The future of China pulp futures - The next generation - Market Insights - Fastmarkets
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
The future of China pulp futures The next generation Market Insights Quarter 2, 2021
Foreword
Just over a year ago, we put together a Market Insights piece about
the rising tide of pulp futures. At the time, we were marvelling about
the 400 million tonnes of pulp futures transactions in the previous 12
months of trading on the Shanghai Futures Exchange (SHFE). In 2021,
volumes eclipsed that number in the first three months of trading!
Like it or not, pulp futures trading is a thing now. As we saw in the
unprecedented run-up of prices in the first quarter of 2021, it has
become clear that the global physical and financial markets for pulp
Matt Graves are inextricably linked.
Senior Vice President
Fastmarkets So, what does this mean for buyers and sellers of pulp?
Matt Graves leads the
This is one of the key questions we will examine in this new Market
Fastmarkets Forest Products,
Fastmarkets FOEX and Random
Insights piece about the future of China pulp futures. As buyers
Lengths price reporting scramble to deal with the whiplash of several rapid price increases of
businesses, including market more than $100/tonne, sellers are trying to get their heads around
reporting and price assessments. how this will play out in the future. In short, now is the time to figure
Matt has worked for over 20 out how to factor in this new variable as you chart out your strategy
years at Fastmarkets Forest for the future.
Products with a focus on the
global pulp and paper industry. Opportunity or threat?
Both! If you ignore it, the financial market will certainly rear its ugly
head in ways you didn’t expect. If you take the time to understand
it and make it part of your strategy, however, there are plenty of
opportunities to use it to your advantage.
So let’s get stuck-in and get our heads around this massive new
elephant in the room that we can no longer ignore!
Matt Graves
Senior Vice President
Fastmarkets
2|
Table of contents
Executive summary 5
Global pulp market trends and price drivers in 2021 6
David Fortin, Vice President, International Fiber
Fastmarkets Forest Products
Understanding SHFE and its impact on physical markets 9
Nick Chang, Managing Editor Asia
Fastmarkets Forest Products
Introduction to NOREXECO’s new China Pulp Futures 12
Anita Skjong, Market Director
NOREXECO - The Pulp and Paper Exchange
Fastmarkets NBSK CIF China and PIX BHKP China Benchmarks 15
Sharon Levrez, Price Assessment Manager
Fastmarkets Forest Products
Meet the Fastmarkets pulp team 16
Hedging and trading opportunities 18
Lina Liu
Head of FIS Shanghai
Hedging and risk management, the buyer’s view – Sappi 20
Stephen Blyth, VP & Chief Financial Officer
Sappi Europe
High pulp prices set to linger – An interview with Liu Zhitao 21
Liu Zhitao, General Manager
Xiamen ITG Paper
3|
Timing is everything!
4|
Executive summary
Global pulp markets experienced an unprecedented rally
in early 2021 driven by China
The China pulp market experienced one of its fastest and steepest
rallies ever in the first few months of 2021, surpassing even that
seen in the second half of 2017. This has had a knock-on effect on
pulp prices around the globe, with Europe and the US also seeing
unprecedented price hikes.
Futures trading contributed to the rally
Both supply-side and demand-side fundamentals were strong
going into 2021, but soaring futures prices on the Shanghai Futures
Exchange drove prices up further and faster than expected. They
created additional buying interest from traders, who could afford to
pay higher prices in the local import and resale markets as they could
sell on the exchange and still make a sizable profit.
High price volatility makes planning difficult
High price volatility creates a challenge for companies when it comes
to managing their margins and costs. This is true for both buyers and
sellers of pulp.
Pulp futures are here to stay
The incredible success of the Shanghai Futures Exchange softwood
pulp contract has proven the use case for futures in the pulp market.
Moving forward, this contract and new offshore contracts focused on
industrial players will become an increasingly important part of the
global market pulp landscape.
