The Newsprint Riddle

MR. DANA PORTER: Before introducing the speaker today, I wish to mention that we have at my left, Mr. Malcolm Morley„ who is in this country to judge at the Drama Festival. Onbehalf of the Club„ I wish to welcome Mr. Morley. (Applause.)

In Pickwick Papers we read about a certain barrister who was described as a promising young man of about forty. Our guest today, Mr. Vining, is less than forty, but he could hardly be called a promising young man because he already has very great and notable achievements behind him. We were, perhaps, first introduced to Mr. Vining in the days when he wrote for some of the more frivolous journals of this city. Gradually he became more and more serious until he has now taken up his pen to portray the statesmen of this country.

Mr. Vining, from the very outset of his career showed that combination of the accuracy of the scholar and the imagination of the journalist. Consequently, he has now arrived in a position which might be called a position of big busines. In the recent book he has written, "Bigwigs," he has shown that penetration, wit and that great resistance to pomposity which he has shown from the early days when he wrote for "The Goblin" in Toronto. But, if I praise Mr. Vining too highly, he will want to debunk me so I call upon Mr. Vining who is known to you through his writings and is known to you as the President of the Newsprint Export Manufacturers Association of Canada, to discuss the question of "The Newsprint Riddle". Mr. Vining.

MR. CHARLES A. M VINING: Mr. President and Members of The Empire Club: Being a minister's son, I have never been allowed to stay long enough in one place to have a real home town. If I could claim a home town, however, I think it would be Toronto. Moreover, I find beside me in the person of your President, an old friend of my school days in Toronto, and I am sure, therefore, you will believe me when I say I especially appreciate your kindness in asking me here today and that

I am genuinely happy to be at this table. I often think of those school days in Toronto and reflect upon the mystery of man's fate. Your President and I used to sit in the same lecture room, absorb the same economics, the same Roman Law. He was industrious and so, I think, was f. But see what has happened. He left Varsity and went onward and upward to Osgoode Hall. He achieved his call to the Bar; he climbed even higher and became a partner in his eminent firm. Now, he is President of the Empire Club, the highest distinction, I understand, Toronto can offer its citizens. I left Varsity and did not go to Osgoode. No, I took my first downward step and became a newspaper reporter. My descent quickened and I slipped into the advertising business. Now, any Toronto audience will judge the completeness of my degredation when I confess I live in Montreal and am connected with the newsprint industry.

The newsprint industry is the subject I am now going to talk about. We could, perhaps, have a more pleasant subject but we could have very few subjects of more real importance to every person in, this room. Newsprint, next to wheat, is the chief commodiy we have for sale to the world. Newsprint, next to agriculture is our largest manufacturing industry. Newsprint means the livelihood of many thousands of our people and affects the welfare of us all and few Canadians know anything about it.

I doubt if we realize that in the last five years of depression the newsprint industry, in spite of its disruption, has brought to this country, from foreign customers, $472,000,000., compared with $360,000,000 of gold production and $95,000,000 of nickel exports. I doubt if we realize that production of newsprint this year means the employment of 75,000 men in our woods, another. 25,000 or so in the mills and many thousands more in related industry. I doubt if we realize that the 500 to 700 million dollars which we have invested in this industry is our largest industrial investment, with the exception of our investment in Hydro-electric power and newsprint, by the way, consumes almost half of our total power development; and still more do I doubt whether many realize that the forests upon which the newsprint industry is based and which it is consuming in vast quantities each day, belongs chiefly to the people of Canada, that the public is the real landlord of this property which governments have leased to the industry on your behalf. In short, you and I and our neighbours, have in newsprint, a close proprietory interest and its is surprising that we have not realized it more clearly. It is also unfortunate, because as I think you will agree a; little later, we badly need in this country today a force of public opinion to check the destruction of this great industry, the depletion without profit of one of our chief sources of national wealth.

I am going to give you, therefore, as well as I can, a brief account of the newsprint industry, the course it has followed, the consequences of that course and some conclusions we may be able to draw from it. Before I finish, you may appreciate why I have described this subject as `The Newsprint Riddle'.

Before I proceed, however, it may be well if I explain just what newsprint is for I find many people who do not know. Newsprint is paper, paper on which newspapers are printed. It is a world commodity, as universally used today as coal or steel or cotton or salt, and Canada has become its chief producer. Newsprint is made from trees, from spruce and balsam. Men cut these trees in our northern woods and each spring drive them down our rivers to the pulp and paper mills which dot Northern Ontario and Quebec, and, to a less extent, the Maritimes, British Columbia and Manitoba. At the mills, the logs are ground into a fine pulp and mixed with a proportion of chemically treated pulp and the wet pulp which is like thin porridge, is fed into huge machines and emerges at the other end in rolls of newsprint. These rolls are shipped to all parts of the continent and across the seas to England, Australia, South America and the Orient. They feed the presses of the world and this is the material you handle when you read your newspaper unless, of course, you happen to read one Toronto publication which, I understand, is by necessity printed upon asbestos. (Laughter.)

