Newsprint in the headlines for all the wrong reasons.

The newsprint market has been in the doldrums for quite some time now. Prices across Europe and North America have been extremely weak and that has been reflected in the share prices of the big producers.

In itself, that is bad enough. But some commentators have speculated that this could be a symptom of a broader malaise that could be set to plague the paper industry long into the future. The argument goes something like this: if what is arguably the most concentrated area of the entire paper industry with high degree of production capacity held in a few hands cannot exert any price influence, the what is the future for everyone else?

Undoubtedly, consolidation is a very real trend that has been witnessed across almost ever sector of the pulp and paper industry, whether you are discussing newsprint or woodfrees or the containerboard market. Newsprint has also been one of the early birds in the consolidation process. In addition, it is clear that major newsprint producers have struggled with price levels and operating margins that are at the kind of levels that make headlines for all the wrong reasons in the financial press.

Norske Skog is a case in point. Operating revenue, earnings, and gross margin were all well down on the same period last year, although it is fair to say that the strength of the Norwegian krone played its part here too. Stora Enso also saw newsprint sales fall dramatically, and the first quarter operating profit was less than 40% of the figure for last year--and 2002 was not a good year for newsprint earnings at the company. On the other side of the Atlantic, Bowater's share price chart tells you all you need to know about that company and Abitibi-Consolidated was even forced to slash its dividend to a fraction of its previous level. All in all, it is clear that the world of newsprint is not enjoying a golden period.

TROUGH LEVELS 

Morgan Stanley analysts note that prices are hovering around "trough levels" if you look back as far as 1996. This could indicate that some sort of recovery is due, although you could go back to the dark clays of 1993 to see some even lower troughs. At the same time, the percentage of available capacity concentrated in the hands of the top producers has increased enormously over that period.

However, it is far from clear that what the true effect of consolidation has been on price development trends. The combined influence of 9/11, SARS, and the Gulf war have conspired to create one of the most poisonous and unstable advertising environments encountered in recent memory. As such, macroeconomic factors must be a prime consideration for the sector's current predicament.

Morgan Stanley's analyst also newsprint is sold can be problematic--typically in annual negotiations for extremely large volumes for powerful, highly concentrated buyers such as News Corp. Consolidated or not, there is precious little chance that companies can afford to turn down such huge orders without worrying what to do with all the spare capacity left over and, more importantly, where next year's earnings will come from.

What producers can control though, is output. And here, the logic of consolidation still holds to a certain degree. As we have seen with Stora Enso's Langerbrugge mill, it is possible to balance new newsprint capacity with closures and grade switches elsewhere in the system. With newsprint use rates in Europe running at around 90%, it is clear that "discipline" must remain the sector's watchword.

For now, it is impossible to say whether consolidation has "worked" in any conventional sense. But it is also clear that few realistic alternatives spring to mind.

About the author: Jim Kenny is contributing editor/Europe, for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president editorial for Paperloop and today heads his own company, DSI. Contact him by phone at [phone], or by email at [e-mail].