Sunday, October 14, 2018
Business

Tariffs, paper shortage combine for financial pressure on newspapers

Two years ago, a Washington state paper mill was bought by a private equity firm with interests in everything from pizza and urinalysis to car rentals and chemicals.

That transaction, little noted at the time, laid the groundwork for what could be a devastating blow to the already-struggling U.S. newspaper industry.

Under its new owner, North Pacific Paper Co. claimed that it faced unfair competition from Canadian paper mills. The U.S. Commerce Department agreed, recently slapping stiff tariffs on paper that the Canadian mills ship to American newspapers each year.

The action has benefited the U.S. mill — at least in the short term — but is contributing to a huge increase in the price of newsprint. And as newspapers cut costs to make up for that, it could mean:

• Smaller reporting staffs and less local news. Those changes will be seen not only in the print papers but also in the versions read on smartphones and computers.

• Fewer of the advertising inserts that many shoppers rely on to find good deals at Publix, Target and other retailers. Stores will cut back on advertising because the cost of paper for the inserts is going up, too.

• Some small newspapers could go out of business, leaving a news vacuum in rural areas with spotty access to the Internet.

The tariffs come at a time when the U.S. newspaper business already has lost roughly 30 percent of its subscribers and more than 230,000 jobs because of the recession and readers’ growing preference for digital sources of news. Moreover, the supply of newsprint has shrunk due to the closing of many paper mills — also casualties of the turn to digital — and an increased demand for newsprint by publishers in China. That shortage is contributing to the steep climb in prices.

"It’s almost like a perfect storm with what’s going on in China and all the capacity taken off the market, and now with these tariffs," said Paul Boyle, a senior vice president of the News Media Alliance. "It’s just whacking the whole newspaper industry."

The alliance, which represents 2,000 U.S. and Canadian newspapers, is among several trade organizations fighting the tariffs. At least three dozen members of Congress have written to Commerce Secretary Wilbur Ross, warning of the impact on the U.S. newspaper publishing and commercial printing industries that together employ more than 600,000 people.

"By contrast, the (tariffs) would benefit a single petitioner that employs approximately 260 individuals at one mill," eight U.S. senators wrote.

At the center of the controversy is North Pacific Paper Co., NORPAC, in Longview, Wash. Started as a joint venture between U.S. and Japanese paper companies, NORPAC was sold in 2016 to One Rock Capital Partners of New York.

According to its website, One Rock focuses on "misunderstood" and "under-optimized" companies — in other words, those not making as much money as they potentially could. One Rock says it works with its investors and its strategic partner, the giant Mitsubishi Corp., "to increase the value of our portfolio companies,’’ which include fast food, consumer appliance and chemical firms.

Last year, One Rock’s†NORPAC complained that Canada was subsidizing its paper industry and enabling Canadian mills to dump paper on the U.S. market at less than fair value. That triggered an investigation by the Commerce Department.

To counteract the effect of the subsidies, the department in January imposed preliminary tariffs of up to 9.93 percent on Canadian paper companies. In March, it imposed an additional 22.16 percent preliminary tariff for dumping on all but two companies.

U.S. customs officials already are collecting the tariffs, although it will be months before a final decision is made on whether to keep them in place.

"Even if there is some type of reduction, a lot of damage already will be done by then," said John Snyder, CEO of PAGE, a cooperative of small- to mid-sized U.S. newspapers. PAGE partners with Cox Newsprint Supply, a sister company of the chain that owns the Atlanta Journal-Constitution, to negotiate lower prices than its members might otherwise get.

Snyder noted that several Canadian companies began raising their prices even before the tariffs were imposed. Resolute, the cooperative’s biggest supplier, hiked prices in October by $80 a ton and will raise them an additional $44 a ton over the next two months. At the same time, newsprint supplies are shrinking.

"Two things are happening, and both are tremendously detrimental to the small papers," Snyder said. "We have members who are literally running out of paper and nobody to go to for help because most of the mills are sold out. So it’s not just a pricing issue, but people can’t even get paper."

Among PAGE’s Florida members is Sun Coast Media Group, owner of papers in Venice and Port Charlotte. Due to the tariffs, the papers have fewer pages, have raised their subscription prices and expect to raise their ad rates. Staffs have been trimmed, though largely through attrition.

