Maybe we should call it AbitibiUnderwater

Early this year, paper giant AbitibiBowater was stiffed for $13.3 million when Quebecor World filed for Chapter 11. That seemed like a minor wound at the time for a company reporting more than $10 billion in assets, but today it would have been almost enough to buy control of AbitibiBowater.

Just 13 months ago, North America’s two largest newsprint producers joined forces to create AbitibiBowater. Stock of the new company closed at $36.77 per share that day amidst investor optimism that the combination would lead to market discipline – that is, coping with reduced demand by shutting machines rather than cutting prices. In January, Citigroup chose it as a top stock pick for 2008.

AbitibiBowater stock closed today at 53 cents, giving the company a market capitalization of only $30.5 million. That’s less than 10 months after it sold a single mill (Snowflake, AZ) for $161 million.

The shares went as low as 43 cents a couple of weeks ago until a market analyst reported that demand for pulp was picking up in Asia. (Nope. Pulp prices are still collapsing in Asia and the rest of the world.)

It turns out that becoming the dominant newsprint producer in North America is as worthwhile a pursuit as striving to be the world’s best catcher of live hand grenades. Meanwhile, the crown jewel of the Bowater half – the coated-paper mill in Catawba, SC – has lost its luster now that the markets for coated have tanked, currency shifts have taken away the mill's position as a low-cost producer, and quality problems reportedly caused it to stop making rotogravure papers.

The publication-paper market in the least danger of crashing is the one for high-end supercalendered grades (SCA, SCA+) that compete with higher-priced coated groundwood. But one of the first things AbitibiBowater did after the merger is close its only mill that played in the true SCA market.

How can a company with $10 billion in assets have a market value of barely $30 million? Highly leveraged paper companies will struggle more than ever in this recession, and AbitibiBowater is among those with "the most pressing liquidity problems,” Fitch Ratings said last week.

It looks as if Wall Street is betting that another major Canadian/American company will join Quebecor World in Chapter 11.

Dec. 3 Update: S&P downgraded AbitibiBowater's credit rating two notches today, to CCC, and RISI reported that the company had rescinded the December increase in newsprint prices. RISI also said this week that newsprint prices continued rising in November and predicted that the price decline next year will be gradual despite falling demand.