5|Global pulp market In the first few months of 2021, producer inventories were already
the global pulp market saw at levels considered balanced to
trends and price an historical price run that tight, and additional unexpected
drivers in 2021 outstripped even the run-up production outages and the
experienced in the second growing logistics challenges from
half of 2017. Most indicators a lack of available containers
pointed to improving market constrained supply further, pulled
fundamentals at the close of producer inventories lower and
2020, which set the stage for pushed delivery costs higher.
pulp prices to finally move higher This had a disparate impact on
after an extended stretch when pulp consumers in China. While
they hovered at low levels near larger end users in China were
the cash costs of high-cost reportedly holding up to six
producers. Synchronized growth months or more of pulp supply
in the global industrial markets and could delay ordering as
David Fortin took hold toward the end of the prices catapulted higher, smaller
Vice President, International Fiber third quarter, with the worst end users were operating more
Fastmarkets Forest Products of the economic devastation on a hand-to-mouth basis
brought on by the pandemic and were forced to continue
David Fortin has been with seemingly behind us. Producer ordering and chase prices higher,
Fastmarkets Forest Products inventories were back in balance, placing additional strain on
since 2005. He spent his first supported by strong shipments their margins.
seven years as a member of the and supply-side disruptions.
Fiber Economic Analysis team,
Pulp demand showed signs At the same time, pulp demand
where he was responsible for
specialty pulp coverage and of both seasonal and cyclical improved thanks to robust tissue
assisting with the World Pulp improvement as the nascent and ivory board consumption.
Monthly, the 5- and 15-year economic recovery began to The reacceleration of the
World Pulp and Recovered Paper take shape, while delayed and spread of the virus bolstered
Forecast and Dissolving Pulp extended maintenance outages at-home tissue usage and
Monitor. During his time on the piled up and constrained supply. demand for paper packaging for
Fiber team, he was the author pharmaceuticals. Additionally,
of the World Fluff Pulp Study While these factors were ivory board demand was
and multiple single-client and supportive of an increase in pulp strengthened by increased
mill risk studies.
prices, the pace and magnitude usage of paper packaging as
of the increases seemed to go a replacement for single-use
well beyond them. This raises plastics and a more constructive
the question of whether market consensus outlook for the
fundamentals fully supported macroeconomy in the second
the rapid increase in prices or if half of the year.
prices had overshot and would
tumble lower to realign with The resultant price gains were
market fundamentals. reinforced by the continued
appreciation of the renminbi
The upward pressure on pulp against the US dollar. The
prices from the improvement in stronger renminbi engendered
underlying market fundamentals end users’ initial acceptance
was magnified by a number of rising pulp prices as a pillar
of factors. On the supply side, of support for raising domestic
6|Comparison of global NBSK prices, 2001-2021
($/tonne)
1,700
1,500
1,300
1,100
900
700
500
300
g 01
Oc -20 1
M -20 2
ay 02
c- 03
l- 3
b- 4
p 05
r 05
v 06
n 06
n 07
g 08
ar 08
t 09
ay 09
c- 10
l- 0
b- 1
p- 12
r 2
v- 13
n- 13
n 4
g- 15
ar 15
t 16
ay 16
c- 17
l- 7
b 8
p 19
r 19
v- 20
20
ar 0
Fe 201
t 0
Ap 200
Ju 201
Ju 200
Fe 200
Ja 201
Fe 201
Ju 201
Se 20
De -20
Au -20
No -20
M 20
Ju 20
Oc -20
M -20
Se -20
Ap -20
Au -20
M -20
De -20
Ja -20
No -20
20
Se 20
Ap -20
De -20
Au -20
M -20
No -20
Ju -20
Oc -20
M -20
n
Ja
US East (Contract) South Korea Europe China
Source: Fastmarkets Forest Products.
paper and board prices, but end has skyrocketed, increasing $50/
users’ margins were squeezed as tonne in November, $100/tonne
they struggled to raise product in December and another $150/
prices in line with the unrelenting tonne in January to $895/tonne,
rise in pulp prices. up a total of $345/tonne from
mid-2020.
Pulp prices were pushed even
higher by speculation in pulp The pace of the increase in the
futures contracts on the pulp futures contract was both
Shanghai Futures Exchange. The unanticipated and breathtaking
March pulp futures contract and has pulled domestic resale
raced upward, supported by the and net import prices markedly
general rise in global commodity higher. The rate of change has
prices and anticipation of resulted in disequilibrium across
stronger pulp demand as the grades and regions, with the
recovered paper import ban NBSK premium to BEK reaching
was fully implemented in China. more than $250/tonne and
The price of the March futures the net NBSK price delivered to
contract plateaued at $600/ China exceeding $150/tonne
tonne through early November, above estimated net delivered
after a $50/tonne increase prices to Europe and North
in late August. Since then, America. Net delivered pulp
however, the futures contract prices outside of China chased
7|net import prices in China, encouraged pulp producers to
while net import prices in China redirect spot volumes to China,
chased resale and futures prices. dig deeper into their inventories
The March futures contract hit and push for higher prices with
a high of RMB 7,444/tonne in contract customers.
