The picture for the paper industry is not as gloomy as it was a few years ago, despite continued declines in newspaper subscriptions and the growth in digital readers such as the iPad and Kindle, according to speakers at the 2010 Paper Recycling Conference & Trade Show’s second plenary session, “The State of the Paper Industry.”
Mark Fitzgerald of Editor & Publisher, John Sims of International Paper, David Knight of SCA and Filipe Barona of Papeles Industriales, an SCA joint venture based in Chile, spoke at the session, which was Monday, June 14.
Fitzgerald, who serves as editor of Editor & Publisher, Chicago, said that when he last appeared at the conference in 2008, he talked about falling revenue and subscriptions and generally sounded like a “gloomy Gus.” He added that things have gotten worse since 2008.
Ad revenue for newspapers continued to decline in 2009, sliding by 27.2 percent, Fitzgerald said. Additionally, ad revenue was below $25 billion in 2009, the first time it’s fallen below that level since 1985, he said. “And that’s not accounting for inflation, incidentally.”
Fitzgerald also recounted the names of some large newspapers that went out of business in 2009, including the Rocky Mountain News in Denver and the Seattle Post Intelligencer, which has become an online-only publication with a pared-down staff, describing their closures as “most tragic of all.” He added, “Obviously newspapers that don’t print newspapers are not buying recycled newsprint and are not providing a source for recycled newsprint.”
Newspapers were focused on trimming their operating costs in 2009, largely through staff reductions and production facility closures, he said. However, “Newsprint was a big enough factor that it was mentioned in almost every quarterly analyst conference call that I attended,” Fitzgerald said. “The drop in newsprint expense was about half from usage and about half from lower newsprint costs. Of course, almost everybody agrees that that newsprint discount is coming to an end.”
The drop in circulation was having the largest influence on the decline in newsprint, according to Fitzgerald. Newspapers had a household penetration of 120 to 130 percent through the early 1950s, on average, he noted. Household penetration didn’t drop below 100 percent until the early 1970s and then declined more rapidly. “In 1990 it was down to about 67 percent penetration,” Fitzgerald said. “Now it hovers around 40 percent in most big city markets,” which, he added, were the biggest consumers of newsprint.
Magazines also have been affected in the last year, with smaller folios and a smaller subscriber base, he said. “In 2009 alone, we have lost 360 magazines—that’s a big number. It included some really big and historic magazines that have survived these economic cycles for decades.” He mentioned titles like Gourmet, Portfolio and his own magazine, Editor & Publisher, which was purchased by The Duncan McIntosh Co. and never missed an issue.
“Despite all I’ve said here today, I think newspapers and magazines will stay in print for the foreseeable future,” Fitzgerald said. He added that newspapers were a victim of the cyclical economy more so than of their secular challenges.
Sims, who serves as vice president of finance and strategy for International Paper, began his presentation by commenting on the importance of recovered fiber to the company. “International Paper manages over 6.5 million tons of recovered paper in North America. Four million of those go into our paper processing, so it is a very important part of the business from a supply chain perspective as a fiber resource,” he said.
Recycled paper can provide advantages to producers. Chief among those is that the capital costs for a new virgin kraft paper mill is about double that of building a recycling mill, Sims said. However, he added that the fiber and energy costs associated with recovered fiber “can be 50-60 percent of the cash cost to manufacture containerboard. On a kraft process, it can be about half of that, so that does drive different economics for the industry.”
Boxboard demand has declined in recent years, according to Sims, with 2009 declining to levels on par with 1992 levels. However, he added, “Box demand is rebounding. It is 4.5 percent year-to-date. That will grow, but even at that rate, you will not see 2010 even approach close to the level it was in 2008.”
Sims added, “What drives box demand is non-durable demand in the United States. If you look at that period between 2000, where box demand was declining, non-durable consumption in the United States continued to increase. It is just that it was being fed by production from China.” He continued, “Thirteen percent of the economy was driving 85 percent of the containerboard demand, hence the recovered fiber demand for containerboard in North America. So as the economy recovers, non-durable demand should increase, and that means that demand for recovered fiber will increase.”
According to Sims, containerboard demand would increase by nearly 100 million tons by 2030, “and that is all going to be fed by OCC.” Therefore, he said, “global recovery rates are going to have to increase to be able to meet that need.”
Among the challenges that Sims sees facing containerboard producers are the need for competitive green energy sources, equitable international trade agreements, rising health care costs and papers reputation as a green product. “How is it that a product that comes from a renewable resource that is the most recycled, recovered in the world is still perceived to be less sustainable than other materials is baffling. It is a message that the paper industry needs to continue to put resources in to make sure that the right messages are getting out to the public,” Sims said.
Knight, recovered fiber director for SCA Tissue, said the away-from-home tissue business declined 8 to 9 percent by volume as a result of the recession. “The away-from-home tissue business is largely where the recycled content comes into play,” he said.
The economic recovery has not yet led to growth in away-from-home tissue consumption, he added.
Despite this decline, the tissue segment of the paper industry was exhibiting more growth than other industry sectors, he said. “Most of the paper industry has been downsizing and reorganizing. The tissue business keeps growing,” Knight said. Tissue had a growth rate of 1.5 percent in North America, eh said, however, Latin America is seeing higher growth, near 5 percent, in light of its higher population growth.
Knight also mentioned the growth in finished tissue imports to the U.S. “For many years, in the tissue industry, we thought we were safe from imports,” he said. “But we are seeing more and more material coming in from Asia. That is going to be a threat to the domestic market.” He noted the growth in imports from Indonesia in particular.
Environmental sustainability also presented a growing challenge to the tissue industry, Knight said, as recovered fiber costs increase and supply of recovered fiber decreases and more chemicals and water are needed to clean the material.
“As the volumes of material decrease, we have to look at news ways of getting that fiber,” he said. “Mostly that involves collecting it in a dirtier form, a more contaminated or a mixed form. We need to have the technology to clean that up and be able to make the same brightness and softness that we’ve always made.”
Barona, general manager of Chile-based Papeles Industriales, said Chile recently had an earthquake that was centered in the pulp producing region of the country, which the industry has begun to recover from.
Papeles Industriales is the second largest tissue producer in Chile, he said, with 25 percent market share.
Chile represents 15 percent of Latin America’s population, he noted, though the country is one of the richest in the region. Per capita tissue consumption is close to 10 kilos in Chile, larger than the 5 kilos consumed per capita on average in Latin America. Twenty-five to 30 kilos of tissue are consumed per capita in the U.S. and Europe, he added.
The away-from-home market is also increasing in the region, experiencing double-digit growth, according to Barona, though toilet paper represents the largest market segment at 81 percent.
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