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NEW YORK (AFX) - It's only a few days into newspapers' third-quarter earnings season, which has been expectedly dour as ad spending remains stagnant. But several publishing executives have been almost giddy in the last week as they predict the end to a major headache: soaring prices for newsprint.
Prices for newsprint, one of publishers' largest operating costs, have climbed more than 50 percent in the last four years. But newsprint prices have remained stagnant since the spring, and may even start to roll back, say newsprint buyers and industry analysts. As spiraling newsprint costs have eaten into newspapers' already thinning margins, any savings are welcome news to newspapers and their beleaguered investors.
"The balance of power is shifting toward the publishers," said Kevin Mason of Equity Research Associates, a paper and forest products research company in British Columbia. "It's looking more and more likely we're going to see prices start to unravel."
One sign of the downward pressure is paper companies' difficulty in pushing through a recent price increase -- the 10th since 2002.
Paper producers planned in August to hike newsprint by $40 to above $650 a metric ton, or 2,200 pounds, of newsprint. For New York Times Co., the price increase means an added $19 million in annual expenses, based on the company's 2005 newsprint usage.
But under pressure from publishers, market leader Abitibi-Consolidated Inc. cut the price hike in half, and others abandoned it completely. As in airline fees, price hikes don't stick if all companies don't go along.
"I don't see any way that the August increase goes at all this year," Robert Jelenic, chief executive of Journal Register Co., told analysts last week. He said there's a "good chance" newsprint prices will decline in 2007. "It looks like maybe the tides have turned. That would be very beneficial for us, and the rest of the industry."
Executives at Gannett Inc. and Media General Inc. made similar comments during their third-quarter conference calls. Investors will likely hear more about newsprint trends this week as McClatchy Co., New York Times and Tribune Co. report earnings.
As newsprint prices have climbed, publishers already hurt by stalling revenue are squeezed by rising costs.
Most newspaper companies don't break out their newsprint expenses, but they say increased operating expenses -- which have come despite rigid cost controls and staff cuts -- are driven by higher newsprint prices.
At industry bellwether Gannett, for example, operating expenses were $1.1 billion for the third quarter, up 4.9 percent from a year earlier. One major factor was newsprint expenses, which were up 6.6 percent, despite a decline in paper usage.
If prices for newsprint decrease, newspapers can thank themselves. Publishers have reduced page widths, removed stock tables and switched to lighter-weight paper in an effort to curtail consumption. The Wall Street Journal, which is published by Dow Jones & Co., plans to reduce its page width as part of a broad overhaul of the newspaper.
The efforts have helped cut newsprint usage by 7.8 percent this year, according to the Newspaper Association of America, and put pressure on newsprint prices.
In another effort to gain the upper hand, publishers, including Gannett, have been testing newsprint from Chinese producers. Though the usage is small so far, the threat of switching to Chinese paper gives publishers extra leverage as they negotiate with North American paper companies.
Paper producers have shuttered mills to rein in newsprint supplies and keep prices steady. But Mason, managing director of Equity Research Associates, said paper companies can't choke off output fast enough to keep the supply-demand equation in their favor.
"Going forward in 2007, it's a question whether they have the willingness to shut what they need to keep price" in check, said Mason, adding that 2007 "is going to be a very interesting year." Copyright 2006 Associated Press. All rights reserved. This material may not be
Copyright 2006 AFX News Limited. All Rights Reserved.