early March, which was close to
$1,000/tonne after removing VAT While we had anticipated a
and logistics. Resale prices were rebound in prices this year,
at a similar level, and net import the rate of change greatly
prices were between $930/tonne surpassed expectations. Heading
and $1,000/tonne depending into 2021, the continued
on the brand. The pace of the economic recovery, stronger
increase in resale prices in China pulp demand, balanced-to-
in November 2020 to March tight producer inventory levels,
2021 surpassed that seen in the stronger renminbi and a lack of
second half of 2017, with prices meaningful capacity expansion
up $350-400/tonne, and if you until the end of the year set
include the $50/tonne increase up a market environment that
achieved in August before is supportive of higher prices.
the price plateaued through However, a combination of
October, the total gain from exogenous factors, including a
trough to peak was $400-450/ lack of container availability,
tonne or nearly 70%. The main speculative trading on the
difference this time is that prices Shanghai Futures Exchange and
started $85/tonne lower at the additional unexpected supply-
trough. The exceptionally strong side outages, sent prices higher
back-to-back increases have at a breakneck pace.
8|Understanding the The now established pulp futures redirecting spot volumes away
trading on the Shanghai Futures from other regions to capitalize
SHFE and its impact Exchange clearly played its part on the high prices they could
on physical markets in the spectacular rally seen in achieve in China. In early March,
the global pulp markets in late a major Chinese end user already
2020 and early 2021. had to fork out $1,000/tonne for
northern BSK (NBSK) pre-sold
On March 15, the Ilim Group by a Canadian producer for May
announced a hike of $100/tonne shipments. The buyer explained
for bleached softwood kraft pulp the tonnage would feed a new
(BSK) imports for April shipments cartonboard machine scheduled
in China, taking the grade’s prices to come on line in the second
to $1,000/tonne, an historical half of the year.
high. The Russian powerhouse
indicated the decision was made The rises clearly show that the
Nick Chang based mainly on BSK futures surge in BSK futures prices
Managing Editor Asia prices on the Shanghai Futures have made their impact on
Fastmarkets Forest Products Exchange (SHFE). the industry felt, with buyers
constantly bidding up levels
Nick Chang manages the Ilim sells more than a million for pulp imports and suppliers
PPI Asia editorial team and reports tonnes per year of pulp, pre-selling them. Besides
on the Asian pulp and recovered chiefly BSK, to China. The papermakers and traders,
paper markets. He has been with
announcement set a precedent financial institutions not related
Fastmarkets Forest Products
for nearly 20 years. He speaks for BSK pricing past the mark to the industry are also involved
Mandarin Chinese, the Chinese of $1,000/tonne, and Chinese in BSK futures investments.
dialect Hokkien and English and buyers braced themselves for
reads Japanese. other suppliers to follow suit. When BSK futures prices surged,
traders pounced on arbitrage
Canadian producers were the opportunities, which were
first to peg softwood pricing cracked open when the gap
to BSK futures and even began between prices for futures and
The Shanghai pulp futures were the 50th set of commodities
futures contract to be launched in China. They offer local traders
the opportunity to buy and sell bleached softwood kraft pulp for
delivery in the next 12 months, either for procurement purposes or
as a hedging tool. The contract is physically settled, meaning that
those left with an open sell position when the contract expires
are obliged to deliver pulp corresponding to one of the 12 brands
recognized to a storage delivery designated by the exchange.
The recognized brands include pulp produced by five Canadian
suppliers (Canfor, Catalyst, Mercer, Cariboo and Nanaimo), two
Nordic producers (UPM and Södra), two Chilean suppliers (Arauco
and Pacifico) and Russia’s Ilim.
9|resale/imports widened. There other pulp grades have been
were several times when prices driven up across the board.
in physical trade soared to
points where buyers and Chinese customers have
even sellers felt they were used their stocks of bleached
unsustainable as they had hardwood kraft pulp and
deviated from the fundamentals even bleached chemi-
too much. But the futures price thermomechanical pulp as
run continued unabated. collateral to arbitrage on the
Shanghai bourse. In the face
Most Canadian sellers of soaring costs, they have no
and some Nordic suppliers choice but to adapt, cutting
have accommodated the purchasing volumes when pulp
development, changing sales grows more expensive, while
plans from selling NBSK following reducing their inventories of
monthly negotiations with finished products.
buyers and giving contracted
clients discounts to selling and In the meantime, mills have
pre-selling spot tonnage at net sought to pass the extra costs on
levels, with no discounts given. to downstream clients by raising
paper and board prices in the
The impact has not been limited domestic market. In the end, all
to the BSK segment. Prices for the hikes will reach consumers.
