Dead Tree Edition
July 8, 2011
Manufacturers' failure to follow through on July 1 price increases announced for newsprint and coated paper is making it harder for White Birch to exit bankruptcy protection and is pushing NewPage closer to the brink of insolvency. As noted two weeks ago in An Ominous Week for NewPage, investors have been in a dither lately over whether NewPage would be able to make a $100 million coupon payment that is due today on one of its bond issues. (It made the payment.)
The usual pattern in publication paper markets is that when one large manufacturer announces a price increase, the other mills in the same market quickly follow suit with similar increases. But that didn't happen this time around for either coated paper or newsprint.
On May 18, NewPage announced July 1 price increases of $60 per ton for everything from supercalendered paper to coated freesheet (CFS). The move by the continent's #1 maker of magazine-grade papers seemed a bit aggressive but not completely out of line considering recent capacity shutdowns and rising costs for fiber, pulp, and energy.
But Verso, #2 in the market, took some wind out of NewPage's sails a week later by announcing increases of only $30 on those types of products. NewPage had to dial back its price increases when most other manufacturers went along with Verso's pricing.
Other manufacturers except SAPPI, that is. That company, a major producer of CFS, never issued a July price announcement. As a result, even the $30 increase that most buyers had resigned themselves to was rolled back.
A similar scenario played out for newsprint. White Birch, Kruger, and Catalyst all announced a $35-per-ton increase for July, but that fell apart when giant AbitbiBowater didn't follow suit. White Birch subsequently announced some market-related downtime at its Canadian mills, an indication that they are barely meeting their cash costs at current prices.
"If AbitibiBowater had decided to support the July price increase announcement, and had been willing to remove some supply (as needed), newsprint prices would have moved higher," industry analyst Verle Sutton wrote in the most recent issue of his The Reel Time Report newsletter (available only by subscription). But with its low debt load, efficient mills, and greater access to relatively cheap Southern U.S. fiber, Abitibi didn't need the price increase to go through to meet its current bills.
"What AbitibiBowater really needs is to drive out the least-efficient White Birch and Kruger newsprint capacity," Sutton wrote.
Similarly, SAPPI is better able to forego a price increase than the heavily leveraged NewPage, which has more daunting bills due later this year than today's coupon payment.
And Verso's majority owner, Apollo Management, has an extra incentive to kick the legs out from under NewPage: It has snatched up much of NewPage's debt in a way that would give it significant leverage over the company if (many people say "when", not "if") NewPage defaults.
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This article originally appeared at Dead Tree Edition (http://deadtreeedition.blogspot.com/), which is written by a magazine-industry manager who goes by the pseudonym D. Eadward Tree. Comments made in this blog are the opinion of the author and do not necessarily reflect that of RISI, Inc., its parent company or sponsors.