The Paper Chase : Rising Newsprint Prices Put the Squeeze on Newspapers
As the buyer of newsprint for McClatchy Newspapers, Ray Steele Jr. has delivered nothing but bad news to his bosses recently.
Since last April, the 19-paper McClatchy chain, which includes the Sacramento Bee, has seen its newsprint bill soar 35%, far above Steele’s projections. With prices continuing to rise this year, Sacramento-based McClatchy will have to cut costs in other areas to offset the increases, he said.
“You can control how many people you have” but not the cost of newsprint, Steele said. “We just have to eat the increases.”
As paper mills run at full steam and demand for newsprint remains strong, newspaper publishers--who saw contract prices rise at least 25% in 1994--are bracing themselves for even steeper price increases this year.
Making matters worse, many West Coast publishers are scrambling to find newsprint at any cost after a labor dispute closed two Canadian mills in December that account for about 20% of production in western North America. Many newspapers are down to a week’s supply of newsprint, and newspapers in Vancouver, Canada, are seeking suppliers as far away as South Africa, said Ross Hay-Roe, a forest products specialist at Equity Research Associates in Vancouver.
“The market is in a state of panic,” Hay-Roe said.
Previous rounds of cost cutting and a healthy demand for advertising will help newspapers absorb some of the newsprint price shocks, industry observers say. In addition, higher revenues and profits from television broadcasting will also help shield the bottom lines of diversified media companies. In fact, some analysts say the fear triggered by rising newsprint costs has been overblown.
In updating financial estimates for 1994, media analyst James D. Dougherty at Dean Witter Reynolds found that while newsprint costs were higher than expected, so were ad lineage and revenue.
“It’s not the disaster that people are making it out to be,” he said.
However, because newsprint typically ranks as the second-biggest newspaper expense after labor, many publishers are taking no chances in responding to surging prices:
* The Los Angeles Times will continue efforts to boost operating efficiency as more expensive newsprint raises expenses by as much as $40 million this year. Higher newsprint costs were a factor in a recent hike in newsstand and home delivery prices, spokeswoman Laura Morgan said.
* The Wall Street Journal raised its annual subscription price 10% this month to $164, in part to cover rising newsprint costs, the paper said.
* The New York Times cited more expensive newsprint as one of the reasons for raising newsstand prices in the New York metropolitan area by 10 cents in September, to 60 cents a copy.
* At Tribune Co., publisher of the Chicago Tribune and five other papers, department managers are under orders to cut budgets to offset anticipated newsprint increases of 20% or more, spokesman Robert Carr said.
“The Chicago Tribune has talked about cutting its news hole (space devoted to stories) in 1995,” Carr said. “It’s just going to hurt.”
The steep price hikes for newsprint represent a sharp reversal for U.S. and Canadian paper producers. Prices for newsprint collapsed in the late 1980s and early 1990s as recession gripped the United States, Canada, Japan and Western Europe--all major markets for North American paper producers.
But healthier economies and stronger demand in fast-growing Asian countries such as South Korea and Singapore have given paper producers the leverage to dramatically raise prices. In addition, North American paper mills are running at almost 100% capacity, and only one new mill--in Brit- ain--is scheduled to open in the world this year, said paper and forest product industry analyst Bruce Kirk at S.G. Warburg Group.
“The business is extraordinarily tight right now,” Kirk said. “If Japanese demand starts picking up . . . you will put further strain on capacity.”
The price of newsprint climbed from $420 per metric ton (2,204.62 pounds) in February to $550 in December, according to Pulp & Paper Week, an industry publication. Many analysts say prices will go beyond $610 a ton--the peak reached in 1988 before the slump began--and possibly reach $700 by year’s end.
Prices for recycled newsprint have also skyrocketed. For example, the City of Los Angeles, which collects newsprint from residences, currently receives $10 to $20 a ton for the paper it sells to recycling companies under an annual contract. But those prices should jump to between $60 and $80 a ton next May when the contract comes up for renewal, according to the city’s recycling and waste reduction division.
Despite the escalating prices, cutting back on newsprint consumption is difficult and carries numerous risks. For example, cutting space devoted to news stories could irk readers, and reducing ad space means turning away precious revenue. Even reducing the size of the page could lead advertisers to seek lower rates.
McClatchy Newspapers, which buys 150,000 tons of newsprint annually, has taken numerous steps over the years to cut consumption, including trimming page size, reducing stock market listings and controlling waste, said Steele, the chain’s newsprint buyer. Any further reductions will be difficult, he said.
“It’s sort of frustrating,” said Steele. “I think it’s going to be tough for a couple of years.”
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Newsprint prices have jumped since spring because of growing demand and limited paper mill capacity. Average West Coast price per metric ton (2,204.62 pounds):
Jan. 1995*: $540
* Estimated by Ross Hay-Roe, Equity Research Associates
Source: Pulp & Paper Week