​Introduction
PULP (pulp) n.   1. A soft, moist, shapeless mass of matter.  2. A magazine or book containing lurid subject matter and being characteristically printed on rough, unfinished paper.
American Heritage Dictionary, New College Edition (1993)
Many commodity products have similar characteristics. They are relatively homogenous products that can be produced using readily available technology, and are traded internationally on competitive markets. They are based on natural resources, the availability of which is subject to shocks. They are intermediate inputs with few short-term potential substitutes. As a result of these characteristics, commodity prices tend to be volatile.
Market pulp is in many ways a typical commodity. It also has some particular characteristics that contribute further to price volatility. These include high capital intensity, long-lived capital equipment, and speculative inventory management behavior on the part of consumers. Because of this volatility, accurate forecasting of market conditions is a difficult but potentially very useful exercise. Investment decisions are made on the basis of price forecasts, and improving their accuracy can lead to better decision making on the part of producers. This may in turn reduce the volatility of prices.
Considerable energies are devoted to the task of forecasting pulp prices. A number of recognized short-term leading indicators for price movements exist, and these are widely studied by industry participants. However, less attention is paid to forecasts of the more distant future. This is surprising, given that the relevant time horizon for some of the most important decisions made by the industry (namely, investments in new capacity) is at least five years. This may perhaps be explained by a relative dearth of useful long-term leading indicators on which to base forecasts. The purpose of this research is to contribute to our understanding of how the market functions and to our ability to forecast market conditions, in both the short term and the long term.

• The first step in achieving this is to identify the most important causal factors in determining market conditions. This is done by means of a survey of existing literature and discussion with industry experts. The focus of this survey is on prices and the variables that interact with prices.
• The second step is to assess how best to model these factors in such a way as to be useful for forecasting purposes. Initially, it was intended that this be done using structural methods, focusing particularly on forecasting investment levels (and then prices). In the course of developing the research proposal, however, it became apparent that recently developed time series methods provided a superior means to this end.

Since the late 1980s, time series econometrics has undergone something of a revolution. Two key concepts are non-stationarity and cointegration. Broadly speaking, the first of these refers to a variable which does not have a fixed trend, and the second refers to two or more such variables moving ‘in parallel’ in the long term. Non-stationarity occurs when a variable is subject to stochastic shocks that have permanent effects on it. It has been recognized that many economic variables (including commodity prices) do exhibit non-stationarity, and it has been found that previously used methods based on the assumption of stationarity are not valid for modeling such variables. Methods have been developed to test for non-stationarity, and to model systems of non-stationary variables.
Cointegration methods provide a means for the modeler to take advantage of the effective treatment of short-term dynamics which time series models provide, while ensuring that long-term forecasts have sensible properties. The concept of cointegration is an intuitively sensible one. A pair of variables is said to be cointegrated if they have a tendency to maintain a fixed ‘equilibrium’ relation to one another over the long term. In a stable cointegrating relationship, the variables will adjust to eliminate any divergence from this equilibrium. Such relationships make a great deal of sense for several variables of relevance to the present case, and forecasts for these variables which show significant and long lasting violations of these relationships are not plausible. Cointegration methods allow us to test for and model the existence of long-term equilibrium relationships between the variables in a system, within the framework of a dynamic time series model. A focus of this research is to assess whether these methods prove to be of practical use for building forecasting models.
One difficulty encountered in this research is that little previous time series research on pulp markets has been published. We are therefore obliged to adopt an incremental approach to model building. First, the time series characteristics of pulp prices themselves are explored. We then develop a series of multivariate time series models. These models will attempt to capture some of the short-term and long-term processes that are thought to determine prices. The success or failure of each model will be judged according to three criteria:

• Its statistical acceptability as a representation of the data generation process;
• The plausibility of its estimated coefficients;
• And its out of sample forecasting performance.

Forecasting performance is assessed both on the basis of a formal measure of forecast error, and on an informal assessment of the desirability of the properties of the forecasts.
While these models are designed for forecasting purposes, they may also be used to an extent for structural analysis. This research is not designed primarily to test any specific behavioral hypotheses, but where convenient, structural analysis will be used to provide insights into how the market functions.
The structure of this thesis is as follows.  A description of the pulp market is provided in Chapter 1.  This outlines the short-term and long-term dynamics of the market.  It also addresses the issue of how the ‘market’ should be defined in terms of its product and geographical scope.  Chapter 2 provides a brief overview of the econometric concepts mentioned above, along with a description of relevant modeling methods. Data availability for the variables found to be of importance is addressed in Chapter 3.  The core of the research, which consists of the estimation and testing of several models of pulp prices and other variables, is described in Chapter 4.  The forecasting performances of the different models are compared in Chapter 5.  Chapter 6 concludes.  

Introduction
The pulp and paper industry ended its four-year slump and enjoyed record-breaking profits in 1994.  The unprecedented magnitude and speed of this recovery was due to the timely confluence of many factors:  improving economies in Europe and North America resulted in a large increase in consumption of pulp and associated products such as newsprint and packaging;  imports of European pulp and paper products into the US market leveled off in response to greater demand in European markets;  substantial amounts of marginal capacity were removed from the North American market;  international fiber shortages occurred;  recyclable materials like old newsprint and corrugated containers were in short supply;  weak US and Canadian dollars made North American pulp and paper exports more price-competitive in the international marketplace, thus driving up demand;  and low customer inventories resulted in demand exceeding supply.  The outlook remains rosy, as only limited additional capacity has been added or is scheduled to come on line in the next couple of years. 
This project was undertaken to obtain an overview of the United States pulp and paper industry.  First, all publicly-traded pulp and paper firms were examined in terms of principal products sold.  The second objective was to identify the extent of international operations by these firms, using as a proxy percentage of annual sales from exports and the degree and number of international manufacturing plants, sales offices, and subsidiaries.  The third objective was to evaluate the performance of the firms and to create an industry-based financial performance ranking based on net sales, return on equity, and earnings per share.
 

