep. 16).

However, Sutton was uncertain if smaller suppliers would be able to follow suit. ?It would be the first time that lower-tier producers were able to implement a full price increase over these last three years and seven increases,? he noted.

Quinn indicated that he was ?impressed with newsprint producers' ability to put through price increases at a time when newsprint consumption has turned very negative,? noting, however, that the cost for Abitibi and Bowater was high considering that they had to permanently shut or convert production to maintain the ?tight? market.

Dillon projected that North American newsprint prices would continue to ?edge up in the coming months based on continued positive global demand coupled with substantial North American capacity closures.?

The price of 30 lb newsprint in the U.S. in September was $615/tonne, according to Sutton's most recent report. However, Quinn and Mark Wilde, a research analyst with Deutsche Bank, quoted a price of $625/tonne in separate October market commentaries.