GPP example, tailored and weighted by customers
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Indices are needed to help with price discovery, so that transactions can be carried out efficiently.
EUROPE NBSK PIX NET EUROPE NBSK TTO DERIVED CHINA NBSK PIX NET CHINA NBSK TTO DERIVED USA NBSK TTO DERIVED GPP PRICE (WEIGHTED)
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PRICING DATA FROM BUYERS AND SELLERS In the PIX indices, the price of pulp is given in US dollars per tonne. Prices collated in the European indices are the gross prices agreed between buyer and seller, and do not include any discounts provided by the pulp seller. “The major weakness of gross price-based indices is that no one has actually made a transaction at the reported price. Consequently, the indices do not tell external parties the actual price level of pulp, but pulp trade professionals can use the indices as a reference in transactions,” explains Petri Jokinen , a partner at consulting firm Jay Partners. The PIX indices have a short delay in reacting to pulp mar- ket price changes. On the other hand, indices that monitor spot prices in the pulp market are quite sensitive to change. Such indices include the TTO indices published by Trade Tree Online. There are TTO indices for long- and short- fibre pulp (North America, Europe, and China), as well as global indices covering fluff, dissolving, and BCTMP pulps. One of the founders of TTO, Fraser Hart , explains that the company has been carrying out monitoring since 2016. “We wanted to offer an option that provides a compre- hensive and up-to-date picture of net pulp prices. Spot pric- es allow pulp to be traded at current market prices, so TTO reacts to even small changes in pulp supply or demand.” TTO’s data comes from buyers and sellers who report confidentially each month on pulp batches traded and the prices involved. This pricing data is then adapted into index values using a standardised calculation method. The base period for the TTO indices is May 2016, when the index value was 100. For example, in May 2020 the TTO index value for long-fibre pulp in Europe was 159, which means that the price had risen 59 per cent from the index’s starting point.
SPOT TRADE FOCUSED ON DEVELOPING ECONOMIES Hart says that, depending on the market situation, TTO indices are used by both buyers and sellers who do not want to base their transactions on indices that react more slowly to market developments. Parties purchasing pulp on the spot market include pa- per product producers, who unexpectedly need more pulp than can be provided under their agreement with their pulp supplier. In turn, pulp producers sell excess pulp to the spot market if they have more pulp than is required by customers under contract. “A large proportion of pulp on the open market goes to emerging economies, where local pulp buyers make shorter-term agreements, because demand for the end product can vary from month to month,” explains Hart. USEFUL TOOLS FOR PRICE DISCOVERY Compared to many other commodities, the price cycles for pulp are relatively long. However, Petri Jokinen points out that buyers and sellers still need indices to help with price discovery, so that transactions can be carried out efficiently. “Indices offer some degree of consensus on the price lev- el of the product. Transactions based on reference prices benefit all market operators.” According to Lars Halén, it is current standard practice for pulp prices to be reviewed monthly. “Indices make negotiations easier. Buyers and sellers can refer to the indices and negotiate a mutually satisfactory price on that basis.” Indices are also useful for investment banks operating in commodities markets, who help pulp market operators raise capital and manage risks by hedging against price fluctuations.
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“All pulp market operators require some kind of fixed point against which to assess prices. In price formation, indices are beneficial as they indicate the current price level and market situation relatively well,” says Nicolas Ginman , managing director and head of pulp and pa- per trading of Macquarie Group, an investment banking company. Additionally, indices are used in pulp price hedging services to pulp buyers or sellers, provided by banks and other finance sector operators, to protect against price fluctuations. “Pulp buyers are particularly keen to make use of hedg- ing. It provides certainty about what they will have to pay for pulp in the future, even if the market changes.” VOLATILITY HINDERS PRICE FORECASTING Both Fastmarkets FOEX and TTO are independent opera- tors that do not provide forecasts on pulp pricing trends. However, indices are used by analysts monitoring the pulp market to help them estimate the market in the future. With many years of monitoring the pulp market under his belt, Petri Jokinen states that forecasting pulp prices
has never been easy. In recent years it has become even more challenging, due to increased price volatility. “Pulp prices cannot be predicted from the past, since they are naturally affected by more factors than just their history. Of course, you can predict that if a price has been high, it is likely to fall. However, no one knows when this will actually happen.” By Jokinen’s estimate, the primary factor behind the in- crease in volatility is the growth of China into one of the world’s largest pulp buyers. “The role of speculative buyers in the market has grown, and they aim to buy more pulp than they need when prices are low. Changes in the supply of pulp also amplify volatility. Jokinen believes that in recent years there has been an increase in supply shocks for a variety of reasons. “In particular, the market pulp industry in the Northern hemisphere has generally underinvested, making supply more susceptible to technical disturbances. The price of pulp has also been affected by mild winters in northern regions, making it more challenging to arrange sufficient raw material supply for pulp mills.” •
Lars Halén Director of pulp indices at Fastmarkets FOEX, which maintains price indices for for- est industry products. He has worked with indices since 1999, previously for paper exporter Finnpap.
Fraser Hart Co-founded Trade Tree Online, a company specialising in producing pulp price indices, in 2016 with a business partner. Prior to this he served as director of sales for North America at Resolute Forest Products.
Petri Jokinen Partner at consulting firm Jay Partners. He has more than 20 years of international experience in consulting on pulp and other areas of the forest industry.
Nicolas Ginman Managing director and Head of pulp and paper trading at Macquarie Group. He has specialised in risk management and hedg- ing for pulp and paper sector operators.
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