NEWSPRINT PRICE RISE NOT A SURE BET, NOW OR LATER Abrupt increase considered unlikely, but...

Though newsprint consumption is on the rise -- and it would seem logical that such higher usage would increase prices -- newspaper business executives, newsprint officials and both publishing and paper analysts agree: Nothing is logical in any commodities business.

U.S. daily newspapers'

newsprint consumption grew by 4.2 percent year-over-year through July 1997, according to figures released by the Newspaper Association of America -- boosted by this year's sustained, across-the-board ad revenue growth. That newsprint growth figure, or one just below it, is expected to hold fast through the end of the year, according to analysts, newsprint suppliers and major newsprint buyers interviewed by NewsInc. Should that happen, U.S. dailies' total 1997 newsprint consumption would be about 9.11 million metric tons, up from 8.76 million in 1996, according to figures from the Canadian Pulp and Paper Association.

Given that growth -- to say nothing of newspapers' revenue performance -- it would seem likely that newsprint suppliers would hasten a steady series of price increases. After all, suppliers still are recovering from the unprecedented swoon newsprint prices took in the second half of 1996, when the March 1996 peak transactional price of $750 per metric ton in the East ($765 in the West) plummeted to about $500 per metric ton by year's end.

Those gyrations testify, once again, to the potential folly of forecasting commodity markets. It's also telling that a consensus about the newsprint market's direction through the end of 1998 is hard to come by. But, as a closer look at the fundamentals of the North American and world newsprint market demonstrates, if consumers were to expect rapid -- and successful -- pricing actions, they'd be pleasantly disappointed.

LITTLE AGREEMENT ON INCREASE

According to the industry newsletter Pulp & Paper Week, August's transactional prices for newsprint were $565 per metric ton in the East and $570 in the West, although some major buyers reported paying prices about $20 below those levels.

A $75 per metric ton price hike that suppliers set for last March 1 has largely gone through, albeit slowly and fitfully. This fall, all suppliers but one have slated a $35 per metric ton increase for Oct. 1; Jefferson Smurfit Corp. of Portland, Ore., has set its boost for Nov. 1.

Here's where the dissonance among analysts, suppliers and buyers is heard: They are widely split on whether or not this increase will succeed, and if it does, how soon it will stick.

"Very simply, we don't have a tight market today," said Bernie Bottomley, general manager of Times Mirror Supply Co. of Los Angeles. "We have a tighter market than we have had in the past, but we have not experienced any late deliveries," which, he noted, is characteristic of a tight or tightening market.

"I think the market is pretty well balanced," said William Dean Singleton, president and chief executive officer of Denver-based MediaNews Group, which owns the Denver Post and 33 other American dailies. "Under normal circumstances, if there's a balance, prices don't really go up or down."

Moreover, adds a buyer for one publicly-traded newspaper company, this year's consumption surge has not proved large enough to ease the glut on the newsprint market that led to last year's steep price decline. "There was such an overhanging supply" last year "that it will take more than a modest uptick to cancel the whole thing out," he said.

Nonetheless, this buyer expected this fall's scheduled price hikes to stick.

A strike that began July 14 is one factor working in favor of suppliers. Two newsprint mills in British Columbia operated by Fletcher Challenge Canada of Vancouver, B.C., remain idled; at presstime, no talks between the unions and management were scheduled. (A Fletcher Challenge strike in late 1994 lasted about two months.)

The strike, said Dennis Day, Fletcher Challenge's senior vice president for newsprint, affects two-thirds of the company's Canadian output, or about 650,000 tons per year.

Even factoring in the strike's effects, which are being felt largely in the West, there's some statistical evidence backing up the buyers' arguments. Pulp & Paper Week reported that inventory at newsprint mills -- that is, unsold newsprint -- was 531,000 tons at the end of July; in a tight market, said one industry observer, mill inventories range between 300,000 and 375,000 tons.

Some observers point out that inventories have been artificially inflated by Fletcher Challenge stockpiling paper in the months preceding the strike; in addition, the idling of two mills will mean that about 60,000 fewer tons of paper will hit the market each month.

Singleton, for one, said he doubted that without the strike -- or if it were to be settled quickly -- the fall increase would succeed at all. Still, it's clear that there's quite a bit of extra tonnage to be consumed before the market gets tight.

Perhaps the best snapshot of market conditions can be found in the comments of Bob Tait, manager of investor relations for Abitibi-Consolidated, the industry's largest supplier to North America, based in Toronto, Ontario.

"We see the market as strong, and it has the potential to decrease inventories," he said. But, he added, "compared to times when prices were increasing substantially in 1994 and 1995, producer inventories are considerably higher than they were then."

Nonetheless, some paper analysts beg to differ.

"I'm pretty optimistic for the manufacturers that the price hike they'll be attempting later this year will succeed," said Sherman Chao, a forest products analyst at Merrill Lynch in New York. Wall Street analysts who cover the newspaper industry -- and who admittedly do not follow newsprint as closely as do forest products analysts -- told NewsInc. they all assumed that this fall's price increase would take hold.

"I think a lot hinges on the duration of the strike," said Linda Lieberman, a paper analyst at Bear Stearns in New York, who cited firming market conditions in other paper grades as one conceivable key to newsprint futures.

Newsprint buyers who think the increase would succeed generally predicted it would not stick until early next year.

SELLING TO OFFSHORE MARKETS

One emerging factor in the equation is the role offshore exports play as a means of controlling North American supply.

