July 3 (Bloomberg) -- Gannett Co. and other U.S. newspaper publishers are watching the price of newsprint rise at a record pace, even as the number of advertising and editorial pages is shrinking.

The price of paper stock, a daily publisher's second- biggest expense after labor, has climbed 26 percent to a 12-year high of $700 a metric ton since October, pushed upwards by supplier consolidation rather than demand.

It's the latest blow to newspapers already crippled by a 14 percent print advertising drop in the first quarter, the worst on record. While publishers benefited earlier this year from lower year-over-year paper prices and reductions in usage, the rising cost will have an impact on profit in the second half, Goldman Sachs Group Inc.'s Peter Appert said in an interview.

``It's the worst of all worlds -- ad-revenue declines exceeding expectations at a time when one component of cost growth is accelerating,'' said Appert, in San Francisco, who has a ``neutral'' rating on Gannett. ``It's a year of records, and one of the records is just the amount of bad news.''

Higher newsprint prices, combined with declining revenue, may keep shares of McLean, Virginia-based Gannett, the largest U.S. newspaper company, from rebounding off a 16 1/2-year low in its stock price, Appert said. The USA Today publisher, among the most profitable in the business, may find its operating profits contract to 21 percent of sales this year from 24 percent in 2007, estimates Wachovia Capital Markets analyst John Janedis.

Earnings Hit

Citing paper costs, Deutsche Bank analyst David Clark this week lowered 2008 earnings estimates for Gannett; McClatchy Co., publisher of the Miami Herald; and Davenport, Iowa-based Lee Enterprises Inc., owner of the St. Louis Post-Dispatch.

Gannett declined 23 cents to $19.60, the lowest since December 1991, at 1 p.m. in New York Stock Exchange composite trading. Lee slipped 14 cents to $3.26, its lowest in at least 28 years. McClatchy, in Sacramento, California, declined 38 cents, or 6.5 percent, to a record low of $5.47.

Behind this blast of bad news is the merger of Abitibi- Consolidated Inc. and Bowater Inc. in October, which created the world's largest newsprint producer.

Since its formation, money-losingAbitibiBowater Inc. has closed mills to reduce supply by 600,000 tons annually, responding to record oil prices and a strong Canadian dollar. That has allowed the Montreal-based company, with about 45 percent of the North American market, to push through $20-a-ton price increases every month this year, even as consumption of newsprint by daily newspapers fell 15 percent in the 12 months through March.

Pricing Power

The jump in prices is ``unprecedented'' in a period of falling demand, said Ed Atorino at Benchmark Co. in New York, who has followed newspapers for 25 years. Unit costs for newsprint dropped 29 percent from June 2001 to August 2002, a span overlapping with the last U.S. recession.

Prices will continue to rise $20 a month in the third quarter, AbitibiBowater spokesman Seth Kursman said. Energy, labor and fiber costs have all climbed, he said. RBC Capital Markets paper analyst Paul Quinn in Vancouver expects the increases to continue for six months.

The newsprint producers have pricing power because AbitibiBowater, White Birch Paper Co. and Kruger Inc. control 75 percent of the North American newsprint market, said CreditSights Inc. analyst Chris Ucko.

`Lot of Hurt'

``We've seen substantial and unprecedented price increases since the merger,'' said John Sturm, president of the Virginia- based Newspaper Association of America.

AbitibiBowater fell 52 cents, or 6.1 percent, to $8.03 in New York trading and is down 61 percent this year.

Publishers have responded with circulation cutbacks, smaller pages or lower-weight newsprint. Those moves, with lower year-over-year paper prices, allowed Gannett, Lee, New York Times Co. and Washington Post Co. to report newsprint expense fell between 12 and 23 percent in the first quarter.

``There's going to be a lot of hurt in the newspaper industry in the second half of the year as we cycle through these price increases,'' Appert said.

Lee has said each $10 increase in newsprint cost per metric ton lowers pretax income by $1.64 million on an annualized basis. Los Angeles Times owner Tribune Co. is eliminating as many as 500 newspaper pages a week and cutting jobs.

Salaries and newsprint are ``part of the challenge of the cost structure right now,'' outgoing Washington Post executive editor Leonard Downie Jr. said in an interview.

Europe, India

European prices have fallen this year even as demand rises because the market is oversupplied, Ucko said. North American producers including AbitibiBowater have shipped more to Europe this year, pressing competition with local suppliers, as the euro has appreciated against the U.S. and Canadian dollars.

Indian publishers have it worse than the U.S., with newsprint prices at $950 a ton, up 50 percent in three months, according to a June report from Batlivala & Karani Securities.

HT Media Ltd., the New Delhi-based publisher of the Hindustan Times, has fallen 63 percent this year.

Some U.S. publishers are partially hedged. New York Times gets back one-third of the price increase through a paper-mill venture and a newsprint investment, finance chief James Follo said at a June investor conference. McClatchy's 27 percent stake in a supplier partially mitigates rising prices, according to regulatory filings.

New York Times spokeswoman Catherine Mathis declined to comment beyond Follo's statement. Lee spokesman Dan Hayes, McClatchy spokeswoman Elaine Lintecum and Gannett spokeswoman Tara Connell declined to comment.

Gannett is shrinking the width of its community newspapers and using lighter paper, Chief Financial Officer Gracia Martore said at a June conference. ``We'll just have to balance all those things as the year progresses.''

To contact the reporter on this story: Sarah Rabil in New York at srabil@bloomberg.net

Last Updated: July 3, 2008 15:51 EDT