Fastmarkets Forest Products NBSK CIF China vs SHFE pulp futures
(RMB/tonne)
7,000
NBSK CIF China
6,500
SHFE settlement minus VAT and logistics
6,000
5,500
5,000
4,500
4,000
3,500
0
0
0
0
20
0
0
0
0
1
1
0
1
1
02
02
02
02
02
02
02
02
02
02
02
02
02
20
-2
-2
-2
r-2
-2
-2
-2
-2
2
-2
-2
-2
l-2
g-
v-
an
eb
ar
ar
pr
ay
un
ep
ct
ec
Ap
Ju
No
Au
M
-F
-O
M
-A
-J
-D
-M
-S
-J
-
-
-
01
-
01
01
-
01
-
01
01
01
01
01
01
01
01
01
01
Source: Fastmarkets Forest Products, SHFE.
10 |11 |
Introduction to Using financial instruments to futures contracts tailor-made
increase strategic capacity or for the international pulp and
NOREXECO’s new manage price risk or volatility is paper industry with exposure to
China Pulp Futures common for most commodities, China pulp price volatility. These
and over the last several years contracts are also available
these tools have been made for Asian market participants
available to the pulp and seeking to reduce risk and/or
paper industry. The increasing exploit opportunities:
volume in futures contracts
traded, especially in China, and • NBSK CIF China Net – financially
its significant impact on price settled against Fastmarkets
discovery, prove the importance Forest Products’s NBSK CIF China¹
of making these contracts • BHKP China Net – financially
available to the international settled against Fastmarkets
pulp and paper market. FOEX’s BHKP China¹
Anita Skjong
Market Director On June 1, 2021, NOREXECO 1. For product specifications please visit:
NOREXECO - The Pulp and Paper will launch two new China https://www.norexeco.com/pulp.
Exchange
Anita Skjong, Market Director Below are examples on how to use these new financial settled pulp futures.
with NOREXECO ASA, The Pulp
and Paper Exchange, has been
working in the commodity and
NBSK producer Canada – hedging production
financial service industry for more A pulp producer wants to use the futures market to hedge against
than 20 years. She has extensive price decline and secure revenues of their production.
experience with risk management,
Futures and physical market @ time of hedging, March 21:
hedging strategies, derivatives
and trading. Previously, Anita
NBSK CIF China: $939/tonne
worked in companies such as Futures market (2Q21): $980/tonne
Norsk Hydro, Orkla Finance Volume: 50,000 tonnes per month
Commodity Trading (a hedge Period: Three months (2Q21)
fund) and Norsk Gjenvinning. Futures: Sell - NBSK CIF China 2Q21 Contract¹
Physical pulp: High quality, normally they receive a $20/tonne
Anita holds a bachelor’s degree premium to the NBSK CIF China
in international marketing from
1. Selling futures creates a profit on futures contracts if the price decreases
ICADE, Madrid, and has an (short position).
Executive Master of Management
course from the Norwegian Scenario: By the end of 2Q21, the pulp price has decreased and the
Business School. average NBSK CIF China price for the hedging period is now $900/tonne.
Let’s see how this will affect the producer:
Settlement financial hedge, profit:
($980 - $900) * 150,000 tonnes = $ 12,000,000
Physical average pulp sold during Q2 (including $20 premium):
$900 + $20 * 150,000 tonnes = $138,000,000
Total revenue on pulp production during Q2 ($1,000/tonne) = $150,000,000
Conclusion: Independent of market direction, the pulp producer
will receive $1,000/tonne. Had the producer not hedged, they would
have received $920/tonne.
12 |Paper mill China – hedging NBSK cost
In order to offset risk arising from fluctuations in pulp prices, the paper mill wants to use futures to hedge.
Futures and physical market @ time of hedging, April 2021:
NBSK CIF China: $980/tonne
Futures market (2H21): $950/tonne
Volume: 10,000 tonnes per month
Period: Six months (2H21)
Futures: Buy – NBSK CIF China 2H21 Contract¹
1. Buying futures creates a profit on futures contracts if price increases (long position).
Scenario: By the end of 2H21, the pulp price has increased and the average NBSK CIF China price for the hedging
period is $980/tonne. Let’s see how this will affect the paper mill:
Settlement financial hedge, profit: ($980 - $950) * 60,000 tonnes = $ 1,800,000
Physical average pulp bought during second half 2021: $980 * 60,000 tonnes = $ 58,800,000
Total pulp cost during 2H21 ($950/tonne) = $ 57,000,000
Conclusion: Independent of market direction, the paper mill will pay $950/tonne, eliminating the risk of
increased prices, thus the desired predictability of cost is secured. Had the paper mill not hedged, they
would have paid $980/tonne.
