By Matt Elhardt, Fisher International
If only life in sales and purchasing were simpler. If prices were easy to forecast, we could always buy low and sell high. If falling demand always led to falling prices and rising costs always led to rising prices, we’d always know what to do. Unfortunately, the world is much more interesting than that. And paper markets regularly show common wisdom and traditional forecasts to be wrong.
But there really is a logic to how the paper market moves. We know this because, as individuals, we have a good “feel” for what the market is doing right in the present and why. We can tell, for example, when the market is getting tight and prices are about to turn up or when they’re starting to weaken. The problem is that we can’t forecast for more than a few weeks into the future. After that, we fly blind.
There is a reason for this: Markets are made up of a large number of complex interactions. Many things are happening at the same time: inventories, operating rates, supply, demand, and other variables are all changing simultaneously and they affect each other in non-linear ways. Depending on the market state, a small change in one variable, inventory says, can produce a big move in prices or have no effect whatsoever. Further confusing the issue, some variables cause leading or lagging effects to prices, while others can have a near-simultaneous impact. Markets evolve as these variables interact repetitively over time. Our brains just can’t process very many iterations of all these interactions.
But, wait a minute, don’t manufacturing costs drive market prices anyway, you might ask? In this article, we’re going to answer that question and show that predicting paper industry prices out even for two or three years is actually possible with reasonable reliability.
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