Selective Cuttings

Newsprint capacity under pressure from falling prices

January 23, 2013

Newsprint spot prices have recently started to fall after a long period of price stability. While these have yet to translate into list price declines, they are highly likely to do so within a few weeks. In an effort to predict how much of a price decline might force a mill closure, we examine the relationship between past price trends and newsprint machine closures (see figure).

North American newsprint prices and capacity closures (2006-2012)

This figure shows a line graph of quarterly North American newsprint prices from 2006 to 2012, in addition to newsprint capacity closures over the same period. After a long period of stability, prices collapsed in 2007 (accompanied by a wave of closures) before rising rapidly through 2008, before collapsing again in 2009 (accompanied by another wave of closures). Since that time they have been essentially flat, with periodic individual closures.

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Two types of closures are apparent from the figure, closures that maintain the current price level (grouped in the blue boxes) and closures which occur after prices begin to fall (orange boxes). Price-leading closures are characterised by relatively spread out closures by the largest producers (who have the ability to influence market price). Price-responding closures tend to clump together and primarily affect smaller producers, who have more limited financial resources to deal with relatively sudden bouts of unprofitability.

We could consider price-leading closures to be a type of status quo. Closures attempt to match falling demand with capacity reductions, maintaining current price levels. However, when no one is willing to step forward with a closure, the resulting overcapacity forces a price decline. As prices fall, more and more newsprint machines become unprofitable. All else equal, the highest cost machine would then close, reducing supply, and stabilizing prices. However, individual firms do not know exactly at which point their competitors will become unprofitable. If they believe that better times are ahead, they have an incentive to continue to operate their machine in the hopes that one of their competitors will close first, returning their own assets to profitability.

The first price-responding cycle of closures began in 2007 after an approximately $75/tonne decline in prices. The second price-responding cycle of closures began in 2009 after a $55/tonne price decline. A similar price decline is beginning now, and at least one closure can be expected after a price decline of at least $50/tonne , perhaps sometime in Q2, 2013.

If firms are entering a period where they adopt a strategy of trying to out-last their competitors in an attempt to force the closure of their competitors’ capacity, then we can expect a period of fluctuating prices and instability in newsprint sector.