​Executive Summary
The purpose of this study was to examine the prospects and opportunities for expansion of market pulp exports from Alaska. The focus was on opportunities for the addition or new capacity and expansion of exports in grades not now produced.  We provide a brief overview of the existing industry in Alaska, its historical development, the characteristics of its facilities, sources of raw materials, and its financial problems. And we provide a view of the potential markets for expanded pulp exports by grade, the likely competition to be faced by Alaskan producers, and the comparative cost position of Alaskan mills vis a vis other regions. Certain conclusions emerge.
It seems likely that expanded market pulp exports from Alaska will find their principal markets around the Pacific Rim and particularly in the developed or emerging countries of Asia. There is potential for continued growth in pulp demand in the region.  Given constraints on domestic fiber supplies, environmental and cost considerations in domestic pulp production, and continued strong growth in domestic paper and board consumption, Asian demands for pulp imports will likely continue to grow similarly to recent historical trends.  Japan will be the source of most of this growth.  Both FAO and IIASA projections suggest for Asia as a whole that this increase by 2000 could be as much as twice the current pulp imports.  For Asia this would amount to imports totaling some 2.0 million metric tons.
A new Alaska mill will produce long-fiber pulp in direct competition with existing major producers in British Columbia and the U.S. Pacific Northwest.  Current trends in capacity expansion and the projections of both FAO and IIASA indicate that these regions will continue to figure prominently in Pacific Rim and specifically Asian pulp markets.  If the IIASA projections are correct, however, rising wood costs could push the U.S. Pacific Coast into the role of marginal producer, with the bulk of export growth going to British Columbia. It is also clear that Chile and, to a lesser extent, New Zealand are likely to capture growing shares of this trade. And Brazil will be mounting a major effort to substitute its short-fiber pulps for traditional coniferous grades. Both the IIASA and FAO projections suggest that Brazil will have some success in this venture.  Cost competition will be keen in this market, particularly within light of the prospect of constant or only limited growth in real pulp prices.
Given the substantial cost advantages of South American producers, a minimum condition for a successful Alaska expansion will be the ability to deliver its product in Asian markets at costs at least as low as those in the Pacific Northwest and British Columbia.  We are unable, however, to identify any particular cost advantage for an Alaska mill relative to its closest potential competitors in western North America. Our analysis examined both a traditional bleached kraft mill and a smaller, high yield, thermo-mechanical pulp (TMP) mill.  In either case, an Alaska mill seems to face cost problems across the full range of inputs, with major disadvantages in wood, labor, energy, and construction costs.  The cost disadvantage is even greater when compared to the U.S. South or major Latin American producers.  Thus, although a market may exist, it is not immediately obvious that Alaska is in a position to pursue some share of it.
These results should he viewed only as broad indicators.  Given the time and resource constraints of the present study, we have relied exclusively on secondary and published data to support our analysis.  A far more detailed and specific study of both the market and cost sides is needed to reach a definitive conclusion on any particular project.  Three items merit specific mention for further study:
1.  There is a strong need for close attention to resource and capacity developments in the southern hemisphere.  The rapid growth of plantation-based mills in South Africa, New Zealand, and South America has dramatically changed the nature of competition in the global market for pulp in the past two decades.  In sharp contrast to the dependence in western North America on natural forests, this resource base was designed and grown to meet mill requirements.  The mills operate with considerable advantages in wood costs relative to mills in the northern hemisphere using fiber from natural stands.
2.  Previous studies note the potential attractiveness of a TMP mill on the basis of lower capital costs, lower environmental impacts, higher pulp yield, ability to tailor pulp characteristics to specific customer needs, and so forth.  High-yield pulping technology has been developing rapidly and is characterized by considerable flexibility in its adaptation to specific resource and market conditions. Detailed analysis may reveal opportunities for targeting particularly high-valued markets, reducing energy and wood costs through technical adaptations, or lowering transport costs through pooled shipping arrangements with existing pulp facilities.  As a consequence, this option would seem to warrant close and continuing evaluation.
3.  A final key item relates to the cost and availability of wood fiber.  In our analysis, we have identified Alaska as a region of pulp production that is relatively high in wood cost, owing in part to high costs of logging and transport of logs and chips.  Though our estimates are admittedly crude, this is a crucial concern, because wood is the main variable input cost in production (outside Latin America).  At the same time, it is evident that the bulk of wood supplies to a new mill in Alaska must come from the National Forest and that the Forest Service is under intense pressure to limit both current and future harvest levels.  These circumstances seem to warrant a thorough analysis of prospective future wood supplies and costs under several assumptions about prospective Agency policies and levels of operation of existing log, lumber, and pulping facilities.
This study was undertaken through a grant from the USDA, Forest Service, Pacific Northwest Research Station and the Center for International Trade in Forest Products at the University of Washington. The report, part of a larger study of Alaska forest resource opportunities, was completed in 1989.  The trends noted in the study have continued and the conclusions, based on data available at the time, remain valid.