BHKP producer – flexible pricing customer
The producer wants to increase customer service by offering flexible pricing on commercial contracts to
customers by giving them the opportunity to fix the price when the market is favorable.
In January 2021, the pulp producer gets a request from a large customer regarding a fixed price for pulp
delivered in 2Q21; they expect prices to increase as demand is improving. The producer agrees to fix the price,
but due to improving market fundamentals, they want to remain exposed to pulp prices by using futures.
Futures and physical market @ time of hedging, January 2021:
BHKP PIX China: $537/tonne
Futures market (2Q21): $600/tonne
Volume: 50,000 tonnes per month
Period: Three months (2Q21)
Fixed price customer: $600/tonne
Futures: Buy – BHKP PIX China Q2 2021 Contract
Scenario: By the end of 2Q21, the pulp price has increased and the average BHKP PIX China of the hedging period is
$750/tonne. Let’s see how that affects the producer:
Physical contract: Expected revenue without fixed price: $750 * 50,000 tonnes = $ 37,500,000
Payment from customer fixed price: $600 * 50,000 tonnes = $ 30,000,000
Lost revenue due to fixed price - $ 7,500,000
Financial contract: Long futures contracts 2Q21: $600 * 50,000 tonnes = $ 30,000,000
Settlement futures contracts: $750 * 50,000 tonnes = $ 37,500,000
Profit financial futures + $ 7,500,000
Conclusion: The customer fixed the pulp price in January, thus is not exposed to any price volatility.
The producer used the futures market to remain exposed to pulp prices, which allowed them to increase
customer service and benefit from higher prices.
13 |Trading opportunities - example
The futures market doesn’t always move in tandem with the physical market—sometimes, it can
“overshoot” or “undershoot.” Companies can take advantage of these moves. During 1Q21, the futures
market rallied strongly, and some traders (industrial/professional investors) may believe the futures market
has detached from the underlying fundamentals, supply and demand.
Futures and physical market @ time of hedging, April 15, 2021:
BHKP PIX China: $780/tonne
Futures market (June 2021): $950/tonne
Sell/short 20,000 tonnes June 2021: $950/tonne
Scenario:
1. The trader can at any time until settlement buy back the futures position, either to take profit or loss depending on
the futures market price movement
2. The trader can hold the position until financial settlement (average BHKP PIX China June 2021), no physical delivery
involved. The BKHP PIX China reflects the price of physical transactions done during the period (June 2021) = the
futures market will converge with the physical market at the time of settlement
Example 1:
On May 18, 2021, the June futures contract is trading at $880/tonne and the trader decides to close the position:
April 15, 2021 sold 20,000 tonnes * $950/tonne $ 19,000,000
May 18, 2021 bought 20,000 tonnes * $880/tonne $ 17,600,000
Position closed, total profit +$ 1,400,000
Example 2:
On June 1, 2021, the June futures contract is trading at $1,000/tonne, and the trader decides to close the position due
to changed market fundamentals:
April 15, 2021 sold 20,000 tonnes * $950/tonne $ 19,000,000
June 1, 2021 bought 20,000 tonnes * $1,000/tonne $ 20,000,000
Position closed, total loss -$ 1,000,000
Example 3:
Trader decides to hold the position until final settlement, and position will be closed out based on average China BHKP
PIX June 2021:
April 15, 2021 sold 20,000 tonnes * $950/tonne $ 19,000,000
Settlement BHKP PIX China $850/tonne * 20,000 tonnes $ 17,000,000
Position closed, total profit +$ 2.000,000
14 |Fastmarkets NBSK CIF NOREXECO plans to launch two where required, and outliers are
new cash-settled pulp futures removed. Our integrated peer
China and PIX BHKP contracts in June 2021. These will review system ensures that all
China Benchmarks be a softwood contract, based data is verified by at least two
on Fastmarkets Forest Products’s reporters and an editor or senior
NBSK CIF China assessment, and reporter to ensure quality control
a hardwood contract, based on and compliance.