Well, now, let us see the record of this industry, the course it has followed and the consequences of that course and I am afraid I must warn you that this story of newsprint is a story of our own folly. Ten years ago in 1925, the newsprint industry was sound, healthy and flourishing. It had six years or so of remarkable growth due to increasing consumption of newsprint in the United States, but its growth had been sound, keeping proper pace with demand. From very small proportions the industry had grown to a capacity of 1,720,000 tons a year.

The damage began in 1926. It was operating by the way, at about ninety per cent of that capacity. This prosperity of the industry was too much for us, for all of us, manufacturers, financial interests, governments and investors, alike. In the six years between 1925 and 1931, the rate of expansion of the industry was almost treble that of the preceding six years. The industry's capacity, (that is, its production capacity) increased from 1,720,000 tons in 1925 to 3,600,000 tons in 1931, which is about our present annual capacity. This expansion far outstripped consumption although consumption climbed steadily for several years and has been very well maintained through the depression. The newsprint industry has never suffered from diminished demand as other industries have suffered. Last year, for example, our total consumption was within five per cent of the all time peak of 1929, al condition of good fortune which, I think, is true of very few industries and one which demonstrates the basic soundness of this industry.

In spite of this excellent consumption record and in spite of this recovery, we still have today an excess capacity of more than 1,200,000 tons a year. That is, the industry is equipped to make more than 1,200,000 tons over anything it has been able to sell. The danger of excess capacity to an industry, is, of course, the extreme condition which it creates and in the case of newsprint, this danger has been accentuated by the importance which the industry as a whole has attached to tonnage rather than to dollars.

There are some twenty companies or more in the industry and most of them have been obsessed with the determination to obtain or at least to retain tonnage, regardless of the position of other companies and in many cases, regardless of the price. Taking human nature into account, this is an understandable policy but it has proven a very costly one for all concerned, for it has led to repeated price cutting and to such a wide difference in the position of different companies that there has been no chance whatever of stability. Last year, the industry, as a whole, operated at 67 per cent capacity-a very good average, indeed, compared with other industry, but while the average was 67 per cent, we had and still have, some long companies with their mills filled from 85 to 100 per cent of their capacity and some short companies operating at only 40 to 50 per cent. In this different proportion of business we have all the elements of continued trouble.

Another source of trouble peculiar to the newsprint industry, is its method of making contracts and I should like to take a minute to explain this cause in its profound effect upon newsprint fortunes-it is of extreme importance. The industry's method of making contracts, based on the theory which most publishers insist upon, that all companies shall sell at the same price, or to put it another way, that no publisher shall be able to buy newsprint at less than another, to apply this theory it established the practice that a company makes its contract price dependent upon the contract of another company or companies. As a result, a single contract by one company could so affect the contract of other companies as to set the price for the whole industry, and price is usually named for a period of a year. One price cutting newsprint salesman who may be interested chiefly in the commission he receives, can determine the fate of this great industry for a whole year and cost the industry and this country millions of dollars.

Well, with this condition of excess capacity, this competitive obsession for tonnage among twenty companies or more, and this very dangerous method of making contracts, it is not difficult, I am sure, for you to see the highly vulnerable position which the newsprint industry has occupied.

Let us now see the consequences: In 1926 and 1927, the price of newsprint for delivery in New York was $70. a ton. In 1928 it was $67.50; in 1929 and 1930, it held at $62.00. Then the real drop began. In little more than two years the price of newsprint dropped $22.00 a ton, from $62.00 at the end of 1930, to $40.00 in April, 1933. The market price is still at that $40.00 level and has remained at the $40.00 level for the last two years in spite of sharp improvement in consumption. Consumption last year, for example, was higher than in 1930, but the net price was 40 per cent lower. We are still today at this $40.00 level. There was hope last fall of a moderate increase for 1935, but this hope was destroyed by the action of one company which made 1935 contracts at the $40.00 price in order to obtain some new tonnage - a striking example of the dangerous contract method which I have described. The $40.00 price is the lowest figure since 1908, and I think I am right in saying that relatively it is almost the lowest of all world commodity prices today.

The commodity price index issued by our Dominion Bureau of Statistics shows the following typical prices of commodities in January 1935, compared in each case with 100 in 1926: Cement, 105.2 - and, by the way, cement operated in 1934 at 30 per cent of capacity whereas newsprint operated in 1934 at 67 percent - coal, 91.6; sugar, 83.9; pig iron, 83; cotton, 73.2; flour, 70.6; newsprint, 54.

