Yet another price hike predicted for newsprint

The stock market isn’t the only thing experts are predicting will increase in 1997. The cost of newsprint, which has been declining for some time, appears to be on its way up again. The results will be felt throughout the newspaper and commercial-printing worlds and could soon affect the way both do business.
The cost of newsprint has fluctuated wildly over the past two years. It’s gone from a low of approximately $425 a metric ton in May 1994 all the way up to $772 a metric ton in September 1995, but has been falling since then.
“It’s cyclical, and right now the paper mills are seeing prices drop below their profitability level,´ said Lloyd Streit, sales manager for Intermountain Color. “Paper has now gone back down to around $490 a metric ton in some parts of the country, so the fluctuations are simply enormous.”
That’s not about to stop. Streit says that mills have tentatively elected to increase prices by 15 percent early this year. That likely signals the start of another up trend.
“I think only an act of God would prevent an increase in the first half of ’97,” he said. “But what’s really interesting is that these cycles are speeding up in frequency. You would expect a cycle to have an extremely long life, around seven years in the past. But we’ve seen paper go up and down in a period of 18 months. The cycles are compressing, so basically all bets are off as to what’s happening.”
The cause of the instability can be traced back to the late ’80s and the popularity of junk bonds. Domestic paper mills expanded widely, but found themselves with large amounts of capital debt. The increased production capacity caused a glut in supply throughout the early ’90s.
In order to keep selling paper, the mills had to keep cutting their prices. The price cuts reached their low point at around $400 a metric ton but that, Streit said, was below their profitability level.
“At $400 a metric ton, mills are losing money,” he maintained. “They need to be around $500 a metric ton to make any kind of money at all. They were actually losing money because they needed cash to pay off their debts.”
As producers left the market, prices started to rise again while supply shrunk. Plants with outmoded equipment and plants with hostile labor unions were simply shut down. Environmental regulations also added to the domestic supply difficulties.
“They’ve had an impact, certainly,´ said Dick Moody, production director for the Wyoming Tribune-Eagle. “Companies have to spend a ton of money to make sure that the effluent going out of their mill is within reason and compliance. Combined with the economic drive of cheaper labor costs offshore, that’s driven a lot of mills out of the domestic market.”
Moody noted that there are no new domestic mills planned at all, and that a larger percentage of paper supply is now coming from offshore. With domestic capacity cut and the economy doing well, demand is now growing, and prices are on their way up.
That spells tough times ahead, particularly for newspapers. To combat rising newsprint costs, newspapers often lower their page count or the size of their publication.
“The Denver Post is on a 50-inch web, as opposed to a 55-inch web,” Streit explained. “They’ve been able to dramatically lower their paper usage.”
But that’s no longer an option for the coming series of price hikes.
“The daily newspapers can’t shrink anymore; they’ve already shrunk,” Streit said. “The Denver Post couldn’t get any smaller unless it was to go to a tabloid format.”
The alternative is to reduce the amount of news coverage and give more room to advertisers who bring in needed revenue.
“What you’re looking at is potentially advertising rates going up, and rates from printing companies to the publishers increasing to keep pace with the price increase of the paper,” Streit said.
Moody, too, is feeling the effects of the coming increase. “We absorbed the cost of the raise last time,” he said. “But right now, we’re just in the process of looking at a small increase to compensate for the upward trend again.”
Eventually, that cost is passed on to the consumer in the form of higher prices for advertised goods.
But neither printers nor newspapers can afford to pass on all the cost increases.
“We ended up absorbing a lot of (the last price increase) to keep our customers in business,” Streit said. “We’d obviously love to be able to recapture all our costs, but given the severity of our last round of increases we had to sort of mitigate the effect to the customers, because small papers could go out of business, and that would hurt us. We did a good job of staving that off by offering gradual, smaller increases to publishers.”
The increase in the cost of newsprint also signals increases in the costs of other types of paper, which means that commercial printers, too, will be affected.
“Newsprint is sort of the indicator; it’s like the canary in the coal mine,” Streit explained. “If newsprint prices go up, you’ll see a trickle to the higher grades of stock. It’s pervasive. Eventually it affects all stocks of paper.”
Kevin McDermott, who’s in charge of estimating and purchasing for Kendall Printing, agrees. “We met with our paper representative yesterday, and we are going to be experiencing some increases in regular offset paper, which is 45 to 50 percent of our business,” he said. The cost of many kinds of paper stock for commercial printers has dropped over the past year. McDermott speculates that the announced increase is an attempt by paper mills to offset the past year’s price decreases.
“Once the costs are passed on to us, we do increase our prices, at least to a degree,” he said. That could mean increases in the cost of everything from stationery to business cards.
But newspaper publishers and commercial printers appear to be bearing the brunt of the increases. Moody, of the Tribune-Eagle, which also offers a commercial print shop, said non-newsprint stocks such as those used in most commercial printing might rise in price but probably not to a large degree.
“A lot of times, paper manufacturers see a (pricing) trend and follow it,” he noted. “But the supply and demand of fine papers is different than that of newsprint. If you’re looking strictly at market forces, the relationship is not there.”
Printers such as Moody and Streit are hoping that the mills won’t raise prices as high as they have in the past.
“They don’t seem to be put off by the fact that they’re actually trashing the market for themselves down the road,” Streit said.
A price stabilization, Moody said, would be best for everyone.
“Then we can set up a situation where we can both make a profit and know that we don’t have to watch out for those enormous swings that have come.”
ÿ