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Tuesday, March 30, 2010

The De-Automation of Periodicals Mail

Jim O’Brien of Time Inc., who is in his third decade studying the Postal Service’s “automation refugees,” makes a startling statement in a guest article for the blog run by the Postal Service’s Office of Inspector General:

“More Periodicals mail is manually processed than ever, and manual productivity continues to decline,” wrote O’Brien, widely recognized as a leading expert on the U.S. Postal Service's handling of Periodicals mail.

Magazine publishers have put lots of energy and resources into making our publications more suited to the Postal Service’s sorting equipment. We’ve participated in co-mail to create more carrier-route bundles, moved mail from sacks to pallets, turned our addresses upside down in preparation for the Flats Sequencing System, and are converting our tabloids to other formats to comply with the “droop” test.

But more than ever, according to O’Brien, postal facilities are letting the machines sit idle while employees handle newspapers and magazines (and, presumably, catalogs) manually. These employees are "automation refugees" – whom O'Brien describes as “mail processing employees who were assigned to manual operations when automation eliminated the work they had been doing.” So much for using automation to decrease the Postal Service's costs.

Rather than addressing the problem, postal officials complain that they're losing so much money on Periodicals that they need to jack up our rates. How about acknowledging that there are too many mail-processing employees and offering them a decent incentive to retire early?

“How can the Postal Service continue to imply that Periodicals mailers are responsible for the cost coverage problem when mailers have substantially and consistently increased Periodicals worksharing?” O’Brien wrote in the blog published yesterday. “The Postal Service should NOT be permitted to continue using Periodicals class mail processing as a dumping ground for its excess labor and the associated costs.”

The Postal Regulatory Commission also indicated yesterday that it might finally realize something is fishy about the Postal Service’s cost accounting for Periodicals. Rather than ruling on whether Periodicals rates are out of compliance with a law that requires each class of mail to break even, it held off doing anything until it receives the in-progress "Joint Report" on Periodicals cost coverage. (But it also hinted that major increases in Periodicals bundle and container rates are in order.)

For further information on the matter of automation refugees and how the USPS’s flawed accounting methods might lead to big rate increases for magazines, newspapers (and perhaps catalogs), please see:

Monday, March 29, 2010

Republican Senators Defend Bogus Black-Liquor Accounting

The news media are finally realizing that ObamaCare's supposed savings from ending a black liquor tax credit are a mirage. It's making for some interesting reading.

Todd Zwillich, Washington correspondent for The Takeaway radio show, had an enlightening and amusing piece yesterday basically confirming that Congress knew that there was no black-liquor loophole even though the healthcare-reform legislation claims savings of more than $23 billion from closing the loophole. Especially interesting is that he found two Republican senators who oppose the bill but said the Democrats's black-liquor shell game is nothing new on Capitol Hill.

"Republicans and Democrats have both put together bills like this," said South Carolina Sen. Lindsey Graham.

Zwillich said Iowa Sen. Charles Grassley was unfazed by the claim that the black liquor loophole was worth billions even though no paper companies are exploiting it.

"This is the way it works. They may not use it, but they could use it, okay?" Grassley said. "Even though somebody tells you it wouldn't happen, it could happen, and it could cost the Treasury."

Sorry, Charlie, it couldn't happen. Even without the healthcare legislation, a substance has to get EPA approval as a motor fuel or fuel additive to qualify for cellulosic biofuel producer credits. Black liquor, "a gooey wood pulp byproduct" in the words of BNET's Kirsten Korosec, doesn't belong in a gas tank.

Korosec gets credit for being the first on the black liquor story (other than a couple of obscure blogs) with last week's article Paying For Healthcare: How Democrats Closed an Energy Tax Loophole That Doesn't Exist.

Olga Pierce of ProPublica wins the honesty award for her item at the On The Hill blog today admitting that she previously got the black liquor story wrong. This time she nailed it: "Closing a tax loophole no one was planning to use doesn’t actually save the government any money."

So far, no one in the news media has reported another Congressional goof: If indeed black liquor could qualify for cellulosic biofuel producer credits, the loophole would be worth $60 billion, not $24 billion. Even when it generates imaginary revenue, Congress can't get the math right!

For more information on how a once-obscure pulp byproduct became such a political football, please see:

Saturday, March 27, 2010

Washington Post's New Magazine Will Bypass USPS

In what may be a troubling precedent for the U.S. Postal Service, The Washington Post is about to launch a paid subscription magazine that will bypass the USPS delivery network.

Capital Business will be delivered each week to paying ($49 per year) subscribers along with their Monday copy of the Post, according to the Post’s announcement. The move suggests that the country’s newspaper industry may be ready to try a new twist on a strategy that failed in the 1990s -- competing with the Postal Service to provide home delivery of magazines.

Two networks of daily newspapers delivered a variety of consumer magazines in their home markets during the early and mid-1990s. At the time, the delivery systems for most daily newspapers (kids on bicycles using marked-up address lists) were not suited to delivering a specific package to a specific customer, so the magazines were rarely delivered along with the newspaper, a former insider tells me.

The struggling efforts collapsed when the Postal Service restructured Periodicals postal rates to encourage worksharing (such as dropshipping), which led to lower postage costs for many publishers.

But times have changed. Postal officials want to return to the practice of increasing Periodicals postage prices much faster than the rate of inflation. Newspapers have learned to deliver several products through their daily carrier network -- already capturing a significant portion of The Wall Street Journal delivery business from the USPS. And customers have become accustomed to having publications delivered to their driveway rather than their doorstep.

