Fundamental Analysis

The Fundamental analysis provides the essential background information on the commodity and applies moving average to analyse the individual forces that affect prices. A break above the moving average indicates an uptrend, while a break below the moving average signifies a downtrend. However, it should be noted that the fundamentals tend to change more slowly than the signals in the technical analysis.

Sources

The price and fundamental data used in the fundamental analysis is collected from several different stock exchanges and (regional) data providers, including national and regional statistics bureau, commodity manufacturers, industry organizations, and research institutes.

Some data providers only publish quarterly or yearly data, but the fundamental analysis is updated on a monthly basis, thereby reflecting monthly corrections to this data as well as the recent prices. The exact date of an update can be seen below each individual graph, and at the top of each page.

Furthermore, there will be forecasts from some data providers included in the analysis, which is indicated with grey boxes. Although the boxes may be covering both fundamental and price data, they will only denote the fundamental data. This, as price forecasts is never applied in the fundamental analysis.

This section includes (up to) seven elements; Supply, demand, the supply/demand balance, inventory, cost drivers, market watch and a regression (estimating the collective effect of the fundamentals.) Their individual price pressures are shown in the bottom of the coloured triangle in the overview section. For some commodities, data will not be available for one or more sections.

Supply

This section typically shows the global and regional production levels, but might also include additional graphs such as capacity utilization or area harvested, depending on the type of commodity.

If the production is in an uptrend, the raw material becomes more accessible, and there is a downward pressure on the commodity price, all else equal. Conversely, when production is in a declining trend, the availability becomes scarce and leads to an upward pressure on the price.

The arrow on the top of the page indicates the current price pressure from the supply section.

Demand

This section shows the global and regional trends in demand for the commodity. Usually, this will be supported by the development in the demand from various end use sectors, and the demand per capita for some soft commodities.

If the demand is in an uptrend, there will be a shortage of the commodity and the price will increase, all else equal. However, a downtrend in the demand will create more competition among suppliers and put a downward pressure on the commodity price.

The arrow on the top of the page indicates the current price pressure from the demand section.

S/D-balance

The supply/demand balance combines the supply and demand, in order to show whether there is an excess or shortage of the commodity in the market.

This section generally includes a global supply/demand balance, along with a comparison of the commodity price and the supply/demand balance in per cent of demand. A supply surplus leads to a downward pressure on the price, while a supply deficit will push up the price of the commodity.

The arrow on the top of the page indicates the current price pressure from the S/D balance section.

Inventory

The inventory section presents the world and regional inventory levels. In order to adjust the world inventories for demand, they are also shown in weeks of consumption. This is then compared to the commodity price, and typically also shown in a scatterplot to evaluate whether the price is fair given the inventory level. There might be a few additional graphs depending on the commodity type, such as cancelled warrants (and a comparison of the S/D balance and the inventory).

If the consumption adjusted inventory is in an uptrend, it suggests that production is higher than demand, which will lead to a downward pressure on the commodity price. Nonetheless, if the consumption adjusted inventory is in a downtrend, it is an indication that demand is higher than the production, and the commodity price will be pushed in an upward direction.

The arrow on the top of the page indicates the current price pressure from the inventory section.

Cost Drivers

This section shows the current trends in the production costs of the commodity, and presents an estimated production cost as well as an estimated profit margin for the producers. The estimated production costs include the main variable costs, and if this measure is in an uptrend, there will be an upward pressure on the price of the commodity. Conversely, if the estimated production costs are in a downtrend, it will result in a downward pressure on the commodity price.

The arrow on the top of the page indicates the current price pressure from the cost driver section.

Market Watch

This section generally includes regional price comparisons, speculation trends for the commodity as well as seasonality and volatility analyses.

These factors might indicate an expected price direction, how much it is expected to fluctuate within the next year, and whether there is a seasonal effect in the commodity price.

The arrow on the top of the page indicates the current price pressure from the market watch section.

Regression

This is the concluding section, summing up the price pressure from the supply, demand, inventory and cost driver sections.

It presents a regression based on supply, demand, inventories, cost drivers, the EUR/USD exchange rate and the PMI. It calculates an estimated price and fair value range, and compares them to the commodity price.

In general, the slope of the fair value range indicates the expected direction of the commodity price, but if the price is outside the range, a correction in the price is expected until it re-enters the fair value range.

The arrow on the top of the page indicates the current price pressure from the regression section.

Next section: Business Cycle Analysis