If you will consider the effect of this price decline for a minute, I am sure you will agree it is time we began to measure the newsprint industry in terms of dollars as well as in tons. In 1929, the industry sold 2,700,000 tons of newsprint and contributed to our national income, from foreign sources, nearly 150 million dollars. Last year, we sold, the industry sold practically the same amount of tonnage but contributed 70 million dollars less. In 1932 which probably, or we shall hope was the bottom of the depression, newsprint sales reached their lowest point with a total of slightly less than 2 million tons. Last year, our sales totalled 35 percent above that point but our total dollars were 3 millions less.

That is one effect of the price decline from a national point of view.

Another effect is in forest depletion. With this low price and with more than fifty per cent of this industry in receivorship or its equivalent, the natural tendency and the necessary tendency of each company is to use its best wood, with no provision being made for replacement, and which uses up our timber lands at a prodigious rate. The daily newspapers of New York and Chicago alone, in one day, consume 480 acres of timber land. The 2,600,000 tons of newsprint we sold last year represented consumption of over 1,000 square miles of our forests, an area more than a hundred miles long by ten miles wide. At this rate of consumption and with no provision for replacement, it will not be many years before the Canadian industry is incapable of making low cost newsprint whether it wishes to or not.

This is a problem for the publisher as well as the manufacturer to ponder upon. In the meantime we are consuming our forests and we are obtaining virtually no return upon the hundreds of millions of real money invested in this industry.

To illustrate the position of the newsprint investor today, let me read you another index from the Bureau of Statistics. This shows the market standing of common stocks of various industries in February, 1935, compared again with 100 in 1926: Oils, 177.5; Foods, 135.9; Iron and Steel, 124.5; Gold Mines, 119.4; Textiles, 74.2 Newsprint, 12.8.

So there we have our account of the newsprint industry, its over-expansion and resultant excess capacity, its competitive obsession for tonnage with longs in a raid against shorts, its dangerous methods of making contracts, the consequences of all these things expressed in the present ruinous price and its effects, and we have spoken of the national importance of this industry and its basic soundness.

Looking at these two sides of the story you may well feel it is about time we had a solution to end the folly of the last few years.

I heard it said that if all the economists in the world were laid end to end they would never reach a conclusion. Perhaps that is true of those who have been wrestling with the riddle of newsprint. Let us look at the riddle anyway and see if there are any conclusions which we can form and as a starting point, let us consider briefly the attempts which have already been made.

There have been three organized attempts at solution. These occurred between 1927 and 1933, and each of them lasted about two years. They were the Canadian Newsprint Company the Newsprint Institute and the Bankers Committee. They involved not only the manufactures, but our three largest banks and the governments of Ontario and Quebec. I shall not go into the details of these although each of them is an interesting story. I think I may summarize them by saying these attempts were as follows

First, to set up a central sales agency or central sales company for all the principal producers. Second, to pool all contracts and divide tonnage among companies according to their capacity. Third, to consolidate the industry by bringing twenty or so companies into a small number of strong groups. These attempts all failed and to speak in general terms, I think it is accurate to say that they failed for the following four reasons: In the first place, there have always been among the industry, of twenty or more companies, as there must in an industry of this size, one or two or three companies unwilling to engage in any co-operative action. In the second place, there have always been one or two or more companies who have ostensibly engaged in co-operation but whose statements have been untruthful, whose undertakings have been broken and who, to put it plainly, have dealt dis honestly with the rest of the industry. In the third place there has never been a real willingness on the part of long companies as a whole to accept a lower tonnage position in order to obtain stability. The long companies have failed to realize that their extra tonnage might be not an advantage but a source of danger and such division as to tonnage as there has been has been inadequate and too long delayed. And, in the fourth place, there has never been any effective means of compelling recalcitrant companies to participate in or adhere to co-operative action. Companies which have kept their undertakings have suffered thereby, while those who have cheated have gained an unfair advantage, temporarily, at least. Mutual confidence between members of the industry has thus been steadily destroyed. In justice to the industry, I think I must say that the moral standard is probably no worse than that of any other industry. The majority of our newsprint companies today are represented by men who are honourable and intelligent but you must bear in mind the dangerous contract method which I have described and by which one company can upset the best intentions of the rest.

I think the causes of failure may be very briefly described by saying that there has always been in this industry a destructive minority and there has never been a means of controlling them. There has been no organized attempt at solution since the Bankers Committee ceased its activities about the end of 1932.

