HOW THE PAPER CHASE SPIRALED OUT OF HAND

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Skyrocketing newsprint prices have been blamed for everything from a hiring freeze at the Dallas Morning News to a 50 cents price hike for the mammoth Sunday edition of The New York Times.

The hikes also have accelerated the trend of disappearing afternoon papers: in Milwaukee and Providence, R.I., where the papers merged into combined morning editions.

With no easing on the newsprint front, where costs are up about 35% to 40% over a year ago, this year's price jumps ultimately may give publishers another strong shove toward the electronic media.

As industry executives gather at the annual convention of Newspaper Association of America in New Orleans this week, they're already aware that on May 1 the list price of newsprint from most U.S. and Canadian mills jumps again by 11% to $750 per metric ton, and that volume discounts are shrinking.

"What they've been doing is increasing list price and cutting discounts at the same time," says James McLaren, news editor, Pulp & Paper Week.

"If the May 1 price hike sticks, it will be an all-time high," says Bernard Bottomley, general manager of Times Mirror Supply, the paper procurement arm of Times Mirror Co.

He said the best price for large-volume chains is also rising by $75 to $675 per ton, with prices slightly higher on the West Coast where supplies are tighter.

Overall, however, Mr. Bottomley says he sees a light at the end of the tunnel.

"Inventories that were depressed last year have returned to normal," Mr. Bottomley says, adding he's "hopeful" the industry has seen the last of price hikes this year. He even believes the May 1 increase might not stick, though he admits he is in the minority on that one.

In fact, some people in the industry fear another price hike in September or October, although there's nothing to substantiate the rumor yet-especially with consumption weakening earlier this year.

The good news is that some industry experts feel that prices for newsprint-which began rising earlier than other grades of paper, in 1994-will at least begin to stabilize for the remainder of 1995 because newspapers' paper inventories are in better shape, and panic buying appears to have eased.

The bad news is that prices appear unlikely to ease back from their current level, because even if the U.S. economy weakens and softens demand, the worldwide market will maintain demand.

"Prices will stay high for an extended period of time," says John Maine, VP of paper analyst Resources Information Services.

As tough as it has been in the U.S., Mr. Maine points out that the worldwide paper shortage has triggered even higher prices on the European spot market. Newsprint today is very much an international commodity.

"Overseas markets are screaming for paper right now," says Mr. Maine. "Some of the spot markets are hundreds of dollars more than the U.S. price."

In some cases, the European spot market price has soared to more than $1,000 per ton;that's nearly double the price in 1993.

As a result, Scandinavian suppliers, which sold to the U.S. last year and helped to keep supplies plentiful, are now finding it's more lucrative to sell their supply closer to home.

Meanwhile, newspaper publishers are trying to dig in their heels.

"The increases are causing a few grey hairs," says Nick Penniman, publisher of the St. Louis Post Dispatch and senior VP-newspaper operations for Pulitzer Publishing Co.

As well as anger on the part of publisher Anthony Ridder, CEO of Knight Ridder Newspapers, who called the increases "gouging on the part of the suppliers. I do think they were entitled to some increases, it is just the magnitude of it that I object to."

Paper mills counter that for nearly two years of the recent newsprint consumption downturn-due to a retail recession-they were losing about $100 on every ton sold.

"When the next price hike hits for newsprint on May 1, that will probably be about it [for the current year]," says Kathryn McAuley, paper and forest products analyst for Brown Brothers Harriman.

In that sense, she sees newspaper publishers getting more relief than their counterparts in the magazine world, where the price of coated groundwood paper is expected to continue to rise this year.

She points to new newsprint capacity coming on board from the British Columbia printing plants, where strikes finally ended early this year, and the possibility that the Gold River plant in British Columbia, mothballed since late 1993, will reopen and increase supplies slightly.

"Of all the grades of paper, newsprint will probably stabilize the quickest," she says.

But that doesn't mean prices will ease back to their early 1990s levels.

Newspaper publishers in the U.S. who are looking for new supplies at home to meet the new demand are unlikely to find it over the next two years. American Forest & Paper Association says capacity for newsprint is expected to remain flat at 7.3 million tons through 1997.

"The last time we invested in capacity was in 1988, and demand subsequently dropped," says Barry Polsky, spokesman for AFPA. "The mills are not about to make the same mistake again by increasing capacity."

Even if some plants did decide to make the enormous capital outlay and increase capacity, it generally takes two to three years for a new mill to come on stream, Mr. Polsky says.

Further holding down incentive is a proposed batch of tough new regulations from Environmental Protection Agency, known as the "Cluster Rule" and designed to clean up water and air pollution at paper mills.

Originally, the new regulations were to take hold on Jan. 1 but have since been postponed.

If the rule goes into effect as proposed sometime in 1996, it could end up costing the industry $11.5 billion, says Mr. Polsky.

"Money that might ordinarily go to capital investment in new plants and equipment is being held back," Mr. Polsky says.

The high price of newsprint should accelerate the move by major publishers to invest in new media and electronic publishing (see story on Page S-6).

Times Mirror, which publishes the Los Angeles Times and Newsday, reaped $1.3 billion from the sale of its cable TV operations to Cox Cable. Some of that $600 million will be used to pay down debt; the rest will be invested in new businesses.

The new strategy seems to be to provide information and content to niche markets rather than installing cable and hardware.

Others who made moves into electronic media years ago may be better positioned for the current paper crunch. While newsprint generally accounts for 20% of a newspaper's total cost, Dow Jones & Co., publisher of The Wall Street Journal, says newsprint only accounts for about 7% of total corporate expenses, due to its heavy involvement in electronic ventures.

For instance, Dow Jones Business Information Services Group-which contributed less than 10% of total revenues a decade ago-contributed $976.8 million, or 47%, of the corporation's $2.1. billion in annual revenues in 1994.

Companies such as The New York Times Co. are taking note of Dow Jones' strategy and have committed to spend from $1 billion to $1.5 billion on new media over the next few years.

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