A Shadow Over the Newspaper Business   

Newsprint prices, long depressed, are rapidly rising. Newspaper owners are running scared.

When it comes to raw materials, newspapers basically buy ink, newsprint and paper clips. The big item, of course, is newsprint, and suddenly its costs have cast a shadow over the newspaper business.

The prospect of soaring newsprint costs has already been cited as a major reason for staff cuts at the Wall Street Journal, the Miami Herald and other papers and the decision by the owner of the Milwaukee Journal and Milwaukee Sentinel to merge the two papers. Until prices stabilize in two or three years, more layoffs, hiring freezes, mergers and, at some papers, news hole cuts, are likely.

Time was, there were two things that could send newspaper publishers into a frothing snit: the unconscionable demands of newspaper unions – demands that would surely drive any newspaper into financial ruin – and the rapacious newsprint producers determined to use their control over the one commodity newspapers could not do without to wring every last bit of money from an already beleaguered business. The cost of newsprint looms large because it accounts for 15 percent to 25 percent of operating costs.

The rhetoric has toned down considerably in recent decades. Unions no longer have much power to shut down newspapers or make "unconscionable" demands. And for the last half-dozen years or so newsprint producers likewise lost bargaining power, mostly because of the peculiarities of how the newsprint business works.

In many ways, newsprint producers are accustomed to thinking like hog farmers. When prices are low, farmers are loath to breed new hogs. Because of this, in time hogs get scarce and prices start to rise. Encouraged, all the farmers raise new hogs, and when they mature at the same time and come to market, prices collapse again.

This has been going on as long as anyone can remember in the newsprint business too. The last time producers were encouraged to invest in new capacity was in the mid-1980s, when newsprint prices were high. The problem is it takes three to four years to build a working newsprint mill from scratch. By the time all the new capacity came on line, pretty much all at once – which by itself was enough to ensure declining prices – the newspaper industry itself was hit by the biggest advertising recession since World War II.

Rising newsprint production and declining demand for newsprint turned out to be a double whammy because advertising volume, which drives newsprint demand, was sinking.

An understandable result of the scenario – lots of hogs coming to market when demand for hogs was waning – was a severe imbalance between supply and demand and plunging newsprint prices. By early 1994, most newspapers were paying the same price for newsprint that they had in the early 1980s. This was a financial bonanza for newspapers and helped them get through a rough recession with respectable earnings growth.

All this started to change during 1994 because advertising demand for newspaper space grew faster than anybody anticipated and narrowed the gap between newsprint supply and demand. With demand up, newsprint prices began to rise, and now we have the well-published complaint that newspapers are beset with "soaring" newsprint prices. By most estimates, newsprint in 1995 will cost 30 percent to 35 percent more than it did in 1994, and prices are likely to rise at least through 1996.

For a little perspective, consider that newsprint prices peaked in 1988 at $600 per ton (this before the deluge of new capacity). If that price had increased since then by the annual inflation rate, the price now would be about $750 per ton. Instead, it is about $600 (having been at certain times since 1988 as low as $410 per ton). During just the last three years of this period of low prices, newsprint producers in aggregate have lost about $3 billion – a loss level that threatened many producers' existence.

Clearly, newspaper publishers do not want newsprint producers to go out of business. Even newspaper publishers realize that newsprint producers deserve to make some profit.

I recently completed visits to numerous newspapers that I appraise every year, and most of the managers I talked to expected that operating profit in 1995 would be the same as last year's because of the higher newsprint costs. This is not upbeat news, but it in no way suggests a financial calamity. Newspapers are profitable enough that they can afford to give back to newsprint producers some of the money they have made on low newsprint prices in recent years.