You all know that predicting commodity cycles can be super profitable so long your analysis is on the ball.
Here is a practical lesson on how to predict commodity cycles.
STEP 1: Access Historical Charts
I Googled “Copper Price Historical Chart,” and landed on this 45 year chart.
The recessionary periods are represented by vertical gray bars. As you can see that the prices of copper started spiking from 2003-04 onwards, crashed after the 2008 bust and then picked up from 2010. Volumes also have picked up from 2010 on, and the copper price spiked to $4.50 (per lb) by 2013-14, and then subsequently corrected. Thereafter it resumed its upward march and is currently at around $3.05 with support at $1.50 and resistance at $4.50. As you can see, the volumes have picked up in recent years, which is a bullish signal.
STEP 2: Search For The Commodity’s Global Global Demand in the Near Future
The next step was to figure out how copper demand will pan out in the near future. I Googled “global copper demand 2020” and landed on a mid-2017 document that discussed about the global copper demand and supply.
(You can get authoritative documents for any commodity so long you know how to search intelligently on Google.)
In this document I learned that:
a. Substantial capacities were added between 2011-16 and that capacities were not expected to increase much between 2017-2021.
b. That demand will outstrip supply as we head towards 2020, a factor that will push prices higher.
c. That no substantial investment in copper mines is expected so long prices do not rise dramatically.
d. Prices are expected to rise faster than costs, resulting in better margins.
e. That the supply of copper scrap increased substantially, a factor that helped keep prices in check despite demand spiking up.
f. That China’s industrialization cycle may end by 2026, a factor that will ensure that copper prices do not spike up. In fact, it is expected that copper prices will remain steady after 2026 or taper off.
STEP 3: Search for the Commodity’s Uses
STEP 4: Global Disruptions
The world is now cruising uncomfortably on rocking terrain. America has triggered a global trade war, countries are resorting to protectionism, and there are geopolitical tensions (N Korea-USA, Israel-Iran).
Any escalation of any one situation can lead to a drop in commodity prices (except precious metals).
STEP 5: Weigh the Bullish and Bearish Factors
|7-5-18||Aarey Drugs||2.73 lakh shares bought at around 55||Investors||This is a drug trading company, hence this may not be a very bullish signal|
|7-5-18||Deccan Gold Mines||--||--||Track the stock. Promoter sold 72000 shares but the stock spurted 13%. This is a bullish signal.|
|7-5-18||Kwality||9,13,584 bought at 50.50||Promoter||Stick closed at 51.50. This company faces corporate governance issues. Track at your own risk.|
|7-5-18||BEML||2,90,079 bought at 1061||Tata AIG||Good sign, long term|
|7-5-18||McDowell Holdings Limited||75,250 bought at 41.80||Investor||Unsure how to label this purchase. Stock is a laggard. Track if you like.|
STEP 6: Analysis
Though demand of copper outstrips supply at the moment, the increased supply of copper scrap and the possibility of capacities getting commissioned have kept prices in check. Nevertheless, the demand for copper will increase as EVs and solar energy applications worm their way into daily life.
At this moment, it will be safe to say that there is nothing majorly bullish about copper because if prices spike up, new capacities will be added very quickly, and existing production disruptions also will get set right, leading to a correction.
Therefore, as things stand, with the possibility of trade wars upon us, we can assume that copper will be range bound with support at $1.50 and resistance at $4.50. Anything over $4 or so will make new capacities kick in.