Off the Paper Roller Coaster

When it comes to predicting prices in the pulp and paper market, it seems as though we are lost in a maze, hoping for a magical crystal ball that predicts our future. The pulp and paper industry is indeed on of the most financially volatile businesses out there, but thanks to some financial strategies, paper specifiers no longer have to try to predict market fluctuations and run the risks associated with guessing incorrectly.

A volatile scenario

Since 1991, 40lb. No.5 stock prices rose and fell an average of eight times a year, varying between two and 13 percent with each fluctuation. It seemed impossible to predict these variances; we were simply at the mercy of the market. Now, there's a solution to the seemingly insurmountable problem having to be reactive, rather than proactive, in the face of market changes. Financial risk management strategies—also known as hedges—take a lot of the guesswork out of managing pulp and paper prices. While these strategies don't help paper makers and consumers predict price variances, they do neutralize the risk of price volatility. They are flexible, easily tailored to each customer's needs, and outline the agreement duration, how much product it covers and how large a price swing will kick the agreement into effect.

Types of solutions

There are several strategies for protecting your business during tumultuous paper market times:

Fixed-price swap: Swaps are privately negotiated financial contracts by which two parties agree to swap different price streams over a predetermined period of time. They protect against market price fluctuations by enabling

producers and consumers to lock in the price of raw materials and/or the final product. A paper producer that worries final product prices will drop too low may enter into a swap agreement that ensures it will be reimbursed by a bank-like third party if the price drops below a certain rate. Conversely, these agreements stipulate that if the prices should rise above the rate, the paper producer must reimburse the counter-party. Either way, the net effect is the same: The producer never winds up paying more or less than the price agreed upon. Production costs and profit margins are easily predicted and managed.