Process Improvements

Earlier this year, RISI—publisher of PPI Pulp & Paper Week (PPW) as well as other information on global pulp and paper markets—acquired Official Board Markets (OBM). We did this because we see an opportunity to improve price assessments for recovered paper by bringing together PPW and OBM along with the Bench$mart recovered paper procurement cost benchmarking service, which RISI acquired from Moore & Associates, based in Atlanta.

In the months since the acquisition, we engaged in an aggressive push to talk to key players in the market about what works with OBM and PPW pricing and what could be improved. We did an extensive review of price assessment in other commodity industries (e.g., oil, steel, chemicals and iron ore) to identify best practices for assessing market prices.

We are excited about the results of this process: A plan to rationalize the prices in PPW and OBM and to make some key improvements in our price assessment methodology while maintaining historical continuity with the OBM and PPW prices that will be published going forward.

We are in the transitional phase of the price rationalization, publishing PPW and OBM prices side by side within the pages of PPW. In January, we will complete the rationalization and discontinue overlapping prices. The prices for bulk grades from PPW and high grades and pulp substitutes from OBM will be discontinued, and we will publish a single source of prices going forward. (Note: In this article, we will call the OBM and PPW prices collectively “RISI prices.”)

Improving the Accuracy
RISI has introduced a number of key improvements designed to enhance the accuracy and reliability of our price assessments:

1) A larger editorial team assessing recovered paper prices. PPW and OBM used to survey the market separately and create separate price assessments. As of October, PPW and OBM editors are working together in a single price assessment process. This means that we can make significantly more market contacts than we could before. Whereas, before, a single editor would make decisions about prices, now decisions are made in consultation with another editor, who reviews the data, ensures there are enough data points to adequately represent the market, ensures adherence to our price assessment methodology and serves as a sounding board for difficult assessments. This combined approach brings collaboration and checks and balances that are designed to ensure more accurate prices.

2) Implementation of best practices in price reporting. Another area of focus has come from the International Organization of Securities Commissions (IOSCO), which has issued principles for price reporting agencies. Those principles are specifically for oil price reporting agencies, but many of the principles apply to recovered paper as well, and we are adopting those principles. Included in those principles are:

• Independence of the price assessment function;
• Documentation of methodology;
• Communication and transparent procedures for changes in methodology;
• Measures to avoid conflicts of interest;
• Formal complaint procedure; and
• Confidentiality.

3) Publishing prices on the fifth of the month will lead to more accurate prices. OBM prices came out on the Wednesday before the first Saturday of each month, which meant that prices could be published as early as the 28th of each month. However, this was often so early that the accuracy of the prices was compromised: Not enough of the market had settled by the time prices were published to get an accurate read on prices. By moving prices back to the fifth, more of the month’s prices have settled by the time we publish, meaning that our prices are more accurate compared with the previous process.

4) Integration of intelligence from Bench$mart mill cost benchmarking. Founded by Moore & Associates more than 10 years ago and acquired by RISI in early 2012, Bench$mart collects actual recovered paper procurement cost data from mills and reports back to participants the volume-weighted average FOB (freight on board) and delivered costs by grade and region. The service has participation from mills representing the majority of tonnage consumed and, therefore, has yielded highly accurate cost results.

The purpose of this service is for mills to accurately benchmark their competitive positioning in the market. That’s why the service is available only to mills, not to suppliers.

However, this highly detailed and accurate data will provide a “reality check” to the prices published in PPW. When we gather Bench$mart data each quarter, we can subtract those actual costs from the RISI prices for each grade and region over the quarter to find the true average premium paid in the market. If we find a discrepancy (i.e., that the premium is either increasing or decreasing) it tells us that we need to audit our price assessment methodology and sources for that grade in that region.

(Note: We will not directly adjust our price assessments based on Bench$mart data. Rather, if we find a discrepancy, it will cause us to apply extra scrutiny to our price assessment process for that grade and region, which should bring the assessments for those prices into closer alignment with reality.)

