Understanding + the economy I Economy of futures, by Joan Vila

It’s been a few weeks, maybe eight, that my main concern at work is the monitoring of certain futures markets. The global commodity price turmoil in 2021 has led us into situations we never would have imagined before. The month of February began with increases in the price of certain raw materials, a movement that we tried to stop by buying more than what we consumed to make stock for the coming months, but they went up and up every month until July. The problem was the impossibility of passing on the costs in the final product, having to work with negative margins. The question we asked ourselves was: why don’t other competitors raise prices? The answer was that many of them had done financial operations in futures markets, ensuring the volume and purchase price when the price was low, and this protected them from increases. Looking at the world market, we discovered what had happened: China, in March, bought cellulose pulp massively, almost half of its annual consumption, a fact that caused world prices to rise exaggeratedly. In April it had already reached its highest point and in July the price began to drop, as a result of the fact that they had already bought enough material. In China, the market has behaved elastically and transparently: an increase in buying due to speculation was followed by a buying spurt when the price went up, which forced prices down, so that from January to April prices had risen 67%, and from July Until December they had already been reduced by 36%, in an attempt to find stable price levels. But this it was not like that in Europe, since prices rose continuously until they reached the top in July and have not moved a single dollar, since then until today.

It is difficult to understand a market where the price does not move a dollar, it indicates that it is a market that not transparent enough: either the prices are agreed, or there is so little movement that it is not capable of modifying the price. After many months of observing, the conclusion is that in Europe the market has mostly made futures contracts, meaning that in the free market there are no large movements or any pressure to lower the price.

We have seen the same thing that we have been seeing with the pulp market with gas and electricity prices. As of April, the price of electricity rose from €66/MWh to €101/MWh, a movement that continued until reaching €320/MWh in December. Gas also made a similar movement, going from €24/MWh in July to €96/MWh in November. Until October, the situation continued to be the same, with customers who did not accept any price increase, making manufacturing margins more negative each month, until in that month, we and the Italian manufacturers stood up and communicated to the clients that we stopped production. If they wanted product, they would have to pay more. Since that month, the prices of our products have not stopped rising, so that, since January 2021, they will have risen throughout the year by 67% and we have finally been able to recover the manufacturing margins lost throughout the year.

In the gas and electricity market things have happened the same. Many buyers (private and industrial) had fixed-price contracts until the year changed. Until now they had the costs safe from increases but, suddenly, they have found themselves with exaggerated price increases, having now to transmit these prices to customers. For many in January the price of electricity will rise 3 times and, obviously, it is difficult for them to understand what is happening.

The conclusion of this episode is thatFutures or fixed price contracts make the markets stop being elastic and redirect. Faced with a rise in prices, the reaction of a market has to be the drop in consumption proportional to the rise, which is what the Chinese market has done. The European market, on the other hand, has not moved a single dollar because it was insured, causing consumption to remain the same. When these fixed-price contracts expire, the market will react sharply, reducing consumption and causing prices to drop dangerously, entering a cycle with more and more intense peaks and valleys, precisely the movement that the futures market He wants to pretend that it doesn’t happen.

The result will be a very high price increase for all products during the month of January and subsequent months, a rise that follows the one that was already being seen in the last quarter of last year. And the one that was not seen, modifying the content of the products downwards, a phenomenon called ‘reduction’. Thus, many rolls of paper have reduced their content, many liquid products have reduced their volume, even egg packs with 10 eggs instead of 12 have appeared.

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The inflation that comes upon us will cause damage, because the immediate effect will be the reduced sales and pressure to raise wages, entering an inflationary spiral reminiscent of what happened in the years 1978 to 1982. Then, the recession was very serious, but the solution was to consume less and now it does not seem that there can be any other way out due to the fact that the central banks no longer have any more margin to introduce more money into the system in a significant way. Nor will interest rise much, because the debts of the States are out of control.

Whatever happens, the truth is that I have stopped doing my usual job of looking at energy costs and new products, to dedicate my time to futures markets. The world of production is dragged by the financial world, an allegory of what is happening to us: the financial economy conquers and crushes us.


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