With major newspaper companies like Hearst and the Washington Post Company (which owns Newsweek) also publishing magazines, finding a critical mass of newspapers and magazines willing to follow the Post’s lead would not be difficult.

Getting heavily into magazine delivery would require further enhancements to newspapers’ delivery systems, but the Postal Service seems unlikely to undercut them this time around. Postal officials believe they are losing money on Periodicals, though in reality the Postal Service would be even more unprofitable without them -- especially without the large consumer magazines that tend to mail most efficiently.

Another unusual feature of Capital Business, which will focus on the Washington area, is that it “will be available only to subscribers of The Washington Post,” according to the magazine’s Web site. And its content will apparently be available on the Web only to the magazine’s subscribers.

For more information about Periodicals postage rates, please see:

Tuesday, March 23, 2010

ObamaCare's Black Liquor Tab: $23.6 Billion

Despite a Democratic Congressman almost ruining the scheme by committing a cardinal political sin – He told the truth! – the historic healthcare legislation President Obama signed today assumes $23.6 billion in savings from eliminating a mythical black liquor tax credit.

Congressman Scott Murphy, whose district in the Adirondack Mountains of New York includes two operating paper mills (and several closed ones) almost spilled the beans on the bogus savings a few days ago. In an interview with the local newspaper about his support of the healthcare legislation, he made the following statement:

"We worked with IP (International Paper Co.) and Finch. And the language that's in here about the black liquor credit is not something that's going to impact their business. They're not going to be impacted by this in terms of what they were planning to do and what they're doing going forward."

In a similar statement last week crying out for explanation, Bloomberg BusinessWeek said that the loophole closure “would prohibit paper makers such as International Paper Co. from claiming a $1.01 tax credit for producing fuel from a type of pulp-making byproduct called black liquor. While International Paper and other forest product companies said they weren’t seeking the credit, the IRS determined they might be eligible.”

The payouts from the real black liquor tax credit, which expired last year, indicate that International Paper accounts for more than 20% of the country’s black liquor production. (See Black Liquor Scorecard: 21 Companies Earned $6.5 Billion in 2009.) If indeed the healthcare legislation plugged a “Son of Black Liquor” loophole worth $23.6 billion, then IP’s share would certainly be in the billions.

Question: Why would IP and “other forest product companies” not be interested in pursuing such generous tax credits? (After all, skyrocketing pulp prices could lead to hefty profits, and a hefty tax bill, for some of the companies this year.)

Answer: Because they knew they could never collect Cellulosic Biofuel Producer Credits, even before passage of healthcare reform. Those credits are only for EPA-approved motor fuels and additives. Executives at pulp-making companies understand that no one's going to put black liquor into their gas tank.

(News Media and Congress Are Confused About Black Liquor Subsidies explains further why, despite the IRS memo, black liquor would not qualify for the credits. How Google Could Help the Democrats By Buying a Pulp Mill explored black liquor's role in the healthcare debate.)

By the way, I’m sympathetic to some other aspects of the ObamaCare legislation, such as government help for the uninsured. But seeing how part of the program is allegedly being paid for with these bogus black-liquor savings make me wonder what other surprises are lurking in the law.

Monday, March 22, 2010

Coated Groundwood Prices on the Upswing, Poll Says

Coated groundwood prices in the U.S. are not only headed up, they will increase again in July, a majority of respondents to a Dead Tree Edition poll predicted.

Of the 58 respondents, 12 voted that the RISI index for 40# coated #5 would increase by $65 or more from the current (February) number of $735. Another 19 voted for a $35 to $65 increase -- which is also larger than the second-quarter increase of $30 that has been announced by nearly all mills.

Only 10 people (17%) predicted that prices would decrease. Another 17 predicted that CGW prices would rise less than $35 per ton.

Thursday, March 18, 2010

Increased Efficiency Led to Higher Periodicals and Catalog Costs, Goldway Says

Is the head of the Postal Regulatory Commission really falling for the Postal Service’s nonsensical accounting methods for periodicals and catalogs?

In her speech last week to a Federal Trade Commission workshop on journalism in the Internet age, Ruth Goldway tried to explain why Standard flats (mostly catalogs) and Periodicals mail (magazines and newspapers) had become increasingly unprofitable for the Postal Service in the past decade despite rate hikes and increased mailer work sharing.

“Part of the reason is that the Postal Service actually created a system of great savings and efficiency for letter mail, and so letter mail became automated,” she said, referring to delivery-point sequencing of letters. “But magazines -- Periodicals -- were not automated, so a greater share of the labor costs for the Postal Service … was then attributable to magazines and newspapers because they still had to be handled manually.”

That’s like an auto company saying it has to raise the price of its trucks because it figured how to reduce the cost of making cars. Automating the sortation of letters had no impact on the true cost of sorting flat mail.

In defense of Ms. Goldway, she did refer several times to “attributable costs,” suggesting that she realized the issue was that the USPS’s broken cost-accounting system was assigning greater costs to flats, not that the actual cost of handling flats had increased so rapidly. But she also mentioned that publishers get a $641 million annual subsidy because “it appears that cost coverage for Periodicals is now at 76%.”

Ms. Goldway works in a world where "cost" refers to a number determined by the Postal Service when it follows a consistent (and flawed) methodology that is in accordance with the law. She seems smart enough to see past that, but let's hope that hours of perusing mind-numbing Postal Service reports doesn't make her forget that, in the real world, the cost of providing a service is calculated by determining how much money would be saved if that service were not provided.

Without stating it directly, Ms. Goldway’s informal speech confirmed what magazine publishers and other mailers have been saying for years: The automation of letter mail turned many postal employees into “automation refugees” who were then assigned to unnecessary manual handling of flat mail. The Postal Service’s accounting system mis-assigns these costs to Periodicals and Standard flats rather than treating them as overhead.

