Short analysis: of market pulp, pulp markets and price formation

Although I have written recently more about the Eurocrisis and economic policy, I still follow the Finnish/European paper industry with interest. In this short analysis I would like to present some thoughts about the Finnish pulp market, its actors and its possible development. In a way, this analysis is an exhibition of how economic sociology, and how it understands markets, may be valuable for firms as well.

First, about price formation – I wrote about that topic before, in 2012, with regard to the price increases in softwood pulp.

The news from Finland (Helsingin Sanomat 30.10.2014) right now is that Finnish forest-owners’ lobbying organisation MTK demands price hikes to the price of pulpwood, arguing that the price of pulpwood has declined by some 40% since 2000, while the pulp industry has performed well.

My interest was raised especially by this sentence (citation of Mikko Tiirola; my translation from Finnish):

Although the price of pulp is set in markets, the price of pulpwood is like a brainwave during coma.

In other words: he, as the representative of the lobbying organisation, is not happy. And it is true that the pulp markets have been quite good, recently at least the pulp divisions of major Finnish forest industry firms have performed well (whether that will last with a slow-down of China is another question).

It is telling that the article mentions that there are about 300.000 forest owners but there are only four pulpwood buyers: Metsä Group, StoraEnso, UPM and Harvestia. For logs there are many buyers, since there are quite many saw mills still in Finland.

So, in effect we see here a market structure which is much like oligopsony. In this situation, the buyers effectively set the price and any standards regarding pulpwood. To see how this works, it is instructive to see the effect of harsh storms on the price of wood (in this news article, no differentiation is made between roundwood and pulpwood). Following the storm, and the inevitable harvesting of the fallen ‘storm-trees’, the price for wood dropped to 20 percent of normal prices. Following an earlier storm in 2012, UPM stated in a press release (my translation):

“The price of wood naturally is of interest for forest owners. However, the price level is determined on the market through supply and demand.”

The manager of wood acquisition who is speaking here then goes on to list many factors which influence the final price effect of the storm. Of course, one can dress this up as a question of supply and demand, but in a situation with only a few buyers this is rather more like a negotiation situation – as I emphasised in the older article ‘It should not be particularly difficult to get the market to accept the price increase, they said.’ – but in this case it would be what kind of lower offer would be agreed upon.

The article in Helsingin Sanomat mentions the divergence between prices of pulpwood and roundwood (which goes to sawmills). To show the influence of market organisation, look at this picture (data from the Finnish Statistical Yearbook of Forestry):

Pine prices 1983-2012

Pine prices 1983-2012

 

 

 

 

 

 

 

 

For simplicity I only present the price development (euro/cubic metre) for pine. I now also disregard all kinds of quality requirements regarding what is suitable for sawmills and for pulp mills. Although 2010 and 2011 saw damaging storms in Finland, prices did not change very much. The decline in prices between 2007 and 2009 more likely had to do with the emerging economic crisis in Europe.

Although there is probably a way to argue the same thing through econometrics, I have the feeling that part of the relative success (and in the early euro era, until about 2005, the substantial profits)  of the Finnish pulp and paper industries is also due to the quite constant price of pulpwood (at least for pine). And regarding market organization – I did not find statistics on the import of pulp wood to Finland but Finland does import significant amounts of pulp.

The Finnish Statistical Yearbook of Forestry also mentions the cost structure of the pulp and paper industry in comparison with the wood-products industry, and the fraction of wood raw material for the latter is indeed nearly twice that of the pulp and paper industry, which should not come as a surprise in the light of the picture above. In addition, total profit as a percentage of the total turnover is much smaller in the wood-products industry.

So, in conclusion, it can be understoon why the lobbying organisation is demanding hikes in pulpwood prices. The problem nonetheless is, seen from how the market is organized: why should the Finnish pulp and paper industry firms care about this demand? After all, they are more or less in a position to negotiate the prices that suit them, or even replace domestic pulp by foreing pulp. The organization of the market can then be seen as a key factor in the price developments of pulp wood. The fact that the article in Helsingin Sanomat mentions that the organization of  membership in the lobbying organization changes (not anymore mandatory) may even have the effect of downward pressure on prices, as the buyers may even have more scope to play off different sellers against each other.

 

 

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One response to “Short analysis: of market pulp, pulp markets and price formation

  1. Pingback: UPM Jämsänkosken ja Kaukaan paperikoneet lakkautetaan – näkemykset | Arjen polku

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