One of our faithful readers, Desmond Smith, recently asked me to comment on the widely and wildly fluctuating currency exchange rates and what they might mean for the pulp and paper industry. I am humbled that he thinks I would have any wisdom to share on this subject.
Let us start with a couple of facts: The ratio of the euro and the U.S. dollar is currently about where it was in June 2006, a lifetime ago in today’s rapidly moving markets. Yet only a few months ago, the U.S. dollar, in relation to the euro, was approximately 27% cheaper than it is now. The yen seems to be going the other way.
Let us cut to the chase: both oil and market pulp are sold in U.S. dollars worldwide. This is a problem, for everyone who wants to be in the market to buy or sell oil or market pulp is automatically in the currency hedging business. This is not a problem when world economic matters are stable, but that has not been the case for a while and may not be the case for some time to come. Were I king (and thank your lucky stars I am not), I would be on the same track as Steve Forbes of Forbes Magazine fame: settle commodities exchange pricing in gold. That’s not quite where Mr. Forbes is (he wants to put the United States back on the gold standard), but I think it would serve the purpose. Oil is a good case in point: oil has barely risen in price since 1970, as long as you denominate its price in gold.
A gold standard for commodities exchange pricing does a neat thing: it separates the buying and selling of the commodities from exchange rates. A large company can then have exchange rate specialists that know all about hedging gold and market specialists that know all about pricing commodities. It is sort of like what some papermakers have concluded: multi-fourdriniers, in some cases, just happen to be better than gap formers (please, equipment manufacturers, don’t take it personal and write me on this one!). In papermaking and commodities trading, sometimes trying to do too many things at once is just asking for an unneeded level of complication and sophistication.
Today’s complications, I believe are slowing markets, for transactions are being delayed while traders wait for currency markets to settle down. Pulp and recycled fiber markets have crashed in the last few weeks, in part, because no one knows what the currency will be worth when it is finally in their bank account. This is bad for business. So why would we not go to a gold standard? Perhaps a market on its own could choose to do so. However, the politicians would not stand for it, for it takes away their ability to cheapen a currency, as the Bush Administration did, to serve their own purposes (with disastrous results). Politicians want flexibility that the historic behavior of a 4000-year-old standard of currency -- gold -- does not allow. And here y’all thought I was blindly devoted to Mr. Bush!