It’s clear that automation and declining mail volumes have left the Postal Service with too many employees. The USPS’s new transformation plan mostly dodges the issue, saying the service will gradually downsize through attrition. It seems penny wise and pound foolish not to do what private industry would do to shrink its workforce in the face of declining revenue: Offer a decent early-retirement package ($15,000 is chicken feed in this context) to selected employees so that the Postal Service can rightsize now.

Ms. Goldway’s speech had some other interesting comments about periodicals:
  • "After the year 2000, there's only one year in which Periodicals appeared to have covered their costs, and that was in 2003."
  • "In 2007, there was a big rate increase for Periodicals. And while periodicals were shocked by it and troubled by it, it was, from the Rate Commission's point of view, the only fair thing to do, because, after all, we had single-piece users of the mail, people who are paying bills and using correspondence, who are subsidizing other uses of the mail unwittingly. And under the law, that's our obligation, to try and spread the responsibility for the costs more fairly."
  • "The lowest work-sharing groups, those with the smallest circulation, and with the highest editorial content, actually, cost the Postal Service on average about 19 cents apiece. And those periodicals are often the ones that journalists are most concerned about, those are often the periodicals of opinion, and they're the ones who are distributed nationwide, as opposed to a particular region."
  • She hopes that the Flats Sequencing System “will actually be able to have some really documented cost savings, so that there will be less of a . . . cost requirement for Periodicals to meet in the future." (Question: If FSS creates more automation refugees, to what class will the costs of those employees be allocated?)
  • There’s a “symbiotic relationship” between publishers and the Postal Service, going all the way back to the first Postmaster General, Ben Franklin. "I think if the Congress understands this unique relationship, arguments can be made for finding financial support in one way or another, that may address both of our concerns. I think together we have a case for what is an essential part of American infrastructure, and something that the Congress really does want to maintain. If only for its own personal desire to get reelected every year, they want to make sure that there's a vibrant political dialogue in the country." 
For more information: The Postal Service's mis-allocation of costs to the Periodicals class and the issue of automation refugees is explored further in Postal Service Inefficiency Drives Up Periodicals Costs and Postal Accounting Snafus Might Be Bad News for Publishers.

    Wednesday, March 17, 2010

    How Google Could Help the Democrats By Buying a Pulp Mill

    Here’s a way for Democrats to pass their ambitious healthcare and jobs proposals without looking like budget busters: Persuade Google to buy a pulp mill – specifically a U.S. mill that makes kraft pulp.

    Understanding this scheme requires a walk through the smoke-and-mirrors world of federal budgeting.

    The scheme involves Google acting as if it will cash in on the “Son of Black Liquor” tax credit, then the Democrats rushing in to block that non-existent tax loophole and using the nearly $35 billion or more in new “savings” to pay for their initiatives. The scheme could use any profitable, high-profile company. But Google is an especially good choice to play along because it needs powerful new friends in Washington to help fend off threats of antitrust action and other government intervention.

    The Obama Administration and Congressional leaders squawked last spring when they learned that pulp and paper companies were exploiting a federal biofuel program to get huge tax credits for the burning of black liquor. Then they did nothing while the companies kept raking in the bucks -- $6.5 billion for publicly traded firms and probably at least $2 billion for privately held ones -- until the exploited “alternative fuel mixture” program expired on Dec. 31.

    Now the Administration and various Congress members want to declare black liquor ineligible for the new Cellulosic Biofuel Producer Credits (CBPC) – a closing of the so-called Son of Black Liquor loophole. CBPC already requires that a biofuel be approved by the EPA as a motor fuel or fuel additive, which in essence makes black liquor ineligible. No one’s going to put a molasses-like mixture containing water and sediment into their gas tank. The Son of Black Liquor tax credit is a mirage.

    You could say that Congress watched while all the horses left the barn, then raced to another, empty barn to slam its door shut.

    Nevertheless, various politicians are claiming they are going to save taxpayers $21 to $25 billion by closing the non-existent loophole – and then using the “savings” to pay for new programs. (Congress had never intended or budgeted CBPC payments for black liquor, so even if the loophole existed closing it would be an avoidance of unbudgeted expenses rather than a budget reduction. Still, Congress is counting the closure as revenue.) Some members of Congress on both sides of the aisle wanted to use the funny money to pay for job-stimulus legislation, but the Obama Administration has already claimed it for healthcare reform.

    In theory, Son of Black Liquor could be worth $60 billion. (Here’s the math: Publicly traded pulp and paper companies received more than $1.8 billion in alternative fuel mixture credits during each of the last two quarters. Add in companies that don’t report to the SEC and the total is probably $2.5 million. CBPC is twice as generous as the alternative fuel mixture credits and would last for 12 quarters.)

    The problem is that, unlike the direct payments from the alternative fuel mixture program, CBPC can only be used to offset income tax payments. Pulp manufacturers haven’t been very profitable in recent years, ending last year in the black only because the black liquor tax credits exceeded their losses from making actual products. Administration and Congressional staff seem to be estimating that only 35% to 40% of the $60 billion would end up being claimed.

    That’s where Google comes in. With an annual tax bill of about $1.5 billion, it would have no trouble using all of the CBPC credits from several good-sized pulp mills if black liquor were ever to become eligible for the program.

    In announcing the purchase of the pulp mill, Google could make vague comments about “green energy,” converting the mill into a “bio-refinery,” favorable tax laws, and possible research on turning black liquor into a motor fuel. Google wouldn’t actually have to manufacture or market pulp; it could lease the mill back to the seller or pay it to operate the mill.