Abitibi-Consolidated's Tait reported that the portion of his company's newsprint tonnage heading offshore grew from 26 percent in 1993 to

about 45 percent in 1996. That trend continues to grow at "roughly that rate" this year, Tait said.

"Exports to Asia have been unusually strong," said Kurt Schaefer, associate director of Pulp & Paper Forecaster in San Francisco.

"The question is," Schaefer said, "how sustainable" is that demand. He and Merrill Lynch's Chao pointed out that the potential of financial instability and currency troubles in Asian markets clearly could wreak havoc with this means of damping supply.

Right now, though, trouble is not on the immediate horizon -- leaving some newspaper executives to note, with a tinge of grumpiness, how the newsprint suppliers are manipulating this end of the supply-and-demand equation.

"By exporting as much tonnage as they can, they reduce the amount sitting on their lots, and therefore look as if there's a lot of demand," said Nicholas Penniman IV, senior vice president of newspaper operations for St. Louis-based Pulitzer Publishing Co. But, he added, "there isn't," at least not enough to justify the upcoming price increase on its own.

A comment from a supplier lends weight to Penniman's contention. "There's been some tightening of inventory," said Fletcher Challenge's Day, "but the consumption numbers are encouraging, not spectacular."

SUPPLY-SIDE ECONOMICS

Given the current dynamic between supply and demand, it's not certain that the continued rosy forecasts for newspapers will mean more of their dollars will flow to suppliers. On the other hand, paper makers are certainly better off trying to get price hikes through when newspapers are flush than when they're pinched.

A series of price hikes that suppliers tried to institute during adverse market conditions in the newspaper recession of the early '90s simply failed: Resistance on the part of buyers led suppliers to scrap planned increases.

Market conditions now may be more favorable.

"My expectation," said Miles Groves, the NAA's chief economist, "is that 1998 will be another solid year for advertising in general and newspapers in particular."

Just-released second-quarter '97 figures present results not seen in quite some time: Advertising volume is up 9.5 percent over second-quarter '96, with classifieds and national categories both up double digits -- 11.4 percent and 13.6 percent, respectively. The rise in retail ads sales was not far behind, at 7 percent.

Helping to maintain this pace, Groves pointed out, is that 1998 will have two added advertising boons in the Winter Olympics and congressional elections.

All this indicates that at the very least, newsprint consumption should remain strong. Still, "I don't think we're going to see anything like the increase we saw two years ago," Groves said. "We were dealing with a major supply imbalance with an industry suffering from a major recession, and suddenly demand way outstripped supply."

On a whole, he said, things are much more in balance now.

In fact, the oversupply of newsprint that has plagued producers has its roots in the late '80s. Prior to the massive newspaper recession that took root in 1990, Groves said, the intoxicating growth newspapers posted steadily throughout the '80s led newsprint producers to spend mightily on increased capacity, which left them with new mills coming online just as the worst newspaper recession in generations descended.

Though taking downtime is one supply-side solution -- Abitibi-Consolidated announced 42,000 metric tons of downtime this quarter -- the fact is that it remains much easier for newspapers to cut demand than for mills to cut supply. Pulitzer is one example: According to Penniman, an emphasis on eliminating waste and cutting back on paper use took five percent out of his chain's consumption in the face of the 1995-96 price increases.

GOING UP

Pulp & Paper Forecaster's most recent estimates predict a steady climb in newsprint prices next year, with Eastern transactional prices averaging $618 per metric ton in the first quarter, $635 in the second quarter, $643 in the third and $660 in the fourth.

Looking back, Pulp & Paper Week placed the average Eastern transactional price for 1995 at $669 per metric ton, which dropped to $645 per metric ton in 1996. Through July, the figure for 1997 was around $545.

Getting to $660 by the end of 1998 would require two price hikes on the level of this fall's proposed increase, or one massive increase larger than the $75 per metric ton boost imposed in March. Bear in mind that, even at the trough of the market, this year's $75 increase took effect over several months. It was depicted by more than one newsprint buyer as something of an act of mercy towards suppliers, not as spending necessarily mandated by market conditions.

Nonetheless, Pulp & Paper Forecaster's Schaefer foresees that 1998 will bring a spring pricing action and one in the fall, with continued strength in exports and the Fletcher Challenge strike both serving to tighten the market.

"My reading of inventory is that they were increased by producers in anticipation of a strike" he said. Further, he added, "capacity is just not going to increase through '98. Any incremental growth [in demand] really tightens up the market."

Though further consolidation among newsprint suppliers remains a possibility following this year's merger of Abitibi-Price and Stone Consolidated (see NewsInc., March 3, 1997), Schaefer discounted the possibility of such moves substantially affecting supply. Which is a good thing, since, in the words of one major newsprint buyer, "Most of us are aware of some pretty significant due diligence on the parts of various suppliers over various assets."

At the time of the merger that formed Abitibi-Consolidated, newspaper executives told NewsInc. that the move would have little immediate effect on price trends.

Whether or not further consolidation occurs, newsprint buyers found Schaefer's estimates high. The middle ground may have best been expressed by Pulitzer's Penniman, who foresaw prices topping out at about $645 per metric ton by the end of next year.

A contrarian view, though, is not hard to find: MediaNews' Singleton, for one, said that he expected prices to decline at some point in 1998, as the Fletcher mills affected by the strike produce paper again.

"I think it will get up to $630, and then may go down again," said another major newsprint buyer highly regarded within those circles. Of course, the buyer added, "one thing I learned is that you can't go that far out on anything. It could be $460."

-- Jon Fine