BUSINESS

PAPER CHASE

Publishers reel from paper price hikes

ANDREW WILLIS May 15 1995
BUSINESS

PAPER CHASE

Publishers reel from paper price hikes

ANDREW WILLIS May 15 1995

PAPER CHASE

BUSINESS

Publishers reel from paper price hikes

Kamloops, B.C., is close to some of the finest forests in Canada. But having all those trees nearby is not making it any cheaper—or easier—for publisher Brian Butters to get the 1,500 tons of newsprint he needs annually to put out The Kamloops Daily News. Butters spends about $5,000 each day for paper, a price that has soared by 82 per cent over the past 18 months. This increase is cutting deeply into the Daily News’s profits as well as those of its parent company, Southam Inc. of Toronto, which made $44 million in 1994. To ease some of that pressure, Butters plans to cut the width of the Daily News’s pages by 1.25 inches later this month. The same trim will also be administered to the other 16 daily newspapers owned by Southam across Canada. That surgery is expected to save the company some $10 million every year—although it will cost about $7 million this year to adapt Southam’s printing presses. This strategy, which is also being followed by other newspapers across Canada, is just one component of an increasingly bitter struggle between cash-strapped publishers and the pulp-and-paper industry that supplies them. “Many of us have expressed our deep dissatisfaction with the price increases that we have seen, but newsprint companies don’t seem very interested in hearing our views,” says Butters. The 25-year veteran of the notoriously cyclical paper industry says: “The newsprint companies’ view is that what goes around, comes around.”

What is coming around in a big way is the price of paper. After hitting lows of below $600 a ton between 1992 and 1994—a price that forestry analysts say was $80 below the average production cost for a Canadian newsprint company—the price for a ton of newsprint hit $925 last week. That includes a whopping 12-per-cent hike imposed on May 1. Forest industry analysts predict that by next year, newsprint could cost $950 or more a ton, matching the all-time highs reached in 1988. To make matters worse for publishers, the same upward spiral is playing out with recycled paper, which now makes up about 30 per cent of North America’s newsprint content. In some areas, recycled paper prices have climbed 400 per cent in the past 18 months. In fact, the closure of The Houston Post last month was blamed in part on rising paper costs.

Says John Johnson, a forest products analyst for Richardson Greenshields of Canada Ltd. in Vancouver: “No doubt there will be further casualties among newspapers. Artificially low newsprint prices have allowed some inefficient publishers to stay in business.” For readers, the results of rising paper prices are already showing up on the newsstand. The cost of a subscription to The Kamloops Daily News rose five per cent this year, to $9.50 a month, and advertising prices went up by the same amount. But Butters says: “It is impossible to pass the full impact of price increases on to our customers.” A best-selling paperback book is expected to soon cost $9.99, up from $8.99 for a current hit such as John Grisham’s The Chamber, and the

$7.99 price tag on Grisham’s 1992 best-seller, The Firm. The price of romance has also jumped—a novel from Harlequin now retails for $3.75, after a 25-cent increase in March. Declares company vicepresident Katherine Orr: “The increases in paper prices have been absolutely devastating.”

Paper prices are rising so dramatically because demand for newsprint is mounting at the same time that access to trees is declining. North American newsprint demand is being spurred by a sevenper-cent growth in print advertising this year, while Asian demand for newsprint has grown by 13 per cent annually for the past five years.

However, Canadian publishers complain that the demand from a surging U.S. economy is forcing up newsprint prices at a time when Canadian papers are still struggling to recover from the recession. The Toronto Sta/s advertising sales are off 35 per cent from the boom times of 1988 and company spokesman Fred Ross says: “We’re the 13th largest newspaper in North America, but when it comes to newsprint prices, we are forced to follow the lead of the U.S. papers. And right now, demand for newsprint in the United States is much higher than it is here.”

On the supply side, there are simply fewer trees to be harvested. Johnson says that provincial government regulations have chopped the number of trees available for cutting, while sharp increases in lumber prices have diverted more logs away from newsprint and into higher profit-margin building products. Furthermore, the environmental standards on pulp-and-paper mills are becoming increasingly expensive to meet and maintain. Vancouver-based MacMillan Bloedel, which produces more than 700,000 tons of newsprint a year, estimates it spent $230 million in the past five years to meet new environmental standards, most of which were aimed at halting its mills’ discharge of chlorine, used to bleach wood pulp. And it is these long-term corporate investments that are now reflected in higher paper prices.

Currently, there is no sign of any new newsprint supplies emerging to relieve the pressure on publishers. The cost of building a new pulpand-paper mill is now so high—between $300 and $500 million—that little manufacturing capacity is being added by Canadian companies, a display of restraint that contrasts with the industry’s spending spree during the last peak in the commodity cycle. When newsprint prices soared to a record high of more than $950 a ton in 1988, Canadian paper companies expanded aggressively—only to lose $2.4 billion over

the next five years as paper flooded the global market during the recession.

The hard lessons of the last downturn, however, are serving the pulp-and-paper companies well today. MacMillan Bloedel, one of two paper companies supplying The Kamloops Daily News, recently posted a first-quarter profit of $65.3 million on sales of $1.2 billion, quadrupling the $13.9-million profit recorded in the first three months of 1994. At Montreal-based Donohue Inc., shareholders sipped bubbly wine at last month’s annual meeting, as chairman CharlesAlbert Poissant predicted a second consecutive year of record profits. The company turned in 1994 net earnings of $114 million on sales of $807 million, and Poissant told shareholders that newsprint prices could remain at current levels for several years. Still, he did voice concerns that high newsprint prices may eventually stifle demand. ‘We’d be satisfied with a lower price. But we’re not a leader in | the end,” he noted.

I As international commodity 5 prices soar, Poissant and other I pulp-and-paper producers are Í aware that their relationship with Canadian publishers is becoming increasingly strained. At the annual meeting of the Toronto Sun Publishing Corp. last week, chief executive officer Paul Godfrey declared: “The rate of increase in the past year has been unconscionable.” The Canadian Daily Newspaper Association has also ranted against what it calls “predatory pricing policies” by Canadian producers. CDNA president John Foy says his organization wrote formal letters of protest to every forestry company chief executive in Canada, “but our complaints were largely ignored.” Still, Canadian publishers are not the only ones who are feeling the squeeze. Their European counterparts, hit recently with a 20-per-cent increase in newsprint prices, are accusing their suppliers of fixing prices. Those accusations were taken seriously enough for the European Commission to launch an investigation into an alleged newsprint cartel in seven countries within the European Union. Commission officials recently raided about 40 companies to collect files for the ongoing probe.

For their part, Canadian publishers are continuing to explore ways to cut costs and pass at least some of the newsprint price increases on to readers. Some inventive internal savings have already been found, for example, the earliest copies of a paper coming off a printing press are usually of poor quality and used to be scrapped; now they are used for internal consumption. But many senior publishing executives also say that they are convinced that the cycle will eventually tum in their favor. Butters, for one, says that newsprint companies will eventually be tempted into adding additional newsprint capacity or diverting more of their wood supply into paper production. The Kamloops Daily News publisher adds, with considerable relish: “Our day will come.” But until then, trimming page sizes and reducing print runs will be the order of the day.

ANDREW WILLIS