Research on the correlation between the closing price of pulp futures main contract and the market price of scrap yellow board paper

Introduction: Pulp and waste paper are the two major raw materials for paper making in China. In the spot market, the two show a certain substitution, such as the color paste instead of imported waste paper used in the box board paper hanging, and if the price is appropriate, the downstream white cardboard paper of the pulp can also replace the white board paper. In such an alternative background, as a hedge tool for pulp spot price fluctuations, can pulp futures also effectively hedge the risk of scrap yellow board spot price fluctuations?

As can be seen from Figure 1, there is a certain similarity between the market price of waste yellow board paper and the closing price of the main contract of pulp futures. Pulp and waste yellow board paper are two major raw materials for papermaking. From the perspective of papermaking process, pulp can completely replace waste yellow board paper, but waste yellow board paper is difficult to replace pulp. There is a one-way substitution relationship between pulp and waste yellow board paper, although it is not a substitute for each other, but in a specific period of time, this one-way substitution relationship will also make the price of pulp and waste yellow board paper have a certain linkage.

As we all know, due to the lack of effective risk hedging tools, the current market price of waste yellow board paper fluctuates frequently, increasing the difficulty of market operations. So can pulp futures be used as a risk hedging tool for the waste board market?

First of all, this paper studies the correlation between the closing price of the main contract of pulp futures and the market price of scrap yellow board paper. After analysis, it is found that the correlation between pulp futures and waste yellow board paper decreases year by year.

According to the data analysis of Zhuo Chuang information, since 2019, the correlation between the closing price of the main contract of pulp futures and the price of waste yellow board has declined year by year. In 2019, the correlation coefficient between the two reached 0.75, when in the context of a significant reduction in external waste, driven by the rise in the price of waste yellow board paper, the spot price of pulp rose significantly. In 2020, the correlation coefficient between the two reached 0.51, the supply of waste yellow board paper is mainly from the domestic market, while the supply of pulp is mainly from the foreign market, affected by public health events, and the production situation of domestic and foreign factories is opposite, the spot price of pulp period has risen sharply to a record high, while the price of waste yellow board paper has bottomed out in the same period. In 2021, the correlation coefficient between the two dropped to -0.74, in which the price of waste yellow board paper rose, while the spot price of pulp period fell from a historical high. As can be seen from Figure 1, the trend of the two is still diverging in 2022, and by the end of February, the correlation coefficient of the two is only -0.68, with a high negative correlation.

The delivery target of pulp futures is bleached needle pulp, and the color paste that is more closely related to waste yellow board paper is not the delivery target. In addition, according to Zhuo Chuang information research shows that the pulp market and waste yellow board market supply structure is almost completely opposite, the current domestic waste yellow board paper self-sufficiency rate is as high as 100%, while the domestic pulp import dependence is higher than 60%. The difference of supply structure leads to the limited overlap of factors affecting the price of pulp and waste yellow board paper, that is, the independence of the price trend of the two is becoming stronger and stronger. Under the above background, unless the closing price of pulp futures and the market price of waste yellow board paper is tightened to a historical low, the triggering conditions for the replacement of pulp and waste paper spot are opened, and the correlation coefficient between the two trends may rise to a high point. Otherwise, it is difficult to coordinate the closing price of the main contract of pulp futures with the market price of waste yellow board paper.