On Media: the Paper Chase

The Paper Chase

The pas-de-deux between paper supply and demand is taking center stage this month, as newspaper publishers brace for a 20 percent to 25 percent increase in the cost of newsprint.

Most newspaper magnates, though reticent to say exactly how much they fork out for paper, acknowledge it to be one of the major publishing costs. City Paper publisher Paul Curci says newsprint alone has a price tag of almost $1.5 million per year—roughly 29 percent of the overall budget.

Publishers are more forthcoming with vivid accounts of the Great Paper Shortage of 1995, when demand overwhelmed supply and prices shot up accordingly.

"Printers had a tough time even getting paper," says Robert Christian, who publishes the Weekly Press and University City Review. "We changed the size of our paper from 17 inches to a smaller format, like City Paper's. Some newspapers like the New York Times and Philadelphia Inquirer cut down their Sunday magazines."

It wasn't the first time newspapers were subject, for better or worse, to the whims of the market.

Prices first peaked in the late 1980s, then plummeted, says Miles Groves, chief economist of the Newspaper Association of America.

"Suddenly we had a dramatic increase in manufacturing capacity at the same time demand fell through the floor."

In the early 1990s, open markets and democratic press principles expanded the demand for newsprint in Latin America, Eastern Europe and Africa. Newsprint momentarily became a scarce commodity, which meant high prices for newspapers and high profits for manufacturers.

Net sales for the giant International Paper Co., for example, rose from $432 million in 1994 to $1.15 billion in 1995, then shrank last year to $303 million, according to analyst George Schwartz of A.G. Edwards in Media, PA.

By 1995, newsprint prices peaked at nearly $900 per metric ton, compared to around $550-$600 today, depending on the deal suppliers strike. (If the anticipated 20 percent rise takes effect, a ton will run in the ballpark of $650-$700.)

Schwartz says a recent glut in the market and overseas competition has dragged prices down to a rate cost where it sells for less than it costs to produce; International Paper earnings were down 76 percent in 1996, causing massive restructuring plans to sell $1 billion in assets.

In effect, the profitability of newspapers during the past two years has been at the expense of paper manufacturers.

John Maine, who analyzes forest and paper products for Resource Information Systems in Virginia, says that newsprint prices, as they currently stand, are significantly below the level needed to justify investment in the industry.

"It's not surprising that producers are asking for an increase, given the tightness of the market in North America, and that current prices are relatively depressed."

Maine says that if the market supports the price increase, it will bring the paper industry to a point where it can again justify investment in new capacity.

But Groves points out that newspaper publishers today also have new sources of imported newsprint that they didn't have two or three years ago.

"Announcing a price increase and getting it in full isn't the same thing. We'll have to wait and see how the marketplace responds."

Tim Williams of the Pennsylvania Newspaper Publishers Association suggests that when the cost of paper rises to dangerous levels, newspapers may offset this by slashing other costs, raising ad rates and prices, or developing more profitable products like multimedia and Internet that aren't as susceptible to the forces of production.

Newspaper people are particularly loathe to raise rates or prices, he says, because it often has the opposite effect of decreasing sales of advertising or newspapers—and they seem optimistic that they won't have to take such measures this time around.

"Right now, no one is forecasting an increase as dramatic as two years ago. We have no plans this time around to cut our newshole or adjust ad rates or anything," says Butch Ward of Philadelphia Newspapers Inc., which publishes the Inquirer and Daily News.

As paper gets more expensive, it does put some pressure on budgets across the board, Ward says. "If some costs go up, you cut somewhere else because you don't want to take it out on the readers or advertisers."

Williams thinks newspapers are prepared to absorb the blow.

He points to strong newspaper ad sales in recent years (which ironically also means issues are bigger and require more paper) and says, "Most newspapers will be able to cope. At the worst, the bottom line may suffer a bit, but it's not a death knell."

Some say that the effects of next month's price jump may also be delayed by the fact that many papers negotiate price contracts in advance to hedge against sudden rises—thus we don't know where the paper trail will end.

-Jennifer Rauch