1. Creating Reliable and Effective Pricing System for Pulp Derivatives
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Creating Reliable and Effective Pricing System for Pulp Derivatives
Cutting Edge Derivatives
ICM Conference
14-15 January, 1998; Stockholm
by Timo Teräs

2. Contents Earlier attempts to create futures market for pulp
Pulp derivatives from an industry point-of-view
Volatility of the underlying market - reliable pricing of pulp derivatives
Price fluctuations and their impact on the pricing of pulp derivatives
Creating the Pulp Price Index (PIX) for cash-settled contracts
Comparison of the price distribution of cash-settled and delivery-settled contracts
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3. Pulp Derivatives Problems with Earlier Attempts
Volatility not high enough
Industry not ripe to participate
Bad PR from derivatives failures for other products
Unlucky timing
Physical delivery concept
No reliable index for cash settlement
Division of potential volume
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4. Pulp Derivatives Key Advantages to Industry Participant
Less bottom-line volatility
Risk reduction (insurance)
Easier and more reliable budgeting
Use as a financial tool
Allows tender offers
Increases co-op within company
Allows focus in core business
Optimization of down-time
Possible reduction of volatility
Use of index for other purposes
Increased share values
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5. Pulp Derivatives Company Disadvantages
Cost (product dependant)
Costs (infrastructure, training etc.)
Capital tied up
Delivery requirement (if delivery settled)
Quality problems (if delivery settled)
Getting out of contract at unwanted time
Potential increase in volatility
Derivatives or index influencing underlying product price
Inventory requirement (if delivery settled)
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6. Pulp Derivatives Company Risks
Oversized exposure
Lack of internal co-operation
Low contract flexibility (volumes)
Helping competitor
Failure/problem with index (cash settled contracts)
Technical squeeze (delivery settled contracts)
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7. Pulp Derivatives Volatility of Underlying Market
Increased over time
Marginality of market pulp
Speculation
Sales in different currencies
Supply bursts
Some market variations in pricing
Delivery settled contracts follow spot prices
Cash settled contracts follow list prices
Correctness of changes between settlement dates decisive
Laws of supply/demand and price expectations decisive
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8. Pulp Derivatives Price Fluctuations
Prices quoted less and less misleading
Increased competition and transparency
At times common interest to show high/stable prices
Still some reasons for misleading prices
… varying rebates and payment terms
… sales in different currencies - exchange rates
… spot vs regular sales
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9. Pulp Derivatives Credible Index - Choosing Benchmark Grade
Representing large part of physical trade
Quotes from different producers close to one another
Delivery destination with uniform terms of delivery
Maximum public exposure
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10. Pulp Derivatives Creating the Index
Closeness with the underlying market
Reflecting normal trade of prime quality product
Represented quality measurable in technical terms
Both sellers and buyers views represented
All main countries represented
Big and small companies represented
Defined shipment time for underlying product
Impossible to manipulate
Possible to audit and audited
Acceptance of regulatory and anti-trust authorities
Possible to copyright (sell/lease)
Totally transparent
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11. Pulp Derivatives PIX index elements
Participants report weekly 3 last sales/purchase prices
NBSKP/CIF North Atlantic/North Sea port in USD
Fully bleached ECF/TCF grade
Equal number of sellers’ and buyers’ quotes
Prices before customer-specific discounts
Lowest and highest transactions (10% each) eliminated
Expert panel as “trouble shooter”
Auditing
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12. Pulp Derivatives Comparison: Cash Settled vs Delivery Settled
Traded volumes still small - conclusions unclear
Logical difference: discounts
Other reasons for differences between contracts include
… small volumes
… insufficient number of industry participants
… insufficient amount of warrants issued (delivery settled)
… high portion of actual deliveries (delivery settled)
… closeness of settlement date
… increasing amount or geographical spreading of spot prices
… trading between market makers/non-industry participants
… different closing dates
With growing volumes reliability increases
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