Fastmarkets FOEX’s PIX BHKP
China index. Both prices are net. Both our NBSK CIF China
assessment and PIX BHKP China
Fastmarkets prices are already index show strong correlations
used in some physical and with the domestic resale market
financial contracts. They are for that grade in China, as well
rooted in a robust pricing as with prices for the same grade
methodology and based on in East Asia. In addition, PIX
Sharon Levrez transactions concluded in the NBSK CIF China also correlates
Price Assessment Manager offshore cargo market. well with other softwood grades,
Fastmarkets Forest Products
Sharon Levrez joined Fastmarkets
Forest Products in 2017. She Fastmarkets has a strong history in providing
works closely with Fastmarkets
Forest Products’s SVP of Indices, benchmark prices for the industries we serve.
Matt Graves, to improve
the reliability of our price
assessments and develop new
ways of assessing prices. Fastmarkets has a strong such as radiata pine and Russian
history in providing benchmark BSK. This means they can be
To contact Sharon or a member prices for the industries we used to hedge exposure in
of the price reporting team, email serve. We apply strict polices other locations, and for other
prices.risi@fastmarkets.com. and processes, developed in softwood grades.
accordance with the IOSCO
principles for Price Reporting The new NOREXECO futures
Agencies (PRAs), the gold should provide physical market
standard for all price reporters. players with a more appropriate
tool to manage their exposure
Our pricing process starts with to price volatility going forward.
our trained reporters completing Moreover, they will allow
a broad, representative survey companies to cash in on the
of participants from across arbitrage between China’s
the supply chain. The data offshore and domestic markets,
we gather is entered into our as well as the differential
proprietary pricing database, between hardwood and
where it is analyzed, normalized softwood prices.
15 |Meet the Fastmarkets
pulp team
Producing the most robust price requires a
Bryan Smith
coordinated global team
North America
Pulp Editor Fastmarkets pulp assessments provide robust and transparent
benchmarks for softwood and hardwood pulp imported to China.
They are compiled by our team of experienced reporters located
around the globe in Singapore, Shanghai, Helsinki, San Francisco,
São Paolo and Brussels.
Steve Sachoff
Europe
Our reporters are chosen for their knowledge and experience.
Pulp Editor
Each is assigned a specific beat and works in close cooperation
with a team of colleagues. To contact the team, please email
pricing.risi@fastmarkets.com or info@foex.com.
Nick Chang
Asia
Pulp Editor
Lizzie Yu
China
Pulp Analyst
Marina Faleiros
Latin America
Pulp Editor
Lars Halen
Director of Pulp
Fastmarkets FOEX
16 |17 |
Hedging and The broker’s view
trading opportunities Since the launch of pulp futures to limit counterparty risk—and
by the Shanghai Futures trades can be matched by
Exchange, the pulp derivatives brokers such as FIS. Chinese
market has gradually attracted companies may need to
the attention of pulp industry use brokers like FIS to trade
players and investors and pushed NOREXECO pulp futures. The
the further development of trading process is outlined in the
offshore pulp futures products. graphic below.
As a leading shipping and
commodity derivatives broker, We have seen growing volumes
FIS (Freight Investor Services) has and volatility in the market. In
been actively participating in the 2020, the trading volume of
Lina Liu
promotion of pulp futures. SHFE softwood pulp futures was
Head of FIS Shanghai
nearly 350 million tonnes, and
Lina Liu joined FIS from its Unlike contracts traded in the over 515 million tonnes have
London office and was relocated traditional OTC swaps market, changed hands to date in 2021.
to Shanghai in 2016. In addition the pulp futures offered by the Volatility has risen from 31% in
to managing the FIS office in NOREXECO pulp and paper 2020 to 35% so far in 2021.
Shanghai, she also helps to exchange are standardized,
develop new derivative products cleared cash-settled contracts. The high correlation of global
and has been focused on a pulp Margin is required and managed commodities, the systematic
derivatives contract in China. She by clearing banks—which helps risk uncertainty and the
has several years of experience in
commodity derivatives and has
an MSc in quantitative finance
from CASS and LSE.
