The Taming of Killer Newsprint
Prices are heading down, and that's good news for publishers' bottom lines.
By John Morton
John Morton (firstname.lastname@example.org), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.
It is an irony of the newspaper business that last year's villain has become this year's savior. Yes, I am writing about newsprint.
Remember how outrageously higher newsprint costs last year were trotted out to justify laying off hundreds, even thousands, of newspaper workers? Newsholes were squeezed, travel budgets slashed, special editions scaled back, entire newspapers put down, all because of unprecedented hikes in newsprint prices.
The industry underwent a downsizing the likes of which had never been seen, and newspaper managers put forth the reasonable-sounding excuse that, with newsprint costs soaring 30 percent to 40 percent over the previous year, they had no choice.
This was nonsense. What happened to newsprint prices beginning in mid-1994 and accelerating with a vengeance in 1995 was wholly predictable, or should have been for any industry with a grasp of the factors that affect its operating costs. Many newspapers undermined product and quality for what was sure to be a short term blip in spending.
At the risk of repeating myself (repetition is the easiest form of writing), I will recall what I wrote in a column in March 1995, in which I likened newsprint producers to hog farmers. When prices are low, hog farmers are loathe to breed new hogs. The inevitable result is a dearth of hogs, which causes the price of available hogs to go up – the classic supply-demand effect. When prices get high enough, hog farmers start to breed more hogs. When the new hogs come to market, prices go down again, and the cycle repeats itself. Substitute building new newsprint machines for breeding hogs, and you will understand how the newsprint business works.
The major difference in this cycle the last time around was that global demand for newsprint entered into the equation in North America more than in any previous cycle.
After five years of unusually low newsprint prices because of a supply glut (caused by new newsprint production and a drop in demand because of the early 1990s recession), newspapers in North America in 1994 began buying newsprint at higher levels in response to burgeoning advertising volume. Demand in other parts of the world, notably Southeast Asia, went up as well. This combination dried up the oversupply and drove up prices, from about $425 per ton in early 1994 – about the same price prevailing in 1980 – to $750 by the end of 1995.
Now we have entered another phase of the inevitable cycle. New newsprint production has come on line in Korea and the Philippines, lessening Asian demand. Newsprint use in North America has dropped because of sluggish advertising volume since 1994. The result? Prices are falling (see Free Press, July/August).
The sad part of this scenario is that last year, at the very time newspapers were downsizing so earnestly, the causes of this year's price decline were already becoming apparent. Newsprint actually used in North America declined steadily throughout 1995. But the demand for it – and therefore its price – remained strong because publishers were building inventory, the newsprint kept on hand at newspaper plants. Whereas a 30-day supply ordinarily is considered adequate, by the end of 1995 the average was 55 days.
What has happened this year is that publishers are starting to use up their inventories – the average had dropped to 50 days by midyear. This phenomenon, coupled with lower demand from Asia, has once again created an oversupply. Newsprint producers, apparently condemned to repeating history by ignoring its lessons, have continued to manufacture at high levels, creating another glut.
After peaking at $750 per ton at the end of 1995, newsprint prices began to drop. The price was $650 at midyear and headed down. Canadian paper analysts expect the price to sink below $600 later this year.
This means newspapers will once more reap the benefits of relatively cheap newsprint, which accounts for 15 percent to 25 percent of operating costs (large newspapers spend proportionately more on newsprint because they tend to print more pages). The impact of the lower prices will not show up fully on the bottom line until the last quarter of this year, because it will take that long to work down high-priced inventory.
Thus newsprint, which just last year caused costs to soar, has just as suddenly become a source of higher profit, aided by smaller staffs, slimmer newsholes, reduced web widths and all the other cost-cutting measures newspapers embraced when newsprint prices were rising.
This change in newspaper fortunes will be a comfort to those who still depend on newspapers for livelihoods and investment returns. There will be no comfort, however, for those downsized out of the business. l ###