The great paper chase

Newsprint prices are due to rise again - and even Rupert Murdoch can't control the supply cycle. Mathew Horsman reports

The sharply escalating cost of newsprint - Fleet Street's lifeblood - has done far more damage to the fortunes of Britain's publishers than Rupert Murdoch's debilitating price war. And there is more pain to come in 1996. Most analysts are predicting a further 10 per cent increase on top of last year's 40 per cent hike.

It might seem surprising, in an industry that boasts hi-tech computer technology, sophisticated printing sites and digital photo libraries, that the raw commodity of newsprint, and not cutting-edge production techniques, makes all the difference in the contemporary newspaper business.

A simple calculation of the share newsprint represents of production costs at national titles tells the story. Securing adequate supplies eats up between 20 and 30 per cent of operating costs for most publishers. Mr Murdoch's worldwide newspaper holdings provide a graphic illustration: a mere 10 per cent increase in newsprint prices adds A$350m to costs at News Corporation, Mr Murdoch's global parent company.

The newsprint crisis has lasted for the better part of 18 months and has already caused much pain at the publicly quoted newspaper companies. The Telegraph's profits fell by 65 per cent to just pounds 6m in the first nine months of 1995 (the most recent figures available). The company blamed a 30 per cent rise in newsprint costs.

Profits were also down by pounds 2.5m to pounds 40m at Daily Mail & General Trust, publishers of the Daily Mail, the Mail on Sunday and the Evening Standard, in the first half of 1995.

So desperate have publishers become that the price war launched by Mr Murdoch in 1993 has all but been called off. Even Mr Murdoch, it seems, cannot accept the effects of a newsprint price rise from about $469 a tonne in 1994 to nearly $900 tonne. As a result, the prices of the Sun and the Times have been increased in stages since last autumn, allowing the Telegraph, the Independent, the Mail and others to follow suit.

But how did the spiralling increases come about? And when can publishers expect some respite from relentless price inflation?

The rise was unsurprising. Newsprint prices move in clear cycles, usually over a seven-year period. At the last high point, in 1989, newspapers were scrambling to line up supplies at affordable prices. But as demand faltered and mills continued to produce, the price dropped sharply. By the 1991-92 recession, prices were at a new low. Publishers found themselves able to negotiate low-term, low-price contracts.

That emboldened Mr Murdoch to launch his price war, secure in the knowledge that the lower revenues from cover prices could be offset by savings on newsprint bills. The approach worked until late 1994. By then, newsprint prices were rising again. A combination of factors - dwindling supplies from North America and Scandinavia and rising demand from customers in the Far East - allowed suppliers to push through regular price increases. The effects of high prices were compounded by shortages of newsprint - as the crunch last summer at Mr Murdoch's titles attested.

Senior executives, including Mr Murdoch's favourites John Dux and Gus Fischer, were let go in part because of the newsprint shortage. Print runs at News International were reduced and pages cut. There were even rumours that NI had to turn away advertising - a cardinal sin.

The shortages, at least, have been remedied in recent months. But the price of newsprint remains painfully high. Still, newspaper publishers say they have managed to secure long-term contracts (defined as anything more than six months) - which have encouraged some to add new sections and to increase pages.

Publishers have tried to cut costs elsewhere, principally through shared printing and job losses - 220 at Associated Newspapers alone last year.

Analysts cannot agree whether the crisis will end this year: the price seems to be climbing steadily. In the autumn, just before he raised the price of the Times, Mr Murdoch told an audience in Switzerland: "Paper costs are a worry ... it is going to be some time before this turns around." But Miles Grove, vice-president of the Newspaper Association of America, disagrees. "Newsprint prices will not hold," he said recently in New York. "We expect a marked softening."

Given that most newspaper publishers in the UK continue to expand editions -the Saturday market has seen the Guardian and the Telegraph add pages - the only real savings can come from lower prices rather than less newsprint. And lower prices depend on the newsprint cycle.

There are signs that newsprint manufacturers in North America are prepared to add capacity in the form of new pulp and paper mills. But bringing new mills on stream takes up to 18 months.

In Europe, there are similar plans to expand. While that may not help in the short term, many believe that by 1997 the newsprint industry will have scored an own goal by bringing in plentiful new supplies just as demand starts to flag again.

Thus the cycle begins anew.