How manufacturing costs affect paper prices

The upside

It's a good thing that costs don't control prices. If they did, producers would always operate at breakeven. Shareholders and producers' balance sheets would not be able to stand that, and producers would disappear. Producers make enough money at the tops of price cycles to maintain their equipment and balance sheets in the bottom half.

With an understanding of the market's dynamics, you can plan for the ups and downs far enough ahead to budget accordingly. You can better negotiate contracts with the right length and terms. You can manage inventories to lower — or higher — levels more appropriately.

You can also time investments in capacity and M&A to maximize the use of precious capital. And, of course, you can hedge against cost increases and price swings.

Rodney Fisher (rfisher@fisheri.com) is president/founder of Fisher International, a consulting firm for pulp and paper manufacturing based in Norwalk, CT.