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Swaps Catch on as Publishers like Buying Stable Newsprint Prices

Magazine article Editor & Publisher

Swaps Catch on as Publishers like Buying Stable Newsprint Prices

Article excerpt

In a bid to level out price swings and ease budgeting, growing numbers of newspaper companies have adopted a strategy that dates from the days when newsprint prices surged to around $700 a ton: swaps.

The swaps -- a misleading term for deals in which no rolls of newsprint change hands but newspapers are protected against sharp price swings on their biggest single cost outside payroll -- have become a regular part of operations for companies like Times Mirror, MediaNews Group, and many other small and large newspaper operators.

Houston-based Enron Capital and Trade Resources Corp. says 15 newspaper firms have spent about $4 billion on its newsprint swaps since the service began in 1997.

Southern Co. Energy Marketing, in Atlanta, also offers swaps.

"The market has grown significantly," says Enron director Edward Ondarza. "This will become an everyday part of the financing and budgeting process from this day forward."

How do swaps work? Here's how Ondarza describes a typical deal: the swap agent and the newspaper agree on a price -- $605 a ton, for example -- for a set amount of newsprint over a set amount of time.

At the same time, the swap agent strikes a deal with newsprint producers, also at a set price, say $600.

Each side is gambling on what the market will do over the life of the swap. If the price per ton goes up to $610, the agent owes the paper $5, but according to the deal with the producers, since the market price has gone up, they must pay the agent $10 per ton.

By contrast, if the price goes down to $595, the paper must pay the agent that extra $10, but the agent pays the newsprint supplier just $5.

Newspapers and newsprint manufacturers benefit from stable prices. Each side is guaranteed not to take a bath if the market shifts dramatically, as commodity markets like newsprint do occasionally. The swap agent gains the differential between the price newspapers are willing to pay for newsprint and the price mills are willing to sell for. Swapping levels out the feast and famine cycle: When newsprint prices stumble, newspapers have a field day of low costs and high profits -- at manufacturers' expense -- but when prices rise, newspaper costs soar, and profits plummet.

William Dean Singleton says his MediaNews Group -- which operates the Los Angeles Daily News and The Denver Post -- has 60% of its newsprint needs tied up in swaps ranging from seven to 10 years. With newsprint prices low now thanks to weak demand in Asia and the settlement of the Abitibi-Consolidated strike, he expects to come out a loser over the short haul. …

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