OTC clearing process
Broker
Trade Trade
matching matching
Buyer Seller
Trade
submit
Buyer’s clearer Seller’s clearer
EXCHANGE
18 |booming demand for pulp after calendar year. Contracts with
China’s plastic and RCP bans different expiry dates meet
has driven the volatility of the market participants’ need to
pulp market. Combined with choose the right hedging period
the instability of the US dollar, with corresponding purchase/
market participants are facing sales cycle and realize the
significant pulp and paper price demand of conversion between
risk exposure. floating and fixed prices for
different players in the industrial
From FIS’s network of customers chain. If the physical trade is
in the global pulp and paper also index linked, players can
market, we understand that avoid repeated monthly price
market participants have a negotiations and use the index to
great demand for US dollar pulp reflect the monthly market price
contracts and look forward to directly. Meanwhile, cash-settled
the launch of the additional contracts using the same index
China NBSK and BHKP can minimize the basis risk and
contracts. These contracts are achieve a better hedging result.
more suited to hedging Chinese
imported pulp price risk. The US We believe that the pulp
dollar pulp index is closely linked market development pattern
with the physical import price is similar to that in iron ore,
and can be compared with the with the emergence of onshore
SHFE renminbi pulp futures. and offshore futures contracts
Players can choose between improving the current market
contracts based on the price and system and providing more
create arbitrage opportunities. flexible trading solutions. We
hope the market can go from
Pulp future contracts can be strength to strength, and we will
traded by month, quarter and be supporting it all the way.
Monthly SHFE futures volumes
(tonnes)
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
0
20
ar 0
Ap 020
ay 0
Ju 020
Ju 20
Au 020
Se 020
O 020
N 020
De 020
Ja 20
Fe 021
M 021
1
02
2
M 02
20
20
20
20
2
2
-2
-2
2
-2
l-2
2
2
-2
-2
n-
b-
n-
b-
r-
n-
g-
p-
c-
ar
ct
ov
Ja
Fe
M
Source: SHFE.
19 |Hedging and risk The buyer’s view – Sappi
management It’s not about second-guessing raises fundamental issues for
or timing the market, that buyers, especially in recent
would be speculative, it’s all times of such rapid pulp price
about certainty…of margins increases and particularly for
and cash flows. those who are unintegrated
paper producers. Although
Those responsible for risk absolutely necessary, it is not
management, as far at it always possible to immediately
relates to raw material price pass these increases on to a
movements, are well accustomed buyer’s own customer, either
to being the “whipping boys” in due to fixed contract pricing,
times of price turbulence. If one credit issues or the destruction
Stephen Blyth
has hedged or fixed a position of end consumer demand. The
VP & Chief Financial Officer
Sappi Europe in times of declining prices, one alternative for an end user of
hears “Why did you do that, commodity paper is not another
Stephen Blyth is VP & Chief we could have been so much printer or publisher that can
Financial Officer of Sappi Europe, better off had we floated with source paper at a lower price, but
based in Brussels, where he is the market.” Conversely, “Why a different (often digital) means
responsible for all finance- and did you not lock in the prices” is of communication. Once gone,
IT-related matters in Sappi’s often heard when a buyer’s raw these markets don’t come back.
European operations. Stephen material price is floating with
joined Sappi in 2005 at its
the market as prices are rising. A With approximately 40% of
Johannesburg head office,
before being transferred to
conundrum indeed! global pulp demand emanating
the European headquarters in from China, a liquid pulp
Brussels where has held various Many companies address this futures market in the form of
senior financial management raw material price risk as part of the Shanghai Futures Exchange
roles in finance, treasury and their risk management strategy, and the new NOREXECO China
tax. Prior to Sappi, he worked which may or may not include futures contracts, have European
at KPMG for nine years split a hedging component. For buyers’ derivative liquidity
between the Johannesburg and global pulp markets, despite concerns been addressed? Partly.
London offices and across various their size, a buyer’s access to It is most definitely an additional
functions in accounting, auditing
the pulp derivative market has arrow in the quiver of a European
and tax consulting.
been possible, but limited to buyer trying to manage raw
Stephen recently chaired the mainly OTC trades with financial material price risk.
industry working group for CEPI’s brokers and more recently via
2050 Roadmap and continues the pulp futures offered by the We are getting closer and many
to support CEPI’s initiatives NOREXECO pulp and paper questions should be answered as
looking into alternatives to exchange. Liquidity in both these the understanding of the pulp
fund the investment needed to markets has been constrained. futures volatility on the SHFE
transform the European Paper improves. Liquidity in a derivative
industry toward 2050. Stephen This lack of ability to hedge the futures markets can only be a
is a Chartered Accountant and
price of a critical raw material good thing, right?
has a B.Com Honours from the
University of Kwazulu Natal
in Durban as well as a Higher
Diploma in Tax Law from the
University of Johannesburg.