5) Introduction of weekly, transaction-based export price assessments. Given the influence the export market plays on the market overall, and because export prices can change significantly within a month, RISI is in the process of launching a new weekly price assessment for exports. This new price will be based on submissions of actual prices from market participants. To encourage market participants to contribute their price data, only contributors will be allowed to see the weekly price data. (Please email me at tpetracek@risi.com if you are interested in finding out more.)

Figuring Out Pricing
RISI prices are determined based on a survey of buyers and sellers of recovered paper, conducted by experienced editors. Market participants are asked to report the prices of agreed transactions and are asked a series of questions to validate and substantiate their responses. Price assessments are based on completed transactions, not on forecasts or speculation.

Editors undertaking this survey are very experienced, with an understanding of each player’s biases and incentives, and they ask appropriate questions to verify information, confirm from multiple sources and identify the most reliable sources over time. This process is similar to an investigative journalism approach to reporting on government and other institutions that are difficult to penetrate.

The price assessments RISI publishes reflect the most common values found in our survey, weighted roughly by transacted volume and by the quality of the source. Higher quality sources are those who have a history of reliability, whose information stands up best to journalistic scrutiny and who give more detailed information (e.g., not just market changes, but actual prices; info on how much volume has been transacted at a given price; and even specific POs).

Representing the Open Market
RISI prices represent an assessment of the open market price at which mills or exporters have purchased tonnage for delivery in the indicated month. For instance, prices published Jan. 5 represent purchases agreed to through Jan. 5 for shipment in January. The “open market price” is defined as the price for all transactions except those whose price is specifically determined in whole or in part by a contract that is more than one month long.

Price assessments represent gross prices, i.e., prices excluding market-wide premiums that may prevail in a given region. In some markets, overall average net market prices are higher than RISI’s reported prices because market participants add premiums to reported prices. To maintain consistency over time, RISI prices are gross prices excluding premiums but seek to capture the month-to-month change in overall average net market prices. In other words, RISI reports gross prices that hold the premium constant from month to month.

For instance, say that a reported price one month was $150 and the average premium was $10. The next month, if a market participant reports that prices were unchanged but that premiums had gone up by $15, resulting in a net price of $165, this would be interpreted in our price assessment as an increase in price of $5.

More details on RISI’s recovered paper price assessment methodology is available at www.risi.com/RCPmethodology.

Helping Market Efficiency
Accurate, reliable price assessments improve the efficiency of recovered paper markets, which is good for suppliers and consumers. Mill buyers and suppliers, as market participants, can do some things to help bring about this efficiency.

Don’t index all of your transactions to published prices (whether from RISI or from other sources). Price discovery is the process in which a market establishes the prices needed to bring supply and demand into balance. Tying the price in contracts to a published price essentially delegates the process of price discovery to others in the market.

If this happens some of the time, it’s fine and actually enhances market efficiency for the reasons mentioned above. But, if it’s done the vast majority of the time, it hurts market efficiency by making the open market too small. The smaller the open market is, the more anomalies and special circumstances become reflected in prices, and those anomalies and special circumstances then get applied to the market at large through contract indexing.

If you leave some of your buying or selling to be priced on the open market, you help to make the market more efficient. (Note: Because RISI prices reflect mill purchases, this caution applies only to mill purchases. Tying prices of generator-to-processor transactions to published mill prices doesn’t hurt price discovery in the supplier-to-mill market.)

Help us spread the word about what RISI prices represent. We have found that the more the market understands about our price assessments, how they are made and what they represent, the better.

Become a source of price and market information by working with our editorial staff. Our editors have an extensive network of contacts but are always looking for additional market participants who can offer insight into regional markets and report the prices they are getting in the market. If you are interested, please contact PPW Editor Greg Rudder at grudder@risi.com or at 415-947-6620. Or, if you are interested in contributing weekly export price data to our new series, contact me at tpetracek@risi.com or at 781-734-8915.

Todd Petracek is vice president of news and prices at RISI and oversees RISI’s news, newsletters and price reporting. He can be contacted at tpetracek@risi.com.

Kristin Smith of the Recycling Today Media Group talks with Todd Petracek of RISI during the 2012 Paper Recycling Conference in a video available at www.RecyclingToday.com/paper-recycling-conference-interview-todd-petracek.aspx