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Newsprint trends: no news is not good news.

Is bigger better? Maybe not, but it's better than nothing at all. That is the story of the global newsprint industry, which has a higher level of consolidation and has eliminated more excess capacity than most other major paper grades. Demand for newsprint in the United States has been declining for the past decade and a half, and this slow motion slide has blunted the value of this economic strategy for major newsprint producers such as Abitibi-Consolidated and Bowater, which have struggled to maintain pricing and margins for their product, according to many market analysts. Without consolidation, however, this situation would likely be much worse.

Globally, the growth in newsprint demand in newer markets such as Asia and Latin America has not been enough to offset declines in traditional markets. As readership for large, urban newspapers continues to decline in North America, many market observers characterize the newsprint market there as well past its peak. Some observers see the same signs ahead for Europe as well.

Export markets for North American and European producers are also in decline. Asia, a growing market for newsprint, was once an excellent export market but massive capacity expansion there in recent years has made the region much more self-sufficient. In addition, the Latin American market remains relatively small, with many countries there battling persistent economic problems.

MAJOR PLAYERS

Two companies--Abitibi Consolidated in Montreal, Quebec, Canada and Bowater, Greenville, South Carolina, USA--together control more than 50% of the North American market and about 20% of global newsprint capacity. Despite price hikes and capacity reduction to narrow the gap between supply and demand, these companies reported losses in the first half of 2004, though the financial news was better in the second half. Global demand for newsprint today is estimated at about 36 million metric tons/yr.

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As mentioned above, U.S. demand for newsprint is widely believed to be in structural decline. Traditionally, newsprint has been a cyclical business, with producers earning enough profits at the top of the cycle to survive the inevitable downturns. Unfortunately, the downturn appears to be lasting indefinitely, at least in North America.

Despite a recovering economy in North America, in the first 8 months of 2004 U.S. demand was reportedly down 0.8%, while Canadian demand dropped 2%, both measured from the same period a year earlier. U.S. consumption may actually increase slightly for all of 2004, but that is not likely to signal the beginning of a long-term improvement in demand, according to market analysts. Still, combined with continuing supply curtailments, it may be enough to allow U.S. newsprint prices to surpass US$ 600 per metric ton in 2005, according to some projections. However, that figure may be dependent on a continued recovery in the U.S. economy, which was looking somewhat shaky in the 4th quarter.

Analysts expect the nearly continuous mill closings/conversions and supply reductions that have dominated the newsprint market for the past several years to continue and even increase in 2005. Newsprint producers such as Abitibi-Consolidated are busy converting many newsprint machines to higher value publication grades. They are also continuing to permanently close older, high cost mills.

BETTER NEWS

The news from Western Europe and Asia has been better, by comparison. Western European newsprint shipments through October 2004 showed year-to-date growth of 4.2% at 7.7 million metric tons, according to CEPIPRINT. Demand increased more slowly, at a rate of 2.5%, reaching 7.4 million metric tons during the same 10-month period. In Asia, newsprint prices in Asia rose in the third quarter as the economies of many Asian nations improved.

LONG TERM OUTLOOK

By converting newsprint production to value-added grades, such as SC, manufacturers have been able to increase revenues in some cases while moving the newsprint supply/demand ratio closer to a balance. If this continues, as expected, the market will be more focused on supply with buyers facing price increases despite less than robust demand. While recovery for the newsprint market used to depend both on strong demand growth and capacity restraint, only the latter seems to be a major factor in today's market. So, while the relentless consolidation of recent years and its attendant culling of excess capacity has produced some gains for the newsprint industry, the results have clearly been mixed.

ALAN ROOKS, EDITORIAL DIRECTOR
COPYRIGHT 2005 Paper Industry Management Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2005, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:GRADE PROFILE
Author:Rooks, Alan
Publication:Solutions - for People, Processes and Paper
Date:Jan 1, 2005
Words:725
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