The company also prints 125 community newspapers, and president David Dunn-Rankin worries about what will happen to them as Sun Coast passes along its higher newsprint costs.

"A lot of small weeklies are just barely hanging on, and I’m afraid they’re not going to make it," he said.

Larger papers also are feeling the squeeze. In a letter toreaders last Sunday, Paul Tash, chairman and CEO of Times Publishing, said the tariffs will increase the Tampa Bay Times’ newsprint costs from $600 to $800 a ton. Because the Times uses about 17,000 tons a year, that will add more than $3 million to the paper’s annual newsprint bill.

Read more: Tariffs on paper will hurt us, and our readers

The added costs will result in job losses and create pressure to raise subscription prices and drop popular features like puzzles or comics to save newsprint.

"Newspapers are vital civic assets ... but publishing them is not an easy business. and these tariffs will make it even harder," Tash said. "This is a kick in the teeth."

Gannett, which owns daily papers in Fort Myers, Tallahassee, Naples and Pensacola, hasn’t considered what steps it might take because of the tariffs, said William Barker, president and publisher of the Fort Myers News-Press and Naples Daily News. The News, though, posted a front-page note last Sunday that succinctly explained why U.S. papers don’t just "buy American," as some readers have suggested.

"Paper mills are behind in newsprint production, and our company has had to look elsewhere for newsprint," the note said. "We are receiving newsprint from Spain to meet the shortfalls."

The tariffs are also affecting commercial printers like Wisconsin-based Quad/Graphics, which prints ad inserts for Target, Walgreens and dozens of other retailers.

"You will see fewer inserts," said Patrick Henderson, the company’s director of government affairs. "Our customers are very price-sensitive — even a 2-cent increase in the cost of a postage stamp starts to drop the volume — and a 20 percent increase (in paper) is really going to impact the volume."

That could be a further blow to Quad, which employs 2,000 in its retail division but has been losing 4 to 5 percent of its business every year as companies move from print to digital advertising.

The tariffs are at least a temporary victory for NORPAC, which has raised its own paper prices. But critics have challenged the validity of its complaints.

NORPAC’s petitions to the Commerce Department were based on "incorrect assessments of a changing market and appear to be driven by short-term investment strategies of the company’s hedge fund owners," News Media Alliance wrote to Secretary Ross.

The alliance disputed NORPAC’s claim that unfair competition from Canada caused the closing of more than 10 U.S. mills and the loss of more than 2,000 jobs. On the contrary, the alliance said, "they’ve closed because of the decline in consumption (of paper) with the switch to digital."

As for NORPAC’s claim that the tariffs would also benefit paper mills in Georgia and Mississippi, that was false, the alliance said — those mills are owned by Resolute, one of the Canadian companies opposed to the tariffs.

Despite NORPAC’s contention that it was hurt by the Canadian imports, less than 5 percent of Canadian newsprint comes into the Pacific Northwest, while almost 91 percent enters through the Midwest and Northeast.

"It’s become a very regional market," said Henderson of Quad/Graphic. "This kind of paper is very, very dense, so trucking it around the country is prohibitively expensive. We do buy from NORPAC for our plants on the West Coast, but to ask them to try to get paper to our plants in the East and Midwest, we would pay more in shipping cost than the tariff would be."

Opponents of the tariff will have a chance to argue their case before the U.S. International Trade Commission, which will decide later this year if the unfair trade practices found by the Commerce Department caused enough harm to NORPAC and other U.S. mills that the tariffs should stay in place.

Jeffrey Schott, a trade expert with the Peterson Institute for International Economics, based in Washington, D.C., said it is not unusual for the trade commission to find no harm to a U.S. producer. The panel recently eliminated a nearly 300 percent tariff on Canada’s Bombardier aircraft company, which Boeing had accused of selling jets at unfairly low prices.

But Schott said such decisions are easier when they involve a narrowly defined industry like steel instead of one like newspaper publishing in which many different groups — journalists, readers, advertisers — could claim they were injured by tariffs.

"It gets harder,’’ Schott said, "because it’s a bigger scope of economic activity that you have to prove" suffered harm.

Contact Susan Taylor Martin at [email protected] or (727) 893-8642. Follow @susanskate

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