Identifying the marginal supply of wood pulp
Reinhard J, Weidema B P, Schmidt J H (2010)
2.-0 LCA consultants, Aalborg, Denmark.
Context and objective
This report aims to summarize the steps, arguments and market data that are needed to identify the long term marginal supplier affected by a long-term1 change in demand for Bleached Hardwood Kraft Pulp (BHKP) and Bleached Softwood Kraft Pulp (BSKP).
The procedure and standard assumptions
Put very briefly, if the general trend in the market is expanding or stable, a long-term change in demand is assumed to affect the supplier that has the best options for expanding or renewing the production capacity. This most competitive supplier is often the one with the lowest production costs.
If the market is sharply shrinking, so that production capacity is being reduced, a change in demand is assumed to affect the least competitive supplier.
In some situations, suppliers are constrained in their ability to react to a change in demand, e.g. because of lack of available raw materials or because of production quota. In these situations, an additional assumption is needed, namely that constrained suppliers are not affected by changes in demand. This implies that the demand has to be satisfied by another un-constrained supplier.
The above assumptions are based on simple market economics.
In order to identify the most or least competitive, un-constrained supplier, it is thus necessary to have information about:
- The market in question, i.e. the products, their properties, the geographical and temporal delimitation of the market and the trend in the market.
- Market constraints. In general, we assume that suppliers are not constrained unless there is evidence to the contrary. This implies that the burden of proof lies on those who claim that a process is constrained.
- Competitiveness of different suppliers (typically represented by their production costs).