A Transaction-based Approach to Price Indices
These unexpected movements can happen because the index being used based on survey-based methods is naturally confronted with the risk of biases. The metrics used to measure the market that seek to predict future prices based on industry chatter tend to exacerbate artificial volatility. The ramifications of this type of volatility are serious:
• Making forward-looking business decisions becomes incredibly difficult when price is no longer a function of supply–demand interaction.
• A facility’s margins can be wiped out without a valid market-based reason due to the markets not moving in the way of actual costs.
Uncertainty increases the risk and can increase the cost of capital demanded by investors, and many of the issues arise due the nature and built-in challenges inherent with telephone-based surveys. Therefore, the antidote is to build a different index using a new process.
Markets aren’t really built on word of mouth. Markets are built by the individuals whose job it is—day in and day out—to make sure they get the best price they can whether they are buying or selling. This is how the market is built: transaction by transaction, each one reflecting the supply and demand factors on the ground.
The best way to reduce uncertainty with price discovery is to build an index based on actual market transactions. The OCC market is similar to the complementary feedstocks we’ve worked with – and during our experience, we’ve seen the benefits of reliable data based on actual market transactions in these markets. Prior to the introduction of our transaction-based indices, log markets were highly volatile and uncertain in ways that could not be explained. Our index – now capturing millions of transactions per year – solved this problem.
Download a white paper detailing our approach to recycled fiber prices.
