North America PPPC Newsprint Stats Still Sliding

By: Debra Garcia North American newsprint production, shipments and consumption continued on a downward slope in August, the Pulp and Paper Products Council (PPPC) has reported.

Consumption by U.S. daily newspapers fell year-over-year by 7.8% in August, bringing the year-to-date total to 4.6 million tonnes, 7.7% below a year earlier. Total U.S. consumption, which includes commercial printers, was not much better, being off 7.7% in August and down 6.1% through the first eight months.

"We were particularly disappointed by the magnitude of the decline in overall U.S. newsprint consumption," Claudia Shank, paper and forest products industry analyst with J.P. Morgan said in a research note. She said her previous forecast for a partial implementation of the August price hike over several months "may prove too optimistic."

While not welcomed, the bad statistical report for North American newsprint was not unexpected. However, the longevity of the downturn in consumption, which doesn't seem to be abating at all, is putting even more pressure on mills to consider further cuts in production to match the decrease in demand.

Looking at today's statistics, Citigroup Investment Research paper and forest products industry analyst Chip Dillon said in a research note that his firm believes the rapid rate of decline in consumption is due primarily to the declining physical size of newspapers, rather than declining circulation.

"(I)f newspapers continue to diminish their product in the interest of achieving a one year earnings target, then they may more quickly kill their franchises and thus destroy overall value (since a business is intended to last for many years, not just one year!)," Dillon wrote. "It is evident in this year's M&A activity, not to mention the near mutiny at the Los Angeles Times, that newspaper owners willing to stay in the game 'get' this."

In August, North American newsprint mills produced 990,000 tonnes, a drop of 5.1% from a year earlier, and for January-August 2006 the total output of 7.9 million tonnes was off 6.5% from the same period in 2005.

Operating rates for North American newsprint mills were flat, however, at 94% for August and 95% year-to-date. However, the ratio of output to capacity fell in Canada but not in the U.S. In August, Canadian mills ran at 93% of capacity vs. 94% a year earlier, while U.S. mills operated at a 96% rate compared to 93% last August.


Canadian mills keep inventories low

This led to an increase in U.S. newsprint mill inventories of 3,000 tonnes during August, while Canadian inventories fell by 24,000 tonnes. This left U.S. producer stocks 9,000 tonnes higher than at the end of August 2005, while Canadian levels were 37,000 tonnes lower.

Total North American inventories, though, declined 21,000 tonnes in August and were 28,000 tonnes below a year earlier, according to PPPC statistics.

Canadian newsprint manufacturers have shown more restraint in reducing output all along, with Abitibi-Consolidated Inc. leading the way and taking more newsprint capacity offline than any other producer. Bowater Inc. and Catalyst Paper Inc. have provided some assistance, according to Verne Sutton, editor of Reel Time Report.

Shutting down or converting newsprint capacity in North American has enabled newsprint manufacturers to raise prices at a relatively steady rate for years. However, that might be coming to an end as the drop in consumption has brought demand below the capacity to meet it, market analysts are indicating.

Since July 2002, U.S. newsprint prices have increased by 55%, noted Sutton. However, only between May 1995 and May 1996 were they higher than currently. He lists 30-lb newsprint in the U.S. at a price of $655/tonne for August, where it has been for at least six months.

Salman Partners, Duetsche Bank, and CIBC World Markets quote prices for the same grade at a current level of $675/tonne, according to recent reports.

Bowater's shares declined today as The New York Times Co. became the latest newspaper publisher to warn of weak quarterly earnings from diminishing advertising revenue, Business Week reported. It noted that on Thursday, the Times said a challenging advertising market would result in reduced year-over-year third-quarter earnings, echoing comments from Dow Jones & Co., publisher of The Wall Street Journal, and Belo Corp., publisher of The Dallas Morning News, earlier this week.


August price hike seems to be failing

While newsprint producers were slated to raise prices initially by as much as $40/tonne on Aug. 1, when Abitibi later reduced the hike to $20/tonne, the momentum was already lost and prices remained flat, sources reported.

Newsprint buyers have shown resistant to recent hikes, and their strength is reflected in their inventories of newsprint at the end of August. While U.S. dailies stocks increased during the month by 10,000 tonnes and all U.S. user inventories rose 38,000 tonnes, those levels at the end of August were still 75,000 tonnes and 67,000 tonnes lower, respectively, than a year earlier, according to PPPC data.

Total North American newsprint inventories (mills and consumers) overall increased 18,000 tonnes in August. This was below the average historical inventory growth of about 50,000 tonnes. At month's end, absolute inventories totaled 1.3 million tonnes, 11% below average historical levels, noted Shank.

Export demand for North American newsprint added some support for the market in August, with overseas shipments up 0.1% for the month vs. August 2005. However, through the first eight months of 2006, overseas deliveries are down year-over-year by 13.8%, to just under 1.5 million tonnes.

The only major export destination still showing promise is Latin America, with August deliveries up year-over-year by 66.8% and through the first eight months, ahead by 17.9%. All other export markets are down year-to-date, except for "other," which represents a small percentage of total overseas demand.


Imported newsprint could be a problem

Imports of newsprint into North America were also down year-over-year, showing a 15.1% decline in August and 20.1% drop during January-August. This has been the pattern for several years, but could change soon, according to Sutton.

In his September Reel Time Report, Sutton reports that Gannett has run trials on newsprint made in China, and overcapacity in that country is expected to result in it becoming a net exporter of newsprint as soon as 2006 or 2007.

Although the weaker U.S. dollar has been a disincentive for exporters to the U.S., high U.S. newsprint prices "are a siren's song," noted Sutton. He projects China will export 350,000 tonnes of newsprint in 2007. In addition to this, capacity is increasing in some other countries by more than a million tonnes. While some of this extra tonnage will be absorbed by demand growth in non-Chinese Asia and other parts of the world, "it's likely that there will be some excess world supply and that some of this excess supply will be exported to the U.S.," said Sutton.

Industry analysts are beginning to revise forecasts for U.S. newsprint prices for the rest of 2006, projecting that prices might be flat to down.

Bowater Inc.'s decision to take downtime at its Thunder Bay, Ont., newsprint mill for at least 15 days this month is expected to take at least 15,000 tonnes off the market, Shank estimated, but did not expect it would be enough to support higher prices.

Sutton indicated that mills are running fullout, but are anxious about the year ahead. "We can guess that a concern over volume may have entered into the Abitibi-Consolidated decision to roll back prices so quickly," he said.