PULP Hedging: Give it a try

STOCKHOLM, Feb. 24, 2010 (RISI) - It's taken the industry a while to come round to the idea of hedging when it comes to market pulp, but there's an increasing recognition that anything which helps to secure a more stable pricing environment for pulp has to be a good thing, for both supplier and buyer alike. The volatility of the price cycle has done significant damage to the share value of the industry over the years and cyclicality is unlikely to go away in a commodity market which is driven by supply and demand. So we all have to find ways of minimizing the risk of exposure to the rise and fall of pulp prices. Just as you take out insurance against the risk of fire in your mill, financial hedging is an insurance against prices moving against you - think of it as price insurance rather than fire insurance.

We believe that having a tool for more stable price-setting means we can do better business with our customers. That's why we offer two hedging alternatives to choose from or combine as part of PulpServices Hedging. We take no view on which agreement is best; it depends on the needs and wishes of individual customers. Essentially, both add up to better cost control. Take budgeting for example. With a long hedging period, customers can ensure they have the funds available for planned projects. Hedging also provides customers with a base from which to offer their end-users a fixed price and thus guaranteed margins. If it also seems pulp prices are likely to rise, there is every reason to lock the price at a reasonable and manageable level.

Hedging is a form of insurance against unforeseen circumstances that can affect pricing negatively, minimizing the risk of exposure to a devaluation or a strengthening in the dollar, for example, whichever way your interest lies. Better price control makes it easier for business planning in general. It's a matter of freeing up time and prioritising important tasks. Instead of negotiating prices with our sales people each month, customers can focus on projects they can have a direct impact on, that are within their own control.

In this respect, hedging is a step towards greater efficiency, which is needless to say a valuable asset for shareholders. So what do you have to lose - give it a try!

Linda Claesson is PulpServices Hedging Manager for Södra cell, the hedging service for customers on PulpServicesOnLine. Södra offers a Long Term Fixed Price, LTFP,which is a fixed-price agreement which runs over a longer, agreed period. The price does not reflect Södra's view of the pulp price trend but rather reflects the pulp price on the financial market. It also offers PIX Benchmark Pricing,s a variable price that is presented by FOEX Ltd. on a weekly basis. The price is based on their weekly summary of trade in the pulp market. The Hedging service is complemented by Update, a neutral source of information published on PSOL to give customers a view of the current situation in the pulp market