    Tipped-off politicians could be ready to pounce, warning about the possibility of other highly profitable companies buying pulp mills to take full advantage of CBPC for black liquor. Pointing out that the potential drain on the Treasury is $60 billion, not $25 billion, they could then close the loophole and put some of the new “savings” into both the jobs bill and healthcare reform.

    Will the news media let the politicians get away with this? Sadly, the answer is probably yes. Capitol Hill reporters have been treating Congressional press releases as if they came down from Mount Sinai. (Not that many of them pay much attention to the Ten Commandments, mind you.) News reports continue to refer to the savings from closing the (mythical) loophole without mentioning an EPA official's letter stating that black liquor doesn't qualify for CBPC.

    Of all the mainstream news-media reporting on the subject, Bloomberg BusinessWeek came closest to the truth last week when it said, “The IRS issued a ruling last year that congressional analysts said opened the door for abuses, although companies have expressed little interest in claiming the credit.” But even it didn’t mention that the pulp and paper companies aren’t interested in CBPC credits because they know that black liquor won’t qualify.

    For more on black liquor tax credits and the bogus Son of Black Liquor loophole, please see:

    Black Liquor Scorecard: 21 Companies Earned $6.5 Billion in 2009: Shows the alternative fuel mixture credits that 21 publicly traded pulp and paper companies received last year for burning black liquor, as well as their net income.

    Obama Joins in on the Black Liquor Two-Step: Lazy reporting is abetting the Obama Administration's claim that it will save billions by excluding black liquor from CBPC.

    News Media and Congress Are Confused About Black Liquor Subsidies contains the full text of the EPA official's letter and shows where the news media and Congressional staff have gone wrong.

    Did Black Liquor Credits Pave the Way for Healthcare Legislation? explains the apparent reason Congress did nothing about the billions paid out to pulp and paper companies last year in the form of black liquor tax credits.

    Black Liquor Subsidies – Congressional Shell Game shows that Dead Tree Edition is not the only obscure blog saying that the black-liquor savings being claimed by Congress and the Administration are bogus.

    If that's not enough, how about a whole case of black liquor -- every article on the subject (31 to date) that has appeared in Dead Tree Edition?

    Tuesday, March 16, 2010

    Is Domtar's Exit a Game Changer for Coated Paper?

    Today we discovered what NewPage had up its sleeve when it announced a price increase for coated groundwood paper on Friday: It knew that Domtar was about to close its Columbus, Mississippi mill.

    The two companies revealed today that Domtar next month will permanently close the mill, which has a single machine with the capacity to make 238,000 tons annually of medium-weight coated #5 and #4. NewPage will buy the product lines and trademarks, though it’s not clear whether it will continue to make Choctaw and the other products on its own machines.

    The simultaneous news releases this morning were seemingly followed every hour by another North American mill announcing a $30-per-ton price increase on coated freesheet, coated groundwood, and/or supercalendered papers. Even AbitibiBowater, which postponed a price increase on CGW only a week ago because most competitors didn’t go along, came back to the price-increase party and brought supercal along.

    One industry watcher called the closing of the Columbus mill “a game changer” because it might finally bring the CGW market into balance.

    And another asked a question I can’t answer: If indeed NewPage is about to run out of money (see today's earlier article, Are NewPage and Verso Headed to the Altar?), how could it afford to buy Domtar out of the coated paper business?

    Related articles:

    Monday, March 15, 2010

    Are NewPage and Verso Headed to the Altar?

    Three hedge funds trying to take control of NewPage already own rival Verso Paper and have a major stake in AbitibiBowater, a published report said Monday night.

    The "vulture trio" has scooped up more than 50% of NewPage's second-lien bonds in a "loan to own" maneuver, betting that they will be in the driver's seat when NewPage goes into financial collapse, according to a Debtwire article that appeared in the Financial Times. Five different analysts told Debtwire that NewPage could run out of cash this year.

    The trio includes Apollo Management, which has a controlling interest in Verso, and Avenue Capital, which is likely to hold "a large stake" in AbitibiBowater when that company emerges from Chapter 11 bankruptcy reorganization, the article said.

    Verso and NewPage together control about 55% of the North American coated freesheet market and 50% of the continent's coated groundwood market. Throw in AbitibiBowater and the CGW share would jump to about 65% and the supercalendered share would surpass 50%.

    "Granted, any transaction that involves the potential for such massive consolidation will invite heavy scrutiny from antitrust regulators," the article said. "But the radical repricing afflicting the paper industry" may remove the legal hurdles.

    Verso Joins in on Price Increase, Adds Supercalendered

    Verso Paper told its customers today it was going along with the April 1 price increase on coated paper announced last week by NewPage and applying it to supercalendered papers as well.

    The announcement from Verso, North America's #2 maker of coated paper, says the price for all coated freesheet, coated groundwood, and supercalendered grades will increase by $30 per ton ($1.50 per cwt.) Friday's announcement from NewPage, the market leader, did not mention SC papers.

    Unprecedented increases in the price of market pulp (see BusinessWeek's excellent coverage) have paved the way for CFS prices to rise despite overcapacity. The idling of the St. Mary's supercalendered mill in Ontario, the Finnish port strike, and the Canadian loonie's move toward parity with the U.S. dollar may help firm up the SC market, which should not be affected much by the kraft-pulp shortage.

    My guess is that CGW prices will move up slower than CFS or SC because producers seem especially reluctant to shut down machines in the face of declining demand. Judging by early results on the poll I posted Friday (in the right column, just under the first ad), there is no consensus in the marketplace yet about where CGW prices are headed.

