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Business Commentary Paper mill’s trade complaint could spell doom for U.S. newspapers

This column was originally published on Jan. 4. On Jan. 9, the U.S. hit Canadian newsprint producers with initial countervailing duties.

If you think small-town newspapers are suffering in Canada, you need only look across the border to witness media carnage on a scale unfathomable here. In the United Sates, literally hundreds of daily and weekly newspapers have closed in recent years, having failed to develop viable digital business models to compensate for the decline in ad revenues at their bread-and-butter print editions.

Those that are hanging on – from the Homer News in Homer, Alaska, to The Walpole Times in Massachusetts – are now afraid that a New York hedge fund's desire to make a quick buck on a distressed U.S. newsprint mill it bought in 2016 could drive the final nail into the coffins of their print editions. Without a sustainable online strategy to fill the gap, many papers would be forced to close.

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The U.S. Commerce Department will soon make a preliminary ruling with regard to a trade complaint launched by North Pacific Paper Co., or Norpac, a one-mill operation in Washington state that was cut loose by forest products giant Weyerhaeuser and sold to New York-based hedge fund One Rock Capital in late 2016. One Rock's plan for a quick flip of the asset was dealt a major blow in early 2017 when the mill was forced to shut down after a bacterial imbalance at a nearby waste-water treatment facility forced the latter to curtail its operations.

Alone among roughly 350 U.S. pulp and paper mills, Norpac is now asking the Trump administration to slap anti-dumping and countervailing duties of as much as 25 per cent on uncoated groundwood imports from Canada, a category that includes newsprint and paper used to produce flyer inserts that are the lifeblood of many small-circulation print newspapers.

Norpac argues that Canadian paper producers are unfairly subsidized by governments here, with access to cheap fibre and preferential electricity rates. Some decades-old Canadian mills also produce their own power at nearby hydroelectric facilities and sell surplus power into the Ontario and Quebec grids. But that is a lucrative side business, not a subsidy as Norpac claims.

Montreal-based Resolute Forest Products, the world's largest newsprint maker, produces about a quarter of the power its paper mills use. It owns seven hydroelectricity stations and seven co-generation facilities. In an industry with low margins amid constantly declining paper demand, Resolute's ability to produce its own power and buy cheap hydro power from Hydro-Québec and Ontario Power Generation has given it a critical competitive advantage over U.S. mills.

Norpac's move to lash out at Canadian producers is as desperate as it is self-serving. The problem is, given the Trump administration's protectionist bent, it just might work. And that has local U.S. newspapers fearing this year could be their last.

"Given the outlier status of NORPAC, it appears that One Rock Capital Partners may be using the petitions as a means of increasing the short-term value of this one mill, without any regard for the dramatic negative implications for U.S. newspapers in thousands of small cities and towns," the publishers of more than 1,100 U.S. community papers wrote in a Dec. 4 letter to Commerce Secretary Wilbur Ross.

Mr. Ross has been unsympathetic toward Canada in other trade spats, from the endless softwood-lumber dispute to the dogfight over subsidies to Bombardier's C Series planes. But while the Trump administration has an antagonistic relationship with mainstream media, hundreds of the local papers now threatened by duties on Canadian newsprint are located in solidly Republican states that Donald Trump won handily in the 2016 presidential election and local GOP politicians have argued against Norpac's claim.

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The trade spat comes as The New York Times, whose fabled Sunday edition once took vast swaths of Canadian boreal forest to print each week, unloads its 49 per cent ownership stake in Resolute's Clermont, Que. paper mill. The mill has a storied history, with the Times holding on to its minority stake even as the mill's controlling shareholders repeatedly changed over five decades. Among the previous owners were Quebecor and late British publisher Robert Maxwell.

Resolute, which owns 51 per cent of the Clermont mill, announced last month it is buying the Times's stake for $20-million. The Times previously unloaded its stakes in newsprint mills in Kapuskasing, Ont., and Chandler, Que.

The New York broadsheet will continue to buy newsprint from the Clermont mill. But instead of the nearly 100,000 tonnes of paper it once purchased annually, it will now buy about 20,000 tonnes each year from the mill. The Times cut its overall annual newsprint consumption from about 350,000 tonnes in 2000 to about 100,000 in 2015.

Duties on Canadian newsprint would only hasten a further decline in paper consumption at the newspaper Mr. Trump loves to hate. But we're not about to give him any ideas.

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