We believe that forecasting prices for commodities requires three different aspects:
Business Cycle Analysis – refers to the discipline of analyzing fluctuations in the economic activity. These fluctuations occur around a long-term trend (macro economical trend), and typically involve shifts over time between periods of relatively rapid economic growth and periods of relative stagnation or decline. The increase or decrease in economic activity has a direct impact on raw materials and their supply & demand situation and is essential in the long term picture of the price trends.
Fundamental Analysis – In a market economy, price is determined by the interaction of supply and demand. The study of supply and demand is also known as the study of fundamentals or "fundamental analysis". However, supply and demand is not enough. That is only half the equation. To make a complete fundamental analysis requires a study of the four different factors that effects price namely; supply, demand, inventory and cost drivers for the specific commodity.
Technical Analysis – refers to the discipline of forecasting the future direction of prices through mathematical indicators and other tools. The right combination of these tools can both give long term forecasts, but also pinpoint the exact start of a new price trend.
Analytical models
The above figure shows the different analytical models used on www.kairoscommodities.com to forecast commodity prices. Our aim is to combine macro economical trends (business cycle) with the supply & demand dynamics of every commodity (fundamental analysis) and incorporate these into the mathematical timing aspects (technical analysis). This way we analyze all the aspects for a given commodity in a wider and more complete analytical context.
Why the need of three different analytical models?
Firstly - Almost all commodities are affected by movements in the global economy - so being aware of the movements in the global economy is a necessity if you want to know where the price for any commodity is moving.
Secondly – fundamental analysis provides the basic information and understanding that is needed for any commodity manager to understand what drives the price for a specific commodity. To forecast prices for any commodity you need knowledge of the key drivers for the specific market.
Thirdly – Technical analysis has many purposes – it identifies changes in price trends and it furthermore serves as a “warning system” that puts you in front of any price movements/corrections. One important factor for technical analysis is that it’s the only type of analysis that can incorporate market speculation. And speculation has become a very important factor in all commodity markets especially over the last few years’, which is why technical analysis is essential.
The three different types of analyses all have their strong and weak points but by combining them we add to the (credibility) strength and robustness of the forecast! And we have a track record that validates this – just ask some of our customers.
The following links provide further information, description and theory behind the different analytical models:
Business Cycle Analysis
Links to other articles about commodity risk management: