Manufacturing Costs in theGlobal Market Pulp Sector

Manufacturing Costs in theGlobal Market Pulp Sector:

Manufacturing costs play a pivotal rolein bothshort- and long-term dynamics of the global market pulpindustry.On a short-term basis,the level and shape of theindustry-wide average variable cost curve determines mar-ket price for a given level of demand.In the long-term,thereal (inflation-adjusted) price of pulp will be set by thelowest cost producer.

The rate at which prices go up or down is a function ofthe steepness of the industry-wide cost curve.The steeper(more inelastic) the curve is,the more volatile the pricingenvironment.A relatively flat (more elastic) cost curve isconsistent with a relatively milder pricing environment.Putanother way,the industry can achieve price increases atlower operating rates as the cost curve steepens.The following analysis focuses on regional average vari-able costs.It focuses on average costs for pragmatic reasons,although technically speaking,prices are set by the marginalrather than the average mill.Also,entire regions do notshutdown,of course,when markets are poor.Rather,thehighest-cost mills will shutdown regardless of the region asprices fall to their variable cost levels.

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