Online seminar. The Impact of Exchange Trade on the Development of the Timber Market

Description

On April 27, 2023, the Center for Food and Land Use Research at Kyiv School of Economics (KSE Agrocenter) held an online seminar on the topic «Impact of stock exchange trading on the development of the wood market in Ukraine.» Representatives of the forest sector of Ukraine and international experts were invited to the seminar. The seminar was moderated by Mariia Bogonos, head of the KSE Agrocenter.

As noted by Ihor Lytsar, acting general director of the State Enterprise «Forests of Ukraine», the formation of an organized timber market accelerated in 2021 due to the entry into force of the Laws of Ukraine «On Capital Markets and Organized Commodity Markets» and «On Commodity Exchanges».

At the same time, Arsen Ilyin, a representative of the National Securities and Stock Market Commission, noted significant prospects for the development of the commodity exchange market of wood, which consist, first of all, in the launch of trade in derivatives for wood. In addition, there is a possibility of starting exchange trading of energy wood and quotas for CO2 emissions.

The head of the State Agency of Forest Resources of Ukraine, Yurii Bolokhovets, emphasized that the development of wood exchange trade is part of the general reform of the forest industry within the framework of The State Forest Management Strategy of Ukraine until 2035. The implementation of this strategy is necessary for the deepening of cooperation between Ukraine and the EU in the forestry sector. The development of an organized commodity market increased the value of timber and, consequently, forestry revenues, helping the industry to attract capital investment even in the face of full-scale war. In addition, income growth stimulated an increase in tax revenues from the forestry sector.

International experience was also considered within the framework of the seminar. Vaidotas Jonutis, head of the trading department of the Lithuanian stock exchange Baltpool, shared the experience of wood trade in Lithuania. Local timber auctions include different types of electronic auctions: open auctions for spot contracts with a delivery period of up to 3 months and closed auctions for contracts with a delivery period of 6 months or more. In closed auctions, participants cannot see each other’s bids, which can distort the pricing process. In general, the current trading system on Baltpool is characterized by a number of weaknesses: the possibility of bypassing exchange trading and concluding contracts between the buyer and the seller directly at non-market prices; the price of long-term contracts does not take into account the change in transport costs; there are no clear principles for the execution of exchange contracts. Currently, the management of the exchange plans to change the existing trading model by: establishing a system of physical audit of the delivery process and inspections of forest warehouses; introduction of a system of fines for violating the rules of stock trading; integration of automatic electronic accounts into the trading system of the exchange.

KSE Agrocenter researcher Pavlo Martyshev presented research on the impact of stock exchange trading on the wood market in Ukraine. The launch of electronic timber trading in 2019 and the development of licensed exchange trading from 2021 stimulated the growth of timber market transparency due to two factors. First of all, the integration of the data of commodity exchanges with the Unified state system of electronic accounting of wood strengthened the control over the market at all stages of sale of wood materials. Also, the increase in sales prices reduced the economic feasibility of the existence of the shadow wood market, as it became more profitable for forest farms to work legally. In addition to the increase in revenues and taxes in the forestry industry, an important economic effect of the launch of organized commodity trading is the increased incentives for increasing the efficiency of wood processing. According to the estimates of market participants, the reduction of the shadow market and the increase in the price of raw materials motivated inefficient sawmills to modernize their operational processes or leave the market.

At the same time, licensed commodity exchanges in Ukraine have already overcome a number of shortcomings that are present in some European exchanges. For example, a developed network of regional stock exchange agents allows for inspections of the physical process of wood supply under stock exchange contracts. In addition, there is a developed monitoring system for the execution of exchange transactions.

In general, the seminar showed the importance of the development of the wood exchange market in Ukraine. Prospective directions for the further development of the sector may be deeper integration of trading systems of the stock exchange with state electronic services, legislative regulation of the over-the-counter wood market, launch of trade in long-term contracts and derivatives for wood, modernization of the monitoring system for the execution of stock exchange agreements.