Tuesday, March 18, 2008

Newsprint Producer Fights To Avoid Becoming Another Bear Stearns

As AbitibiBowater, North America's Largest Newsprint Producer, Fights To Avoid Becoming Another Bear Stearns, Norway's Norske Skog Announces More Cutbacks, US Newspaper Groups Brag At Huge Newsprint Usage Declines, And China Ramps up Newsprint Production and Exports
BY Philip M. Stone

The merger of Abitibi and Bowater last October was supposed to form North America's largest newsprint producer that could, with the cost savings a merger between two such giants should produce, finally get the upper hand on production and pricing. Instead its shares are down nearly 70% so far this year, off 15% alone on Monday because the markets don't think its recently announced $1.4 billion refinancing plan will fly.
Meanwhile North American newspaper groups are boasting to their shareholders about the cost savings they are making by using less newsprint.Gannett, the largest US newspaper publisher, reported newsprint expense declined 25.3% in Q4, 2007, due to usage prices that were 8% down, and almost 19 percent lower volume. At the New York Times Company newsprint expense for Q4 declined 30.3% with 16% coming from lower consumption and 14.3% from lower prices. Newsprint costs are thought to consume around 20% of a newspaper's costs.

Those savings did not come by accident. Newspapers have been very busy in the past few years cutting the width of newsprint from 15 inches down to 12 (38cm down to 31cms), converting to lighter weight paper, confining to the web financial tables that used to consume three or four pages daily, reducing the news hole, cutting back on distribution areas, dropping most bulks sales, not to mention the classified advertising debacle that has seen many metropolitan newspapers that used to run two or more sections daily of classifieds now down to just running a few pages. Add all of that up and no wonder newsprint consumption is down by double-digit percentage numbers.

AbitibiBowater has been busy since its October merger shutting down mills and reducing the workforce -- in February it sold a newsprint mill in Arizona and it's selling timberlands in the US and Canada as it attempts to pay off debt. In its first quarter as a merged company it reported a $250 million loss, with analysts basically saying all of its attempts to cut costs still have not caught up to the 12% decline in December newsprint usage over the year before.

And on the other side of the Atlantic, Norske Skog, Europe's largest newsprint producer and second globally to AbitibiBowater, says it has been hit by rising energy costs and lower newsprint demand. It announced last week it was cutting capacity by 7% -- shut 450,000 tonnes of newsprint production at three mills in Norway, the Czech Republic and South Korea -- as the company works on reducing its $3 billion (€2 billion) debt mountain. Its shares have sunk some 80% in the past year and are now selling at 20% of book value. It has quit paying dividends.

And the outlook for newsprint consumption in Western Europe, like in North America is not looking good. Europe is the leader in the free newspaper industry and one might have thought all of those free newspapers would have pushed up European consumption, but those free newspapers are only responsible for about a 5% uplift, according to the Pulp and Paper Products Council. One reason for that is that while there may be a lot of free newspapers, they are printed in mostly small A5 size (230cm x 320 cm - 9 inches x 12.5 inches). And making matters somewhat worse there is a "survival of the fittest" war going on with the weak free newspapers dropping by the wayside.

"Newsprint demand in Western Europe has held up due to growing consumption by free newspapers,"according to Emanuele Bona, European Vice President for the Pulp and Paper Products Council, but he sees storm warnings ahead. "The other key drivers of demand have been falling -- circulations of paid-for titles, pagination, and advertising spending on newspapers have all been weakening."

In his view Europe won't see any consumption increase this year, but he doesn't expect to see the decline that North America has been experiencing although there are storm warnings out there. "Now that the contribution of free newspapers to newsprint demand seems to be waning, as most markets become saturated, we don't expect to see any overall growth in consumption in Western Europe," Bona explained. But he warned, "The weakening economic environment will have a further negative influence on the circulation, pagination and ad pages.

"However, we don't expect Western Europe to show the sharp decline in newsprint demand that we have seen in North America (demand fell over 10% last year, and 33% or 4.3 million tonnes since 2000), but we can certainly anticipate the beginning of a structural decline on this side of the Atlantic as well," he said.

AbitibiBowater is trying to dig itself out its hole not just by reducing production but also by raising newsprint prices - a $60 a ton increase for Q1 seems to be holding bringing prices to around $620 a tonne and the company has announced a similar increase to be phased in during Q2. On the other hand, US newspaper newsprint consumption is expected to decline within a 9%-12% range this year.

The declining dollar is giving AbitibiBowater export opportunities - looking mostly to South American markets but also to India and Europe where prices are higher -- just what Norske Skog needs! "We intend to increase our newsprint export shipments in 2008 by nearly 10%," according to AbitibiBowater Chief Executive David Paterson.

Not to be discounted in all of this is China's announcement that its newsprint production - using new energy-efficient mills plus recycled raw materials - has risen 5.7% so far this year to 689,000 tons. There had been thoughts that China would find it worthwhile exporting to the US West Coast giving North American producers price competition they would not welcome, but the declining dollar probably has probably put an end to that and so the Chinese are looking more and more at India. The bulk of India's newsprint imports now come from North America.

It seems that few weeks go by without the announcement of another Indian newspaper launch. Domestic Indian newsprint consumption is currently thought to be around 2 million tonnes, but that is expected to grow in a year by about 20% as plans are announced for new publications as well as increasing pagination and the number of editions of current newspapers. Currently about half of the demand is met domestically - but not preferred for color printing on quality issues -- and in a country known for high import taxes, newsprint gets away with just a 5% duty.

Increased demand has led to higher prices and a spokesperson for one Indian publication said that whereas in Q4, 2007 the price was around $675 a tonne it is now running around $750 - $760 a tonne. Those types of prices make it profitable, for North Americans to export. According to Resource Information Systems, US East coast prices, ready for shipment, have risen from $608 a tonne to $710, and is expected to rise to $770 by Q3. The thought in India is that before this year is out prices will reach around $850. No wonder that is the world's newsprint export market of choice!

In India the higher prices are a bigger problem than elsewhere because wages are relatively low, so newsprint is responsible for up to half of a newspaper's costs, even more perhaps for smaller newspapers. The big guys will survive, but will the smaller newspapers?

Globally, according to RSI, demand at the beginning of 2007 was around 38.3 million tonnes, and the supply was some 2.2 million tonnes in surplus. That's why the paper companies have been busy shutting down mills and by now most of that spare capacity is gone - thus the climate for price increases.

The question now is whether AbitibiBowater, having done what is necessary to stay in business, now will have the finances to stick around and reap the rewards.

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