Newsprint Use Down, So Price Hike Delayed

By: Debra Garcia With statistics just released showing a sharp 8.5% year-over-year drop in January's newsprint consumption by U.S. dailies, North American newsprint producers are having trouble implementing a $40/tonne U.S. newsprint price increase in February, industry observers reported.

But they said newsprint prices are likely to strengthen.

?We think the January newsprint data is supportive of our current price forecast, which calls for partial implementation over several months of producers' proposed $40/tonne February price increase (which has gained little traction thus far),? indicated Claudia Shank, industry analyst with J.P. Morgan Securities Inc.

Mark Wilde, analyst with Deutsche Bank, agreed that the price hike ?gained virtually no traction in February,? but noted ?it isn't a total surprise as February is normally a seasonally slow month.?

According to the Pulp and Paper Products Council's (PPPC) just-released newsprint statistics, the only bright side to January's data appears to be a reduction in total inventories (mill plus consumer), which is a result of producers' determination to more closely match output with orders by shutting down unprofitable capacity in the face of declining demand.

Low total inventories. While North American newsprint production in January declined year-over-year by 5.1%, to just over 1 million tonnes, total North American stocks at month's end were 19,000 tonnes lower than a year ago.

All of the 19,000 tonnes was attributed to stocks destined for overseas markets, while inventories intended for domestic deliveries were flat year-over-year, the PPPC reported.

Meanwhile, all U.S. users inventories at the end of January dropped 57,000 tonnes below levels a year earlier, the equivalent of one day less on hand than at the end of January 2005, according to the PPPC.

Although total inventories for suppliers and users rose approximately 87,000 tonnes during January, this was in line with the historical average increase of 90,000 tonnes and, despite the hike, remained 6% lower than historically, according to Shank.

Chip Dillon, managing director, Citigroup Investment Research, noted that January inventories traditional rise sharply and moderate in February and March. Yet, January's increase was ?24% less than the average 114,000 tonne increase seen over the past 10 Januaries,? he said.

The North American newsprint operating rate of 94% in January was 1% below a year earlier, but U.S. mills gained by 1% to a rate of 96% while the Canadian rate dropped 1% to 94%, according to PPPC data. Canadian mills have taken the brunt of the market's decline because of rising energy and transportation costs and a strengthening Canadian dollar.

Expect more shutdowns. In his February 2006 Reel Time Report, Verle Sutton writes that losses by Canadian newsprint mills in fourth-quarter 2005 were nearly as severe as at the bottom of the pricing cycle in mid-2003, when U.S. transaction levels reached $425/tonne. Sutton estimates the current U.S. price at $565/tonne for 30 lb newsprint.

Last quarter, Abitibi-Consolidated Inc. permanently shuttered two of its Canadian newsprint mills, one in Kenora, Ont., and the other in Stephenville, Nfld., taking an estimated 3.5% (434,000 tonnes/year) of North American newsprint capacity off the market.

CIBC World Markets recently predicted that ?given the ongoing downward trend in North American newsprint consumption ... and the continuing strength in the US$/C$ exchange rate, we expect further capacity closures in Canada by other producers.?

Cited as possible candidates for closure were Stora Enso's operations in Nova Scotia and some of Bowater Inc.'s mills in Quebec and the Maritime provinces. In addition, Abitibi was expected to review its mills in Fort William, Ont., Grand Falls, Nfld., and Lufkin, Tex., as well as its Bridgewater mill in the U.K. CIBC projects that North American newsprint capacity will decline by 4% in 2006 and global capacity will grow about 1%.

North American newsprint mills shipped 4.8% less newsprint in January than a year earlier, according to the PPPC. North American customers received 862,000 tonnes, a drop of just 1.7% from January 2006.

Sharp decline in overseas orders. However, overseas shipments plummeted by 18.1%, with all markets off significantly except for Latin America, which showed an 85.1% year-over-year jump in January 2006 deliveries. Shipments to Western Europe fell 43.2%, Japan was down 33.6%, and non-Japan Asia was off 39.4%. Interestingly, U.S. overseas shipments grew by 3.7% in January compared to a year earlier, while Canadian overseas deliveries fell 23.9%.

The PPPC reported that total North American demand declined by 2.1% in January 2006 compared to a year earlier. The loss was similar in both countries, with U.S. demand falling 2.1%, while Canadian demand dropped 2.0%.

Consumption by U.S. dailies dropped significantly more (off 8.5%) than the decline in total U.S. consumption (off 5.8%) year-over-year in January, due to an estimated 6.5% improvement in consumption by commercial printers, which is calculated as the difference between total consumption and U.S. dailies consumption.

January 2006 and January 2005 each had five Sundays, making the data for the two months comparable, as Sunday newspapers tend to be much fatter than daily newspapers.

Price outlook relatively good. Despite newsprint demand continuing its downward trend, market prognosticators expect prices will continue to advance this year. Shank indicated that ?stringent supply-demand discipline? would help boost newsprint prices by another $20-$30/tonne in first-half 2006.

Dillon projected newsprint prices would move up in both 2006 and 2007 due to ?relatively high global operating rates in newsprint.? Indicating a current price of $650/tonne in the U.S. East, he forecasts average prices will reach $670/tonne in 2006 and $695/tonne in 2007.

CIBC maintains that capacity reductions at the industry level will be sufficient to maintain pricing pressure, but George L. Staphos, analyst with Banc of America Securities, recently indicated that ?despite relatively tight market conditions, we are only forecasting one round of price hikes in 2006.?

(All news reports are copyrighted by the respective papers. External links may require site registration.)