This week, Norway’s NOREXCO, a Nordic regulated commodity exchange exclusively for global pulp, paper and forestry products, officially launched two cash-settled China pulp futures contracts based on price data from Fastmarkets, to meet growing demand for hedges (i.e., price risk exposure mitigation) from global pulp product users.
While trading in pulp futures–which lock in prices for pulp delivery 12 months forward–has been offered on the Shanghai Futures Exchange, according to Fastmarkets, volume has skyrocketed in recent months. Contracts equivalent to 400 million tons of pulp traded in all of 2019: a figure surpassed in just the first three months of 2021, amid unprecedented price volatility, including multiple intra-month price spikes of $100 per ton.
The new iron ore?
According to figures from commodity risk manager FIS Global, which partnered with NOREXCO on development of the contracts, global pulp production amounts to around 176 million tons yearly, 52 million of which are shipped globally, and 25 million tons imported by China alone. As an input, pulp is used in a range of paper-based consumer products, from container board to writing paper to tissues. FIS sees parallels between the pulp market–which has traditionally centered around long-term contracts negotiated between suppliers and end-users–and the iron ore market of the 2000’s.
NOREXCO’s contracts, one for softwood pulp and one for hardwood pulp, are settled against the monthly averages of Fastmarkets RISI’s NBSK CIF China assessment and Fastmarkets FOEX’ PIX China BHKP Net index. These prices reflect trade in the offshore contract market, where imported pulp is sold to traders and end users on a cost, insurance and freight (CIF) basis for delivery to main ports in China.
“The two new contracts enable anyone with exposure to pulp delivered to China to hedge out unwanted risk,” said NOREXCO CEO Stein Larsen. “We can also announce that clearing and transaction routes for accessing the international NOREXECO market are opened for both Asian and international traders.”
“There is already a well-established market onshore in China, but we hope to develop this globally, helping to grow the offshore, as well as the onshore market,” FIS CEO John Banaszkiewicz said earlier this spring, when plans of the NOREXCO contracts were made public. “We are keen to bring our experience of developing the iron ore futures market to help grow this market.”
Paper trading
Research published from Fastmarkets, reflecting data from the first quarter of 2021, found that the price-per-ton of pulp in Q1 well outpaced the previous historic high from the second half of 2017. While much of the price increase could be naturally attributed to economic bounceback from 2020 effects of covid, according to Fastmarkets, the magnitude and pace of price gains in pulp have appeared out of proportion to post-covid fundamentals. According to recent figures from the Global Packaging Media Alliance, pulp futures in China rose 45 percent between November 2020 (¥4542/ton or $703/ton) and March 2021 (¥6584/ton or $1019/ton).
On the supply side, tight pre-pandemic inventories levels, production outages, and shipping container shortages all pushed product and delivery costs, which Fastmarkets notes disproportionately affected pulp consumers in China–especially smaller users without a supply buffer. Meanwhile, demand for pulp products soared, driven by increased usage of tissue and packaging during the pandemic, and by broader macroeconomic fundamentals as the recovery outlook strengthened.
All of the above was further reinforced in the Chinese market by continued strengthening of the renminbi against the U.S. dollar, and by an increase in speculative pulp contract trading volume on the Shanghai Futures Exchange, creating a multi-pronged, ongoing volatility driver for products deriving from pulp, and an imperative for Chinese end-users of these products to manage price risks accordingly.
With the release of the new contracts, NOREXCO will set daily closing prices and make a transparent forward curve available for all market participants.