    Friday, March 12, 2010

    Students Lecture Al Gore on Green Printing

    A group of Portland State University graduate students is taking Al Gore to task because his book on sustainability uses paper and printing methods that are not particularly sustainable.
    Our Choice: A Plan to Solve the Climate Crisis

    The former Vice President's book, Our Choice: A Plan to Solve the Climate Crisis, "is a great first step in introducing the importance of sustainable publishing to a nationwide audience," the Sustainable Publishing Initiative of the student-run Ooligan Press said in an open letter to Gore this week. "That being said, we do feel concerned that some of the choices made in the printing of Our Choice are not aligned with the book’s message."

    Despite a section that "attests to the environmentally friendly methods of printing the book," SPI says, the methods fall short of being truly green:
    • For the front cover of the book, you use a custom fold, which is certainly an elegant—if more expensive—option. Unfortunately, these folds also yield books that are far more susceptible to damage. In the publishing business, any damage that occurs to a book instantly allows the bookstore to return it to the publisher, and with this type of flap, it will happen on a large scale. If the book is considered damaged beyond a certain point, it will be pulped rather than enjoyed by a reader.
    • A large percentage of the book is illustrated in full-bleed spreads, a design choice that leads to great waste. To achieve a full-bleed spread, the printer must print on larger paper and trim down to the book size edges. All the excess paper and ink goes to waste.
    • You note that the book uses recycled paper with 10% post-consumer waste content, but this percentage is negligible and does not set a high standard. Many educational institutions, cities, counties, states, and an increasing number of corporations have policies addressing paper efficiencies, recycling, recycled content, and cleaner production methods. Across the board, the minimum PCW content is between 30–50%. Some state agencies even require purchasing 100% PCW paper. 
    • The pages are oversaturated with ink, causing the book pages to become distorted and preventing the book from being recyclable. This book has a CMYK interior, which utilizes the most colors available and uses an excessive amount of ink. The first four pages of the book’s interior are “registration” black as opposed to the standard “key” black of CMYK, meaning the printers have fully flooded all four colors to achieve that saturated black. It takes at least four runs of ink to achieve registration black. The process to recycle pages increases with each run, as does the energy and chemical processing involved in the printing.
    • The size of the book is nonstandard. As in the case of full-bleed spreads, cutting to special sizes creates waste. 
    These students in Portland State's Writing and Book Publishing have certainly done their homework. I've never seen anyone question the environmental friendliness, or recyclability, of heavy ink coverage and four-color ("registration") blacks. But I think some of the criticism is off base.

    I question whether using PCW in book papers makes environmental sense or is a form of "up-cycling" that diverts the recycled pulp from more appropriate uses. (See I'm an environmental idiot! for more on the subject.) More relevant are the type of virgin pulp and the extent and type of bleaching used to make the paper.

    I also wonder about the "nonstandard" size. The print run of Gore's book was probably large enough to justify use of a web press, which would have different standard sizes from those of sheetfed and digital presses that are used to print short-run books.

    These students have raised some interesting points to be considered by those of us who are interested in green printing. Just one question: Is "green printing" an oxymoron? Green, after all requires at least two colors of ink, cyan and yellow. Should we speak instead of "key black" printing?

    Where Are Coated Prices Headed? Let's Vote On It!

    Just when the wheels had fallen off the attempt to raise North American coated-groundwood prices, the wagon started rolling again today.

    NewPage announced a $30-per-ton increase on coated-groundwood (CGW) and coated-freesheet (CFS) prices to take effect on Monday. The pricing for most contract customers cannot be changed until April 1, and many have locked in prices through June 30.

    Today's announcement came only a couple of days after AbitibiBowater started spreading the word that it was “postponing” its Feb. 25 attempt to raise CGW prices by $60 per ton on April 1. Kruger, which seemed to be the only other mill that jumped on that bandwagon, has also reportedly backed down in recent days.

    The North American coated-paper market still suffers from overcapacity that has kept prices low. But thanks to an earthquake, floods, a strike, and a government ruling, an argument can be made for jacking up CFS prices.

    Last month’s Chilean earthquake, wet weather in the U.S. South, and other factors have caused prices for kraft pulp -– the main ingredient in CFS -– to skyrocket. Don’t be surprised to see shutdowns soon at CFS mills that rely on purchased pulp. And even integrated mills may be tempted to idle their paper machines so that they can sell their now-valuable pulp to a hungry market.

    An anti-dumping decision in the U.S. and a similar case in Europe have also cooled Asian producers on selling low-priced coated sheets in the U.S.

    The case is weaker for CGW, a market in which prices had drifted lower early this after seeming to stabilize in the fall. Most CGW products use relatively little, if any, kraft pulp, and Asian producers have not been a factor in North America.

    A few years ago, a strike in Finland would have sent U.S. CGW buyers into a panic. But the weak dollar had already chased the Finns away, limiting the impact in North America of a port strike that is strangling the Finnish paper industry.

    My guess is that CGW prices will start moving up only after CFS does and only after more CGW capacity is idled.

    What’s your bet? On the right you’ll see a chance to vote on where you think the RISI index for 40# coated #5 (at $735 in February) will be on July 1. Warning: I tried a similar crowdsourcing exercise on CGW prices a year ago, and hardly anyone correctly predicted the market crash that came shortly afterward.

    Related Articles:

    Thursday, March 11, 2010

    Turmoil in Magazine Land: Did Folio Diss BoSacks?

