Newsprint faces tough competition from electronic media, but a new study reveals that the fight is a long way from being over yet

By Heikki JW Salonen

Newsprint will still make the future headlines

Gloomy forecasts about the future of newspapers and newsprint are becoming increasingly prevalent these days. Electronic media - first television, and most recently, the internet - have been cited as the catalysts for the impending downfall of the printed medium. However, the pessimistic forecasts are somewhat misleading as both newspapers and newsprint producers have shown extraordinary strength faced with increasingly tough competition from newer forms of communication.

In fact, the outlook for newsprint is far from gloomy. Global demand for newsprint was about 36.2 million tons in 1998. This represents some 12% of the total global paper and board demand. At the same time, the annual average per capita consumption of newsprint reached 6.1 kg in 1998. Consumption did vary widely though, ranging from 42.9/kg capita in the USA and just 0.6 kg/capita in Africa.

Global consumption of newsprint is forecast to rise to 45.6 million tons by 2010, representing an annual average growth rate of 1.9%. Worldwide, average per capita consumption should grow to 6.7 kg by 2010. However, this basic growth forecast may turn out to be a conservative one, as the global consumption potential in newsprint could well turn out to be at least 15-20 kg/capita.

Newsprint producers bend over backward to fight off competition

Advertising edge

Dernecon's recent survey of the world's leading publishing companies clearly shows that the newspaper industry is still a very profitable and viable branch of the media. Although growth rates in electronic information flow have accelerated considerably, printed media still remain by far the world's leading channels for advertising expenditure. This is extremely important, as advertising expenditures account for anywhere between 30-90% of newspapers' sales revenues.

Since the emergence of television, newspapers have lost a significant market share of total adverting revenues. At first, it looked like newspapers would lose the fight with electronic media, especially now that the internet has further expanded the choice of electronic information broadcasting channels. But despite the growing pressure of electronic media during the late 1990s, the results of the leading newspaper publishers were excellent in 1997-1998. Even in the USA, newspapers have remained the biggest single advertising media.

Going forward, global advertising expenditures are expected to grow roughly in line with overall economic growth. Of course, companies still need to offer the most timely, topical, selective, local, time and cost-effective service to its end-users. It must be remembered though, that the end-user's capacity to absorb information is limited. There are only 24 hours in a day and only a small amount of this time is available for studying advertising. On average, scan reading a thick morning newspaper takes just 15-30 minutes. In that small space of time, the reader has seen thousands of adverts and news items. It is impossible to absorb a similar amount of information with any of the electronic media that exist now. Bearing this in mind, there is room for optimism over the future of newspapers.

Production changes

As newspaper publishers have fought the battle against electronic media, papermakers have been occupied with improving the quality of their newsprint. The major driving forces have always been higher quality and increased production efficiency either at paper mills or in newspaper printing plants. The need to achieve good opacity levels in four color printing has led to pigments being used to a large extent in newsprint production. Better newsprint surface properties are being achieved with modern soft calendering techniques, surface treatment and even coating applications. It now seems that the surface properties of newsprint will approach those of supercalendered (SC) and lightweight coated (LWC) paper in the 2000-2010 period. However, it is likely that standard newsprint will remain the most cost-competitive choice for the printers of daily newspapers.

In recent years, intense restructuring has taken place in the newsprint industry alongside rapid globalization in the media business as a whole. On the supply side, perhaps one of the main changes has been the increasing size of newsprint PMs. In the 1970s, a newsprint PM with a capacity of 100,000 tons/yr running at 1,000 m/min was considered to be the most advanced technology. Today though, the biggest newsprint machines have capacities of 330,000-350,000 tons/yr and production speeds range from 1,500-1,700 m/min. These huge machines are usually installed by major forest products companies and operate on a global level.

An analysis carried out by Dernecon covering newsprint machines in the different supply regions reveals that Nordic and western European newsprint manufacturers are clearly in the forefront when it comes to operating the biggest, and more than likely, the most effective paper machines. Indeed, the vast majority of the Nordic and western European newsprint machines operating in 1998 fell into the width category of over 8.0 m. At the same time, 78% of the Canadian newsprint machines were narrower than 7.0 m.

