New Models for Newsprint
by Mark Toner
A quick lesson from Economics 101: Considering how the financial marketplace values businesses, the constant volatility in newsprint pricing doesn't make much sense, according to Edward Ondarza.
"Companies are rewarded for predictability and growth, not volatility," said Ondarza, director of commodity and trade services for Enron Corp., a Houston energy and capital trade conglomerate. Indeed, despite "spectacular highs and lows," total return-on-investment for papermakers over last eight years registered a scant 2.9 percent, offering yet another incentive to reduce volatility, agreed Pierre Monahan, president and chief executive officer of Montreal-based Alliance Forest Products Inc.
Now consider a quick lesson from Economics 102, again courtesy of Ondarza: "Price volatility will thrive whenever spot buying and selling exists," a constant in the newsprint or any commodity market.
Therein lies the quandary for publishers and papermakers seeking to smooth the sometimes abrupt, always frustrating price swings in the newsprint market. But two recent trends discussed at the late-October joint newsprint conference sponsored by NAA, the Canadian Pulp & Paper Association and the American Forest and Paper Association could make some headway.
Risk management, commonly used in other commodity-dependent industries like energy, oil and natural gas, now enters the newsprint arena, with four companies--Enron, Citibank, Bank of America and Southern Co.--offering the financial-management tool.
Typically, these companies orchestrate what's known as a "financial swap agreement." Acting as middlemen, they draft long-term contracts locking in buying and selling prices. For instance, were newsprint transaction prices hovering around $400, Enron might draft contracts setting the selling price at $395 and the buying price at $405. Naturally, the spread between the buying and selling price goes to the middleman; in Enron's case commissions typically range between 1 and 2 percent, according to Ondarza.
Consolidation, more of an inexorable market force than a trend, has swept the newsprint-manufacturing industry by storm in recent years.
In a mature industry like newsprint, consolidation offers ways to increase profitability--by "cutting costs or increasing market share," said Matt Berler, an analyst with Morgan, Stanley & Co. of New York City. And with 30 newsprint producers--"far too many in a mature market"--consolidation will likely continue, opined Mark Wilde, managing director of B.T. Alex Brown of New York City.
What does that mean for publishers? "Consolidation will lead to rationalization," predicted John Duncanson, president of Toronto-based Duncanson Investment Research Inc. Others are less convinced: "I'm pretty skeptical that papermakers ever learn a lesson that stays with them," quipped Wilde.
Before worrying too much, however, consider the newsprint industry's low barriers to entry and high exit barriers, insisted Matt Berler, an analyst with Morgan, Stanley & Co. of New York. "Despite some increased stability, prices will continue to be volatile over time," he said. "And when they do [fluctuate], someone else will build a mill because you can buy the technology off the shelf."
Mark Toner covers technology and new media for Presstime magazine. E-mail, tonem@naa.org; phone, (703) 902-1684; fax, (703) 902-1690.