Tuesday, December 11, 2018

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Guest Post: When winning feels like losing


Winning the World Series must be an incredible feeling.  It’s the result of a lot of hard work by a lot of people. On August 29, when the International Trade Commission (ITC) announced a negative finding on newsprint tariffs, reversing the Department of Commerce’s decision earlier this year, newspaper publishers felt like they had won the World Series. They lobbied hard to end the tariffs, taking their argument not only to their readers (through editorials and op-eds), but to Congress, the U.S. Department of Commerce and the ITC. Through countless hours of hard work, American newspaper publishers had claimed victory.

After the confetti and rounds of congratulations for everyone’s hard work, publishers began looking around for that World Series trophy, which in this case would be lower newsprint prices.

But they were nowhere to be found.

Publishers began asking some very reasonable questions like, “Now that the tariffs are gone, why haven’t newsprint prices gone down?” and “Since producers are getting refunds for what they deposited as tariffs, when do I get my refund?” Regrettably, the answers were not encouraging.

At the end of September, newsprint prices were 26 percent higher than they were at the same point in 2017. Price increases started in October 2017 and continued nearly every month until July 2018.

After a year of linking preliminary tariffs to price increases, producers are now pointing to another contributing factor: operating rates.

Operating rates are the percentage of a newsprint mill’s production capacity that is actually being used. According to RISI, an industry group that tracks pulp and paper markets, operating rates above 93 percent generally support price increases, while operating rates below 90 percent generally support price decreases.

During the past 12 months, many producers have reported operating rates above 95 percent, making it seem reasonable that the tariffs were not the lone actor driving the prices up.

However, a closer look at the factors that drove operating rates paints a slightly different picture.

While North American newsprint consumption has been in steady decline for over a decade, newsprint producers have kept up with the falling demand by shutting down mills or converting them to other products. Producers and analysts point to the fact that, in 2017, overall newsprint production capacity fell faster than demand from publishers. This would have justified some price increases, but not to the extent seen in the last 12 months.

So, what about the tariffs?

Aside from the higher prices that resulted from producers needing additional cash to pay the tariffs first imposed in January, the tariffs had other, more complicated effects.

By reducing the profitability of newsprint sold in the United States, the tariffs made exports – paper shipped out of North America – more attractive for producers. One producer noted that their exports rose from 3 percent annually to 25 percent, and another shipped 100 percent of their newsprint abroad. Exports leave less newsprint for North American consumption, so in that way, the tariffs drove up the operating rates and prices.

The tariffs resulted in lower profits from newsprint, which made other, non-newsprint products more appealing to paper producers. Kruger, a producer hit particularly hard by the tariffs, declined to take orders for newsprint in August and September, in an attempt to expedite the process of changing over a mill to food-packaging paper. This planned conversion will still mean less newsprint supply and higher operating rates.

Again, the higher operating rates were directly caused by the tariffs, but this particular impact will be felt for a long time, even though the tariffs themselves are gone. However, amid the turmoil, there are a few bright spots.

North Pacific Paper Company (NORPAC), the company that filed the complaint with the U.S. Commerce Department that resulted in the imposition of the tariffs, has restarted an idled machine at their Longview, Washington, facility. And White Birch Newsprint is in the process of restarting their mill in Ashland, Virginia. These two developments should inject enough supply into the market to prevent any price increases for at least the next several months.

But what about those refunds?

Canadian newsprint producers will be receiving refunds of the money they paid for the preliminary tariffs. In early October, News Media Alliance President and CEO David Chavern sent letters to every Canadian producer that will be getting a sizable refund. He made a very compelling argument as to why the refund should be shared with newspaper publishers, but to date the Alliance has not received any responses.

And the probability of producers sharing their refunds with the newspapers is low. Why? Because they don’t have to.

Many newsprint producers will explain that they spent more on legal fees than they will receive in tariff refunds, and this is probably true. But, newspaper companies and our trade associations could say the same thing, as we were equal partners with producers in this battle to turn back the unjustified and unlawful tariffs. Hopefully, now that the battle has been won, stability will return to the newsprint market, and producers and publishers will revive a symbiotic relationship that goes back for many decades – one that offers a sustainable future for both partners.