As technology has evolved, the global newsprint business has also changed significantly over the past few decades. Traditionally, Canada and the Nordic countries have been the leading suppliers and exporters of newsprint, based on abundant domestic supplies of good quality raw materials. But the growth of recycled fiber around the world as a key fiber component in newsprint has changed this traditional model. As a result, both traditional newsprint suppliers and new entrepreneurs have started to establish competitive newsprint mills, for example, in the southern states of the USA and in central Europe. New local newsprint mills have also been installed in the Far East and Latin America.

Joining forces

On top of the new installations, companies have also been active on the merger and acquisition front. In North America, Bowater, Abitibi-Consolidated and Donohue have actively participated in industry consolidation. Across the Atlantic, UPM-Kymmene, Stora Enso, Haindl and Norske Skog have carried out similar moves. Evidence of the increasing globalization of the newsprint industry can also be seen in Bowater's recent purchase of Korea's Halla Pulp and Paper, the new Asian newsprint joint venture Papco carried out by Norske Skog, Abitibi-Consolidated and Hansol, as well as Fletcher Challenge's rapid expansion in the Pacific Rim.

The volatile business cycles of the forest products sector are often blamed on the industry's fragmented structure. But the global newsprint business represents one of the most concentrated and balanced sectors in the industry. Indeed, the 15 largest newsprint producers controlled more than 70% of the world's total newsprint capacity in 1998. The remaining 30% is run by 150 independent smaller suppliers.

The recent dramatic restructuring in the global newsprint business speaks in favor of increased concentration in the future. If the trend continues, the sector is likely to behave very differently as far as prices are concerned and this will be in marked contrast to the more fragmented businesses of lumber, market pulp, kraftliner and woodfree papers. At the same time though, continuously increasing productivity plays against increasing real prices of newsprint.

Going forward, newsprint prices are forecast to decrease by about 1.0%/yr between 1999-2010. On the top of that, there will be a cyclical price adjustment to the trend line from the fourth quarter of 1998. The forecast price reductions will be 12% in North America and 8% in Europe. If these price scenarios do in fact materialize, only 15% of all the current North American and European newsprint mills will be able to increase the shareholder value of their parent companies. As a result, 85% of the newsprint mills in the West will have to carry out some kind of cost reduction or increase sales revenues in order to survive the intensifying competition.

Strategic moves

Detailed analyses of the world's larger newsprint suppliers show that a proper newsprint strategy is essential for survival in today's highly competitive markets. In order to compare the newsprint strategies of different companies, Dernecon developed the "Strategic Hexagon" concept, which values and illustrates six key fundamental elements for success. These include the degree of diversification in mechanical printing papers, location of newsprint manufacturing plants, use of recycled fiber, size of newsprint machines (productivity and the level of technology), number of paper machines, and finally, their relative cost competitiveness. In the "Strategic Hexagon" the companies' performance in relation to the six individual features was combined into a "Strategic Index", which represents the company's overall strategic performance. The maximum value of the index is 100.

According to the results, Finland's Stora Enso mapped the highest value for the index with 69.3 (Figure 1). In contrast, the small Canadian company, Alliance Forest Products, gained just 15.3 on the index. Overall, it is clear that newsprint companies have a lot of room for improvement. The report shows that 20-30% of global newsprint capacity is unable to yield profits which increase or maintain shareholder value. This will lead to 10-15% of the present newsprint capacity being closed down, upgraded or switched to other products completely. On top of that, a long list of the newsprint mills and companies will also be the targets of ownership changes.

For those companies willingly to improve their strategies, it is clear that newsprint is still a viable business. But the companies who are slow to accept change should take heed of the gloomy forecasts that are currently circulating about the newsprint industry.

Heikki JW Salonen is the managing director at Dernecon Oy - Global Advisor Pulp, Paper & Wood. This article is based on the company's new study, "The Global Business of Newsprint and Other Publication Papers". Salonen can be contacted by telephone on +358-(0)9-8815 8230, by fax +358-(0)9-8815 7160, or via e-mail on heikki.salonen@dernecon.fi

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