Newsprint Producers Hope for Better Third Quarter

By: Debbie Garcia (Forestweb.com) Major North American newsprint producers expect another struggle to implement the latest price increase and hope that demand picks up in the seasonally strong second half of the year after a weak second quarter. Most major producers announced a $50/tonne price increase for Sept. 1, the second this year, although the first $50 increase was eventually scaled back to $35/tonne.

Increases in advertising linage, together with the presidential election and Olympics, are expected to help boost newsprint consumption in the second half of the year. Several companies are also switching more newsprint capacity to produce specialty newsprint grades for inserts and fliers, effectively adding to the amount of production already taken out of the system by idled mills.

Bowater Inc. said it increased such specialty newsprint shipments in the second quarter by 36,000 tonnes, or about 23%, and has now converted two of its newsprint lines to manufacture specialty grades at its Calhoun, Tenn., mill, representing annual capacity of about 250,000 tonnes.

A year ago, one of those lines was producing standard newsprint, the company said, and it expects the trend towards higher production of specialty grades to continue. Bowater Chairman and CEO Arnold Nemirow said he believed the trend is one reason the industry-wide newsprint consumption figures remain so depressed because they do not reflect the higher consumption of specialty grades.

In addition to the shift to specialty grades, Bowater said it took 17,000 tonnes of newsprint maintenance downtime in the quarter, and one machine at the Thunder Bay facility in Ontario remained idled, representing 36,000 tonnes of capacity for the quarter. "We do not expect to restart this machine until we see more measurable improvement in consumption," said CFO David Maffucci.

For the quarter, Bowater said it realized $30/tonne higher newsprint prices compared to the first quarter, which reflected "a pretty full implementation" of the first price increase. Shipments were down 5% from the first quarter, primarily due to the maintenance downtime.

The company reported a net loss of $1.3 million for the quarter, down from the $25.7 million loss reported in the same quarter last year, and said it expects to return to the black in the fourth quarter.

Abitibi-Consolidated Inc. also increased its production of specialty newsprint in the second quarter after converting and restarting its Alma mill in Quebec during the second quarter, and suggested that the conversion could tighten the supply-side of the market by taking additional standard newsprint capacity out of the system. Like Bowater, it also has no immediate plans to restart idled capacity, saying it needed "higher prices and several months of positive consumption" to consider it.

The Alma conversion, combined with the expected pick up in demand in the third and fourth quarters, will likely help the next price increase, said John Weaver, chairman and CEO, although he did not expect the hike to be easy. "I think that we'll implement the price increase but it will be a struggle as with the previous three or four have been. But at the end of the day the price of newsprint will go up," he said.

Abitibi reported that newsprint prices ended about $35/tonne higher after the last increase, and said its system costs were reduced by $15/tonne. Both contributed to a turnaround in second-quarter performance of its newsprint business, which reported an operating profit of C$21 million compared to a loss of C$13 million in the second quarter last year.

Newsprint sales volumes declined 84,000 tonnes in the quarter compared to last year's 1.084 million tonnes, however, and net sales fell 3.1% to C$780 million.

Commenting on the drop in newsprint exports in May and June, Weaver suggested that idled capacity was a factor. "If you take the idled capacity out of the various production statistics, you see that the industry's running at 97 plus percent over the last several months and I think what that means is that perhaps there's just not as much paper available for the export market as there has traditionally been."

Tembec Inc. was more pessimistic on the prospects of an improvement in the newsprint market in the second half. It hopes there will be a pick up in demand this quarter but expects "nothing significant", despite the potential increase in consumption from the presidential election and Olympics.

"There's like a wet blanket over this whole sector where the big guys just feel they'll decide what the price is going to be and there's not enough negotiating power on the supplier side to do very much about it. So until we're short of a couple of tons of newsprint I would say it will be a tough market," Frank Dottori, president and CEO, told analysts.

He said price rises of about $25-$35 had been passed through to customers in the company's fiscal third quarter ended June 26 "at long last." Shipments of newsprint and uncoated groundwood in the quarter were down about 3,000 tonnes from the previous quarter to 145,800 tonnes.

NorskeCanada also reported a small decline in second quarter shipments of newsprint (down 7,700 tonnes to 193,200 tonnes) due to maintenance downtime but a similar $30/tonne increase in average prices for the quarter, helping cut the operating loss in its newsprint business to $2.1 million in the second quarter, down from $16.7 million in the second quarter last year and $5.2 million in the first quarter.

Higher transaction prices also offset lower shipments, increasing second-quarter newsprint sales slightly to $143 million from $142.6 million in the first quarter.

NorskeCanada said it believed the "lack of recovery" in the newsprint market at this stage of the economic recovery is typical, and it would likely be one of the last commodity markets to revive.