Newsprint Prices Expected to Ease in 2006

By: Jennifer Saba The rising cost of newsprint is expected to abate in 2006, according to a report released by Goldman Sachs. The research firm deemed it a "rare bit of good news."

The reason, however, has more to do with the drop in consumption because of declining circulation and weak advertising. Goldman forecasts that for the first time in two years, newsprint consumption will slide at a faster pace than newsprint production capacity in 2005.

Still, the upbeat forecast doesn't prevent Goldman from warning investors to avoid newspaper stocks.

The report points out that since 1980, the cost per ton of newsprint has increased at a compound annual growth rate (CAGR) of just 1.5% -- below the rate of inflation.

The low rate is because of several causes including a decline in the number of newspapers, a decline in circulation, and the use of smaller pages. Most publishers have moved from a 54-inch web width to 50 inches. Goldman Sachs estimates these factors have reduced North American newsprint consumption by 10%.

As for the recent spate of hikes, Goldman said it has to do with a give and take between publishers and producers: "Our sense is that both publishers and newsprint producers would like to see greater stability in newsprint prices, but neither side knows how to achieve this goal," the report said. "For publishers the tug-of-war between greater long-term cost visibility through more stable prices versus the short-term earnings benefit of cyclically depressed paper prices always seems to favor short term earnings."

Because publishers are going for the short term, producers play "catch-up" where they push for higher prices. The industry has been in this phase for the last several years, said the report.

The following companies' earnings per share are more sensitive to newsprint hikes. Goldman calculated EPS sensitivity by consumption, number of shares outstanding, and internal newsprint capacity. They are listed in order of impact: Dow Jones, The New York Times Co., Belo, Tribune, and McClatchy.