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In the agricultural industries, the whim of nature can distort prices wildly between the very cheap in a bumper crop year and the very expensive in the leaner years. For a farmer, investing in growing produce is therefore a risky business, with no guarantee of a return on spending. Hence, hedging, the process of fixing a price for a commodity over an agreed period to reduce exposure to fluctuating prices, is a common practice. If the price drops below what you agreed, then well done to you, but if it goes higher, then the client is quids in. Either way, the price is set at a level both parties are happy with, so, whatever the market does, everyone knows where they stand.

 Printers, being an observant bunch when it comes to potential cash savings, have eyed this trend with interest. Paper prices are inflating rapidly - in the past year, price rises of up to 30% have been reported. So if you fixed your price at the beginning of 2010, you would be forgiven a smile.

 It’s fair to say David Clarke, managing director of Slough-based Vario Press, is smiling very broadly indeed. At the start of 2010, his customers were asking for savings over the course of the year and Clarke knew the only way he could guarantee that was if he could fix the price of his paper. 

 "I had seen people hedge in other industries and thought there was no reason it shouldn’t be done in print," he explains. "At the start of the contract, I went about 3-4% higher above the then price, as a sweetener. Twelve months later, prices are at least 15% higher. We have obviously made a massive saving."

 Clarke fixed his price with two major suppliers. One stayed true to its word and stuck with the price over the course of the year-long contract. The other backed out, claiming force majeure at the first sign of a rise in the price of paper. "This was not ideal," admits Clarke. "We had an agreed price for the year with clients so this was a massive hindrance."

Stock options
Unfortunately, when negotiating a fixed price, this is a danger. Difficulties can also arise if you use multiple paper products. Clarke is perhaps fortunate that Vario Press mainly uses MCS triple-coated from Arjowiggins Appleton, giving him an advantage at the negotiating table.

 "Obviously, using a set product gives us an advantage in hedging, but if any client wants good prices they have to be prepared to trade a bit," reveals Clarke. "If you say to them, we are going to buy these main brands in bulk that you will have to use in order to fix our prices and give you a good price, they will turn to you and say ‘well done’ as it also gives them the security of price they need. It’s a win-win."

 From the merchant’s point of view, hedging can be just as good a deal, though Paul French, managing director of Paperlinx merchant Robert Horne Group, says each case is judged individually.

 "Merchants do sometimes allow customers to buy a fixed rate over a fixed period of time," he says. "However, any agreements made are customer specific and are dependent upon the volume plus the mix of stock and indent, sheets and reels."

 It can get quite complex, then, and as such, some may view hedging as a bit of a gamble for both parties. It is very difficult to predict future price fluctuations from the merchant’s point of view, as Antalis McNaughton’s regional marketing director Richard Champion confirms. He says that hedging in relation to price movements is not an area in which the company has particular expertise or experience, admitting that "it is a commercially technical field". Part of the problem in predicting, says Champion, is that paper prices in the UK have gone from a relatively low level to where they are today.

Pulp friction
And the crystal ball is even cloudier in its forecast for 2011. Those merchants that did negotiate a fixed-price contract last year no doubt lost out as pulp prices kept rising. From the merchant’s perspective, a fixed price from the mill is key to passing on a fixed price to customers.

Kieran Ferguson, commercial director at cartonboard merchant Warren Board, says that this is increasingly looking to be an unlikely occurrence. In the carton and graphical boards sector, he says the vast majority of mills are shying away from fixing prices for any longer than a quarter, while some are granting validity for only a month.  "With the unprecedented cost increases seen this year they are reluctant to tie themselves into any long-term pricing," he says.

 It would seem that some in the market are certainly expecting cost rises. Denmaur Independent Papers marketing director Peter Sommerville says this is certainly the case in newsprint and that mill groups are indicating coated mechanical qualities are also "certain to rise" in January. However, it is not yet certain if the same applies for woodfree coated and uncoated markets.

 He reveals: "With all the talk of international trade tariffs in the woodfree sector and the general uncertainty over currencies, it is proving extremely difficult to gauge accurately as to what we are seeing in our proverbial crystal ball."

Robert Horne’s French adds that, though costs have shown some signs of stabilising, and that pulp prices may have peaked, he is not expecting significant reductions and cannot rule out future rises.

 It’s a nervous situation, then, and one that BPIF corporate affairs director Andrew Brown believes is down to a number of variables. "I have spoken to a variety of people in the paper industry who believe that prices may level out in 2011," he says.

"Some experts even seem to think that there may be a fall in prices because demand for paper in Western Europe could fall faster than supply and because the short-term supply issues (including hurricanes, earthquakes and strikes) that caused major shortages at the start of the year have passed through the system. Whether the UK will benefit from any such shift in the market to the degree that other countries may do is at issue though, as the UK market is seen as less attractive by many merchants because of shipping costs and exchange rates."

 This ambiguity in the market along with the rises of last year makes negotiating a fixed-price term for 2011 at best difficult, at worst impossible. Clarke, for example, has gone back to his 2010 fixed price supplier and found the door is not fully open to a similar deal.

 "I am in negotiations to do the same again, but they are obviously slightly apprehensive as they would have lost out towards the end of the year," he says. "Obviously, because of the rises, we will take a hit as our starting point is the higher price. I am hopeful we can do a deal and I’ve looked at ways to minimise the jump in costs from last year – the main one being buying my paper in bulk. By doing this, I should be able to get away with only a 10% increase in my paper costs, which is lower than it would have been."

 Clarke’s supplier has provided him with a spreadsheet of the company’s paper usage last year. From this, Clarke can work out how much paper he needs per month and get it delivered in advance in a container. He has the room to store it and it reduces the deliveries for his supplier, therefore reducing its costs. This reduction is then passed on to Clarke.

 "It means paying for it up front but I don’t mind as I know we’ll use it," says Clarke. "And by buying in bulk it saves the supplier on delivery costs so will hopefully smooth the price out so the rise from last year is not so much of a hit."

Michael Moradian, owner of Colindale-based Print Express London, says this way of working is quite a common deal: the printer accepts to order a certain amount of tonnage or number of pallets at the pre-increase price, within a specified time period. However, he warns that, while for cash-rich print companies this may be helpful, it would not be advisable for a company trading on an overdraft where the interest payment could eat away at potential savings.

Compare the market
That said, the method of planning ahead to offset rises, rather than hedging, is seen by some as the more sensible way of working. For example, if rises are predicted, it is a good idea to look around for comparable, cheaper products that you can substitute for the stock hit by price rises. The merchant is in a good position to do this and so building a good relationship with them so they can advise you is key.

 This is exactly what happens at Denmaur, Sommerville reveals. "The publishing market, with its shorter purchasing chain, always adapts much better to a moving market and, therefore, it’s naturally in our mindset to provide alternative paper products or concepts, whenever we have price inflation or deflation."

Warren Boards’ Ferguson adds: "Planning ahead may allow customers to order tailor-made material rather than having to purchase standard-size stocks. As part of our service, we offer customers the opportunity to order not just standard sizes from pallet stock but material cut to their actual size from our own reel stocks."

 This is not to say you won’t get a fixed price if you try your luck with the merchants when contract renewal time comes up. However, with the market for 2011 looking to be as difficult to predict as it was in 2010, this type of deal may well be harder to come by if merchants have previously lost out as a result of them.

That’s when the forward planning becomes essential in price negotiations. Whatever you choose to do, negotiation
is key and working closely with merchants should ensure printers can keep their paper costs manageable as 2011 unfolds.