The next hope of the industry developed, not in Canada, but in the United States when the National Industrial Recovery Act became law in June, 1933. For twelve months or so after that there was hope that an effective N.R.A. code might be applied to the newsprint industry in the United States and that this might also apply to Canadian producers. But the opposition of the American Newspaper Publishers Association was too powerful. The hope was not realized and the industry approached another annual contracting period last September with no solution in sight.

It was, however, obvious to anyone interested in the industry last fall that the price should be advanced and most manufacturers seemed to regard $5.00 a ton as a proper figure. The attempt which was made to secure this was based on voluntary and unorganized co-operation between manufacturers having similar policies. The increase was blocked by the action of one company - in the first instance, by one company - in the manner I have described. Later, an attempt was made to negotiate an increase of only $20.50 a ton, but this also was unsuccessful. The price in 1935 thus remains at the $40.00 level in spite of increasing consumption and in spite of increasing cost of production, which to face the unpleasant truth, leaves this industry in a worse position today than it was a year ago.

From the experience which these unsuccessful efforts of the last seven years provide, I think there are one or two conclusions we may form: As number 1 conclusion. I think it is obvious that the primary weakness of the industry has always been and still is, its excess capacity and that there is little use in attempting to deal with the price of newsprint or other deficiencies until a sound way has been found to deal with the instability which excess capacity creates.

I must digress for a moment at this point, to make it quite clear I have never believed and do not now believe that the industry's remedy lies in a high price or in repeated price increases. My belief is to the contrary. I think it is apparent that the price is uneconomic and ultimately dangerous to publisher as well as manufacturer and that some degree of increase is necessary, but I believe the increase should be moderate and I believe the long term policy of this industry should be to sell at the lowest possible price, consistent with proper provision for forest depletion, fair wages to labour, and a reasonable return upon actual investment. We must think of newsprint as a world commodity in a world market and we must accept efficient management, minimum price and fair dealing as our only sound formula. I believe this view is now held by so large a proportion of the industry that no customer of the industry need fear any different policy.

As conclusion number 2, I think it is sensible to realize that co-operation without compulsion offers no hope of a dependable solution. Some form of co-operation may serve as a temporary expedient but its success now would probably depend on whether or not the industry had before it a plan of a more permanent nature. When we think of compulsion, it is natural, of course, to think of governmental action. It should be recognized although it is difficult for everybody to recognize, that our governments have a right which might become a duty to restrain this industry from continued self destruction in view of the fact it is public property, your property, which is involved. Control by legislation, however, is a desperate and a doubtful remedy and one to which the majority of the industry is undoubtedly opposed. We shall be on far safer ground if we determine to find a solution along sound business and financial lines, supplemented, perhaps, by a helpful governmental attitude but still a business solution rather than a governmental one.

If we are to seek a business solution, I think our conclusion number 3 must be that consolidation still appears to be the only permanent remedy for this industry. We might perhaps find a preliminary to consolidation in some form of co-operative or joint acquisition, of excess mills, but I think one is forced to the conclusion that consolidation is the true ultimate answer. By consolidation I mean the regrouping of the industry into three or four strong companies-not to form a monopoly but to retain the stimulus of competition, to secure a sound businesslike way of managing excess capacity, and to permit the most economic and efficient operation of this industry which must, of course, be our main objective. I think there can be little doubt as to the desirability of consolidation, either from the customer' point of view or the manufacturers' point of view. The real problem of consolidation is how to bring it about. It is doubtful if the industry can accomplish it and it would appear that some outside driving force is necessary.

We are left then with these two questions: First, how can consolidation be accomplished? Second, what can be done in the meantime to deal with the weaknesses we have seen in this industry?

The first is the more important question; the second; the more pressing, and to either of them today I offer no immediate answer. I do, however, offer this suggestion You who constitute the public and are the real proprietors of this industry can play a very important part by the force of your opinion in supplying the missing element of compulsion, the element which has been missing in the attempts of the last seven years. I firmly believe that a well informed public actively concerned in what is happening to one of our chief national assets care do a great deal to discourage further misconduct by those who should regard themselves as trustees. That is one reason, Mr. President, why I have greatly appreciated this opportunity to be here today and why I thank you sincerely for listening to me at such length. (Applause, prolonged.)

MR. FETHERSTONAUGH: May I say a word from the floor? I think this address today is the most practical address The Empire Club has listened to for many a long day. (Applause.) I think it brings before us an industry which I know at least, so far as I am concerned, a great many of us know has not been understood at all - the great importance of it, and I think also that the speaker is to be congratulated for his most practical summary of the situation. If all other industries-if you could get such a light on other industries of this country, I am certain there would be a good deal more done in bringing back prosperity. (Applause.)