20 |High pulp prices An interview with Liu Zhitao of Xiamen ITG Paper
set to linger When prices for northern impacts that the SHFE has
bleached softwood kraft (NBSK) had. “My company participates
pulp imports to China soared in the BSK futures market,”
from around $600/tonne in Liu says. “Our parent firm,
November last year to a record Xiamen ITG Trade, is involved
high of $1,000/tonne in March, in futures activities for other
sellers and buyers ascribed commodities, such as iron ore,
the jump to a surge in pulp steel and chemicals. But most
futures prices on the Shanghai Chinese papermakers have
Futures Exchange. kept their distance from futures
investments, as they are not
The sharp increase of $400/ familiar with how they work.
Liu Zhi Tao
tonne (67%) in just five months
General Manager
Xiamen ITG Paper was unprecedented and would “As for pricing dominance,
have been unthinkable before soaring prices in both BSK
Liu Zhitao joined Xiamen ITG the Shanghai bourse launched futures and physical trade have
Paper in 2003. He has almost 20 its bleached softwood kraft led to a number of suppliers
years of management experience (BSK) pulp futures contracts breaking away from the
in the forestry industry, with a in November 2018. The BSK traditional pattern of sellers and
focus on marketing and sales futures spike during the period buyers negotiating NBSK prices
management in wood, recovered unleashed the pent-up potential on a monthly basis,” he says.
paper, pulp, paper and board.
of NSBK price rises in physical
He graduated from Xiamen
University with a major in
trading. Consequently, price With investor buyers constantly
economics and business. hikes accelerated, with demand bidding up prices, many
outstripping supply. Canadian and Nordic producers
have cut tonnage allocated
Liu Zhitao, general manager to contract customers and
of Xiamen ITG Paper, sees increased their spot sales, with
the process as the price multiple hikes implemented
discovery function of the BSK within a month for the same
futures market. “Although month’s allotments or for
there has been no softwood presales. And while BSK futures
manufacturing capacity levels ostensibly peaked in late
expansion in the global market, March and have been heading
NBSK prices had been kept low south (with fluctuations), NSBK
for one and half years prior imports have not seen prices
to late 2020, despite growing dropping proportionately.
demand in China due to a
wave of new paper and board Liu projected that current high
machines coming on line in the NBSK levels in the offshore cargo
country,” he said. market will linger for the next
few months. He pointed out
Besides price discovery, hedging that following several months
and shifting pricing dominance of robust purchases of pulp
to China are the other major imports, suppliers have little
21 |stock pressure and are therefore The BSK uptick has led to price
unwilling to cut prices, despite increases for other pulp grades
the fall in futures and absence of in China, notably bleached
arbitrage buying. hardwood kraft (BHK) pulp. And
the futures-driven pulp hikes
have also persuaded global
suppliers to send more volumes
to China, while pushing for rises
“As for pricing dominance, soaring prices in both BSK in other markets to close their
futures and physical trade have led to a number of suppliers gaps with China.
breaking away from the traditional pattern of sellers and
NOREXECO attraction
buyers negotiating NBSK prices on a monthly basis.”
On October 16 last year, Oslo-
based NOREXECO launched
the listing of its Shanghai pulp
Meanwhile, the ongoing futures. The offshore cash-settled
international shipping logjam contract is based on the monthly
has hit deliveries of pulp cargoes final delivery settlement prices
to China. Liu indicated that a of the BSK futures on the SHFE,
big portion of pulp that Chinese with the NOREXECO contract
buyers ordered over the past being a “mirror contract” to the
month is likely to be shipped SHFE contract, converted from
from June onward. “Pulp prices renminbi to US dollars with the
are likely to be under downward Chinese VAT of 13% deducted.
pressure in July and August amid
the summer paper and board lull The team-up allows cross-market
in the Chinese market,” he said. hedging and arbitraging between
the Norwegian bourse and
SHFE, aiming to attract futures
investors. Liu said the offshore
pulp contract settled in US
dollars is attractive to Chinese
companies, but unfortunately,
most Chinese investors are not
familiar with how NOREXECO
operates in China. That is
something NOREXECO will
be working on in the coming
months, particularly with the
planned launch of two additional
China pulp contracts settled
against Fastmarkets Forest
Products’s prices this summer.
NOREXECO is also ensuring
that Chinese companies can
participate in trade via brokers
and clearing houses by providing
an easy access route.
To gain more insights in the pulp, paper and packaging markets, visit us online here.
22 |You can also read
