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Pricing Follies

Week of 17 Sept 07

I was recently engaged in a public exercise concerning prices of product in a certain grade of paper—and was once again reminded of the futility of this effort.

Now, it is a well known fact that our industry, particularly in the United States, has been found guilty many times of price collusion. Senior executives have gone to jail under such scenarios. Trade associations and others spend a great deal of time making sure their organizations are not a vehicle for such shenanigans. I do not intend to make light of such issues. Yet, we really know very little about actual transaction prices.

About the only place where legitimate prices can be found is on the FOEX market in Helsinki. There is an attempt by this organization to operate a transparent market, and their effort is a noble one with as many safeguards as one can have for such a system.

The problem with most other attempts at setting markets is a lack of transparency. Nothing beats the real-time open exchanges found for commodities at, for instance, the NYMEX in New York or the CME Group in Chicago. There are a number of weekly newsletters that, with a sincere attempt, try to establish prices in various markets and grades. Many of these, however, depend on private phone calls or emails to obtain the data. Such sources are suspect, for they are not out in the open and are one sided.

If, for instance, I call you up once a week and ask you what you are paying for OCC (Old Corrugated Containers), what is your motivation as a buyer? To tell me a low price, for sure. For no doubt you are buying from many sources each week and you will probably give me the lowest price you are paying, for that is your motivation. On the other side, if you are a seller of OCC and I call you up every week, you are probably going to give me the highest price at which you are selling, for that is your motivation.

Out in the open, either (old fashioned) open pit or electronic, is the only way to fully assure that a true market price exist for any commodity. Everything else is just “trust me.”

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