    Folio: posted an interesting blog about online news aggregators today that was made more interesting by this aside near the end:

    "I can think of at least one well-known media news aggregator who not only pulls publishers’ headlines and leads for his e-newsletters but posts full news stories, verbatim—and sells ads against them," wrote Jason Fell. "Sure, he links back to the original story, but who is going to click back to the publisher’s Web site when they can read the whole piece directly from the newsletter?"

    Bob Sacks, alias BoSacks, agrees with me that he is almost certainly the target of Fell's ire. More than 11,000 people in media-related industries, especially the magazine industry, receive his e-mailed newsletter -- which is mostly media-related articles he forwards, often with commentary and sometimes with one of his famous BoRants.

    "Yes. I do fit the M.O. described in the article," Sacks emailed me. "I have been at this a long time. I have tried to save every letter from publishers and writers begging me to pick up their stories -- and also the many thank-you letters for doing so."

    I would much rather have one of my articles mentioned by "blurb-and-a-link" than having aggregators publish the entire article. A blurb at Postalnews.com brings at least a thousand visitors, while having an entire article on a prominent Web site will lead to only a handful of links. (Links from emails are hard to track.)

    But I have no quarrel with BoSacks because he provides proper attribution and links. He also tries not to pull often from any one source -- though he did send out three Folio: articles last week, including two by Fell. Besides, reformatting by Constant Contact software often makes BoSacks emails so hard to read that many people probably end up linking to the source Web site instead.
     
    For an obscure, anonymous, part-time blogger like me, the exposure from BoSacks is worth more than the lost traffic from people seeing an article in one of his emails rather than on my site. (Besides, I'm not very good at "monetizing" the traffic here, which only averages about 1,000 people a day. You could help by clicking on one of the ads, you know.)

    But as someone who has sent a few cease-and-desist emails to Web sites that used my content without permission or compensation, I'm sympathetic to Fell's annoyance when he concludes: "In an age when publishers are struggling mightily to make nickels from their online endeavors, shouldn’t this aggregator offer some sort of revenue sharing program?" Folio: may be so widely read by magazine people that having an article become a BoSacks email does little to bring new readers to the magazine or its Web site.

    For the record, Folio: always plays fair with my blog, providing proper attribution and links when it cites my articles, which is not often enough. At times it seems to have gone out of its way not to mention one of my "scoops" when it picks up the same story, but Folio: always puts original research and thought into its article rather than just rewriting me.

    Also, for the record, BoSacks does not know the true identity of D. Eadward Tree.

    "I can't tell you have many people ask me who you are," he wrote me. "I always speak the truth, which helps my newsletter be what it is. So I tell them I have no idea. They don't believe me. I say, 'No, really, I have no idea.' They say, 'OK, so you won't tell me.'"

    Bob, don't expect me to tell you, either -- unless you take Fell up on that revenue-sharing thing.

    Tuesday, March 9, 2010

    Seven Misconceptions About the Postal Service's Action Plan

    Despite the Postal Service’s massive communication effort surrounding the introduction of its long-range action plan last week, the news media and general public have misunderstood some aspects of the plan. Even mailers and postal officials are confused on a few points.

    Here are seven misconceptions about the plan gleaned from news accounts, conversations, and the Postal Service’s own presentation:
    1. The Postal Service wants to cut retirees’ healthcare benefits. Absolutely wrong. The plan is too polite in describing the problem as "retiree health benefits prefunding." In reality, the Postal Service in essence has been lending the federal government billions of dollars annually, interest free, to make the federal deficit look smaller. These “pre-payments” into the retiree health fund do nothing to help retirees or current employees. That’s why postal unions actually oppose the pre-payments; they weaken the Postal Service without doing anything for postal workers. Union leader William Burrus (whose math I have criticized in the past) was right on the money last week when he said that "the central cause of USPS financial difficulties" is "the congressionally imposed requirement to pre-pay retiree healthcare obligations."

    2. Taxypayers subsidize the Postal Service. Talk of the Postal Service losing money and being “bailed out” by Congress has led to the logical – but incorrect – conclusion that the federal government provides financial support to the Postal Service. The Postal Service has actually subsidized the federal government with the retiree-fund pre-payments, and the supposed bailout was actually just a reduction of the pre-payment. The USPS has also paid billions of dollars more than its share into a federal pension fund -- another way that the supposedly independent Postal Service has been a cash cow for the federal government.

    3. The Postal Service is planning massive layoffs of full-time employees. The USPS is indeed planning to downsize further but plans to do it through attrition, mostly from retirements. It wants to replace some of the retirees with part-timers, whose hours can be adjusted in accordance with fluctuating mail volumes.

    4. If Saturday delivery is ended, people will have to mail their bills sooner to avoid late payments. Large organizations that receive numerous mailed bills, such as banks and utilities, will still be able to get this “remittance mail” six or even seven days a week. Although postal officials want to eliminate Saturday delivery, their proposal would not affect people and organizations that pick up their mail from post offices, which will remain open.

    5. If Congress lets the Postal Service close thousands of post offices, service will suffer and lines will become even longer at post offices. In addition to closing post offices, postal officials want to be able to sell stamps and to offer other services through thousands of retail businesses, such as convenience and discount stores. Such outlets may be better suited than post offices to dealing with the natural fluctuation in demand for retail postal services.

    6. The Postal Services loses money on Periodicals. Actually, the Postal Service doesn’t know its true costs for handling magazines and newspapers (or catalogs, for that matter). Greater automation and declining mail volume have led to the Postal Service having excess employees. Rather than letting them sit idle, postal management often puts these “automation refugees” to work doing unnecessary tasks, such as opening and sorting carrier-route bundles of flat mail -- and thereby inflating the cost of handling magazines and catalogs. “That is the prerogative of the USPS, but it should not be counted against flats as an extra cost,” writes Joe Schick, Director of Postal Affairs for Quad/Graphics. “Correct the costing problem before penalizing mailers.”

