A Practical Guide To Predicting Commodity Cycles

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.

Example: Copper

STEP 1: Access Historical Charts

I Googled “Copper Price Historical Chart,” and landed on this 45 year chart.

predict copper super cycle

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.

copper mine capacity 2020

b. That demand will outstrip supply as we head towards 2020, a factor that will push prices higher.

Copper demand-supply scenario

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

Googling “uses of copper” helped me discover that copper is used in the following applications:
a. Electrical equipment because it conducts heats and electricity efficiently.
b. Construction (plumbing, roofing, etc.)
c. Industrial machinery
d. Water purification
e. As a poison in agriculture (copper sulfate)
f. Other minor applications such as detecting sugar.
The biggest takeway from these uses was that the boom in electric vehicles and technology (advanced electronics that may trigger technological obsolescence) will drive demand for copper going forward.
I also Googled “future uses of copper, and learned that copper will be used in the following applications that have potential in the future:
a. Solar energy
b. Earth-coupled heat pumps
c. Electric Vehicles
d. Electronics (as usual)

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

DATESTOCKTRANSACTIONWHONOTES
24-4-18Associated Alcohol110,400 sold at 385InvestorThis stock is already in the news because cult investor Dolly Khanna has gotten in. Tread carefully.
24-4-18TWENTYFIRST CENTURY MANAGEMENT SERVICES31,940 bought at 40.90PromoterPromoter's been buying since the stock was at 33 levels. This is a bullish signal.
24-4-18Kirloskar Electric Company50,000 bought at 237PromoterGood sign
24-4-18Larsen & Toubro Infotech 3,09,409 sold at 1527PromoterStock is higher than the sale price. Promoter's been selling since 1100 and the stock has been rising. Looks good.
24-4-18Oceanic Foods----BSE SME stock worth tracking. Makes dehydrated foods.
24-4-18GATI Net 1.6 lakh shares bought at 120InvestorStock hit UC..
24-4-18Hathway Cable & Datacom 255,44,922 sold at 36CLSA Stock closed at 35.15
24-4-18Kwality Limited Net 9 lakh shares sold at 50InvestorSeems like the fire sale is on. Unsure when it will stop.
23-4-18Minda Corp1,080,000 bought at 182Ashish KacholiaBullish
23-4-18V.I.P.INDUSTRIES106500 bought at 391PromotersBullish. Promoter's been buying regularly.
23-4-18SH KelkarApprox 76000 shares soldPromoter.. but the stock held on to its price.. earlier the promoters were buying, and now they are selling.. both events have not impacted the price.. unsure what's up
23-4-18LT Infotech11,43,909 sold around 1395PromoterStock jumped 115 bucks today. been suggesting this stock since 800-1100 levels..
23-4-18Kwality----68 lakh shares got invoked.. be very wary of operators trying to lure you in
23-4-18Astra MicrowaveAbout 11.5 lakh shares net bought at 84InvestorsSeems like this dog has woken up.. track its moves, don't jump in
23-4-18CIMMCO1,11,511 sold at 94.80Porinju's FundStock is now at 92, after falling to 86. Unsure what's up.
23-4-18KWALITYNet 10.4 lakh shares sold at 53.75InvestorDog stock, lousy corporate governance.. best to avoid

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.

Conclusion

 Well, this is more or less it. You can try this method for any commodity and check how it works. You also can dig deeper by Googling for terms such as
“why is  (commodity’s) supply disrupted”
“seasonal factors that impact (commodity’s) production (or, demand).”
Good luck, and drop in a line if you found this article helpful.
PS: If I were you, I’d buy a quality copper scrap recycling stock and hold it for 3 years. It will become a sure multibagger.

1 Comment on "A Practical Guide To Predicting Commodity Cycles"

  1. Hi
    You mentioned about a better choice : buying quality copper scrap recycling stock…
    Will appreciate if you can suggest some names

Leave a comment

Your email address will not be published.


*