    7. The exigent rate increase slated for early next year will be relatively small for all mailers. Postal officials have said officially that they would seek an increase of less than 10%, and a 5% estimate has circulated in some quarters. But those are averages. Postal officials have also indicated a desire to hit Periodicals and non-profit mailers with higher-than-average increases, a process that could start with the exigent increase. It’s possible that some mailers will pay 2011 rate increases that are much higher than the rate of inflation while others hardly pay any increase.
    For more information , please see:

    Saturday, March 6, 2010

    Quad/Graphics Was Profitable in 2009 Despite Big Sales Decrease

    Quad/Graphics eked out a profit last year despite a 21% drop in revenue, the privately held printing company revealed in the first public disclosure of its finances.

    The company had net income of $52.8 million in 2009 on sales of $1.788 billion, a 3% margin, according to a report filed late Friday with the Securities and Exchange Commission.

    Quad provided a peak at its finances as part of its effort to become publicly traded and buy rival Worldcolor, a transaction it hopes will occur this summer. The document reveals that Quad employees own nearly half of the company's stock via the company's "Personal Enrichment Plan", a 401(k) and profit-sharing program.

    In contrast to Quad, larger and more diversified rival R.R. Donnelley suffered only a 15% drop in revenue last year but had its third straight unprofitable year in 2009. Quad has been profitable the past five years, though its profit has shrunk the past two years.

    Quad, however, is more heavily leveraged, with a debt-to-sales ratio of 0.44, versus 0.30 for Donnelley. That is apparently a result of Quad's tendency to invest heavily in new equipment and technologies, which the company brags about in its SEC filing:

    "Over the last 15 years, Quad/Graphics has made substantial, yet disciplined, investments in its manufacturing platform, creating what Quad/Graphics believes is the most efficient and modern manufacturing platform in the commercial printing industry. Quad/Graphics also has made substantial investments in research and development and other technological innovations. These investments have led to the development of various manufacturing process improvements, including innovative press and finishing control systems and material-handling equipment for use in Quad/Graphics’ own operations as well as for sale to other printers worldwide. Quad/Graphics believes that this ongoing innovation focus positions it on the leading edge of technology in the industry. Quad/Graphics believes that this continual investment and innovation and its modern manufacturing platform, together with its focus on customer service and its distribution capabilities, have resulted in Quad/Graphics being one of the most profitable commercial printing companies in the industry, as measured by EBITDA (net earnings attributable to common shareholders plus interest expense, income tax expense, depreciation and amortization) as a percentage of net sales. This profitability, in turn, allows Quad/Graphics to continue to invest in equipment, research and development and other technological innovations to benefit its customers."

    Black Liquor Scorecard: 21 Companies Earned $6.5 Billion in 2009

    The $6.5 billion in controversial black-liquor credits earned in 2009 by 21 publicly traded pulp and paper companies was far more than their total profit for the year.

    Despite the government’s unintended largesse, the 21 companies had combined net income of only $2.2 billion, according to an exclusive Dead Tree Edition analysis of documents filed with the Securities and Exchange Commission.

    Without the U.S. government subsidy, only nine of the companies would have been profitable in 2009, In fact, four recipients – AbitibiBowater, Weyerhaeuser, NewPage, and Sappi – together lost nearly $2.7 billion last year despite receiving more than $1 billion from the black-liquor program that expired on Dec. 31.

    At least one-fourth of the country’s capacity to make kraft pulp is in the hands of privately held companies that don’t have to file with the SEC. Assuming they took advantage of the “alternative fuel mixture” program in the same way that their publicly held peers did, the federal government probably shelled out between $8 and $9 billion to pay to do what they would have done anyway – use black liquor, a pulp byproduct, as a fuel source for their pulp operations.

    Several of the public companies' reports state that they expect to receive no subsidies for black liquor this year. And they're right.

    But don’t tell that to Congress or the news media. Obama Joins in on the Black Liquor Two-Step documented how sloppy reporting by leading news organizations had allowed Democratic Congress members to claim they were saving money by excluding black liquor from the new Cellulosic Biofuel Producer Credits (CBPC) -- a program that black liquor couldn't qualify for anyway.

    In the 12 days since that was published, the black-liquor silliness in Washington has gotten even worse, with Republicans joining the shell game. Sen. Jim Bunning (R-KY) tried to play taxpayer hero this week by proposing to “pay” for a new jobs program by closing the non-existent CBPC loophole. But Democrats blocked that effort because they have already committed to using the bogus savings for healthcare reform.

    Bunning's effort to exclude black liquor from CBPC "is absolutely meritorious and should be adopted whatever else Congress does," The Washington Post opined in a fact-challenged editorial. "This particular piece of corporate welfare showers paper companies with about $2.5 billion per year . . . that encourages them to generate power with 'black liquor,' an 'alternative fuel.'" Nope. Not a dime has been paid to pulp and paper companies under CBPC.

    Here are the 21 publicly traded companies, listed according to the amount of credits they received. The first number is the amount of black-liquor credits reported, the second is 2009 net income:

    • International Paper: $2.06 billion in black liquor credits; $2.36 billion net income
    • Smurfit-Stone Container: $654 million; $8 million
    • Domtar: $498 million; $310 million
    • MeadWestvaco: $375 million; $225 million
    • Weyerhaeuser: $344 million; $-545 million
    • NewPage: $304 million; $-308 million
    • AbitibiBowater: $276 million; $-1.553 billion
    • Verso Paper: $239 million; $106 million
    • Temple-Inland: $218 million; $206 million
    • Boise: $208 million; $154 million
    • Rayonier: $205 million; $313 million
    • Kapstone Paper and Packaging: $178 million; $80 million
    • Packaging Corporation of America: $176 million; $266 million
    • Clearwater Paper: $171 million; $182 million
    • Graphic Packaging: $147 million; $56 million
    • SAPPI: $136 million; $-251 million
    • Buckeye Technologies: $130 million; $154 million
    • P.H. Glatfelter: $108 million; $123 million
    • Rock-Tenn: $75 million; $279 million
    • Appleton Papers: $18 million; $25 million
    • Wausau: $14 million; $21 million

    Wednesday, March 3, 2010

    Postal Service Preparing Double Whammy for Publishers

    The U.S. Postal Service is preparing to hit magazine and newspaper publishers with sizable rate increases starting next year.

    In addition to seeking an extra rate hike for all mail next year, the U.S.P.S. will ask Congress for legislation that would allow Periodicals rates to be increased much faster than the rate of inflation.

    The long-range action plan postal officials released yesterday calls for changing "the fact that certain mail, such as nonprofit mail, Media Mail, Library Mail and Periodicals, does not presently cover costs." Postal officials want to "ensure that these products get to a point where they cover costs while contributing reasonably to overhead costs. An alternative would be appropriations funding to cover the gap."

    Based on the latest data from the Postal Service's Alice-in-Wonderland accounting system, Periodicals rates would need to be increased more than 31% for the agency to break even on the delivery of magazines and newspapers.

    The plan calls for a "moderate" exigent (emergency) rate increase next year for most classes of mail. That would be in addition to the usual inflation-based price increases for each of the "market-dominant" classes -- such as Periodicals, Standard, and First Class.

    "The Consumer Price Index should apply to the entire group of products, rather than each individual mail class," the Postal Service's fact sheet on pricing flexibility says. Such a change in the law would mean that if the CPI increased only 3% one year, the Periodicals increase could be 10% as long as it were balanced out with, say, a Standard mail increase of only 1%.

    "No business can survive selling products below costs," says the fact sheet. The problem is that the Postal Service really has no idea what its costs are for the Periodicals class.

    In the past couple of years, Periodicals mailers have greatly increased the sort of activities that reduce the Postal Service's costs, such as co-mailing, dropshipping, and reducing the number of sacks. At the same time, the average weight of copies has decreased.

    Despite all of that, the Postal Service's accounting methodology finds that the costs for handling Periodicals have increased dramatically. Postal officials have never explained this nonsensical result. The issue is explored further in the following articles:

    Tuesday, March 2, 2010

    Postal Service Plans to Use More Part-Time Employees

    The U.S. Postal Service plans to rely more on part-time employees as it adjusts its operations for declining mail volume.

    “Annually, approximately 5 percent of employees are eligible and expected to retire. It would not make sense to replace them with full-time employees if demand is moving in a direction better suited to a part-time workforce,” the USPS says in its “Action Plan for the Future” that was released today. Most of the news-media coverage of the ambitious plan for righting the Postal Service’s finances deals with the no-surprise initiatives, like trying to eliminate Saturday deliveries.

    The shift to a more part-time workforce, however, slipped under the radar even though it’s a departure from recent practice. The number of non-career postal employees decreased by nearly 13% in Fiscal Year 2009.

    “There is limited remaining opportunity to reduce part-time, temporary, and overtime work hours,” the Postal Service presentation said.

    “Over the next 10 years, over 300,000 employees — more than half the current workforce — will be eligible to retire. This will provide an opportunity to make the workforce even more efficient by increasing use of flexible and part-time employees.”

    The plan indicates that, while replacing retirees with part-timers, the USPS will also seek “more flexible work rules through the collective bargaining process.” And just in case collective bargaining doesn’t work, the USPS will also ask Congress to require that arbitrators take the Postal Service’s financial condition into account before issuing any decisions.

    With 87% of its workforce being full-timers, the U.S. Postal Service has difficulty varying its staffing levels (and costs) to deal with seasonal variation.

    “When benchmarked against other large posts, the Postal Service employs the most full-time workers as a percentage of the total workforce.” For example, 40% of the German postal system's employees are part-timers.

    For more information:

    Monday, March 1, 2010

    Magazine Publishers Rediscover the Magazine

    Remember how the big magazine publishers were trying to persuade everyone that they were really media companies who were going to tweet, blog, and app their way into the future?

    Forget about it, that is so 2009. Five big publishers revealed their "Magazines: The Power of Print" advertising campaign today that, as Paid Content noted, was a way of saying "Drop dead" to their digital units.

    Or, more accurately: "We've sunk a lot of resources into you, and all you've brought us is eyeballs and buzz. Meanwhile, our print editions keep chugging along and paying most of the bills."

    Starting in early April, nearly 80 U.S. consumer magazines will start running a series of ads touting printed magazines -- you know, the kind that people actually pay for, except at the doctor's office, in hair salons, or on airplanes. The "Magazines" logo was created by taking one letter from the "distinctive typographies of multiple magazine logos," according to a news release announcing the campaign.

    The CEOs of the five publishers appear in a brief video (below) that explains the campaign. They have managed to get ad-space commitments from other publishers, including such titles as as National Geographic, Travel + Leisure, and ESPN Magazine.

    The Wall Street Journal says the ad space committed to the campaign is valued at more than $90 million based on the publishers' rate cards. The actual cost to the publishers will be a few million dollars. And, trust me, no full-rate-paying ads will be bumped to make room for the campaign.

    Related article: As An Advertising Medium, Magazines Still Rock