What issues or problems are we addressing?

Getting a grip on the volatility of prices for raw materials, either of primary or secondary origin, as well as of intermediate substances is not an easy task to accomplish. Most of these prices are fluctuating over time. Often they do so in an irregular way, showing a volatile and unpredictable behaviour. Yet, a company that is buying, using, producing or selling these materials and substances needs to know what their price will be in order to make its budget correctly, and to decide upon the optimal purchasing or sales price. Therefor many purchasing managers, sales managers, corporate strategists and business unit managers are trying to figure out, not only what prices are today, but also where they are expected to be a few weeks, or months from now.

This price assessment may be done in several ways. Most commonly those in charge will evaluate how supply and demand for the feedstock in their industry are evolving. They will listen to their sales staff and customers, read their industry journals, judge the overall economic picture and outlook, study publications by their industries' specialized information brokers, use their experience and gut feeling and make their decision. This approach is also known as 'fundamental analysis'.

In some industries there is an important role for information brokers who report on price developments, based on actual deals being done. In addition they interview their contacts in the industry about their expectations for price's progress in the next few weeks. Based on these opinions of industry participants on market sentiment, sometimes combined with a dose of their own knowledge and expertise, these information brokers publish their expectations on the most likely price development for a raw material or intermediate substance in the near future.

Sometimes Excel-based price graphs are studied additionally, to explore price's behaviour over a given amount of time. The benefit of this approach is that the proverbial 'picture-that-says-more-than-a-thousand-words' allows the user to get a swift impression of how price has been behaving over that period. The downside however is that such a price graph just shows the bandwidth in which price has been moving. Frequently it is assumed that over time price will continue to meander back and forth within that bandwidth. While that may be true under some market conditions, we also know that from time to time price is strongly breaking out of its range and leaves the market wondering what will happen next. Another drawback of having just an Excel based graph is that one cannot see in advance when price is setting up for a trend change.

On the right side you see an example of what graphs of this type look like.

The main drawback of using fundamental analysis, with or without additional consultation of excel graphs, is that even if one succeeds in monitoring most aspects that influence price development, it is virtually impossible to assess correctly the relative importance of all these different aspects at all moments in time. Obviously price is the result of many different forces that may either oppose, or also reinforce each other, and may have a different impact and behaviour from day to day. Another potential flaw is that the future price exploration as offered by information brokers is based on the market-sentiments of those who are interviewed. In other words, what is known as fundamental analysis provides only limited answers to a correct appraisal of future prices.

We favour a different approach, known as technical analysis. It is based on the assumption that all relevant information known about a commodity is embodied in its price and can be seen on its price chart. Price developments are evaluated quantitatively and displayed graphically. Technical analysis has been used for decades to interpret price development in the financial markets. As a result there is a vast body of knowledge available about various methodologies that may be used to gain the required insights and about an extensive range of tools that helps the technical analyst in reaching the right conclusions. It is our strong conviction therefor that our work is based on a solid background of well researched and evaluated methods and techniques. Also, our research has shown us that this approach may just as well be applied to non-securitized commodities and intermediate substances, and even to macro economic data series.

The beauty of a price graph, aka chart, is that it contains all that is to be known about a raw materials price development in a very condensed format. In essence it is nothing but a different language to describe from a price perspective what has been happening in a market, much like braille, staves of music or an architects drawing can be considered to be languages. And, while showing price history it also allows for an interpretation of what is still to come, through an analysis of its cyclical behaviour according to its fractal structure. This quality now makes it possible to gain an insight into the future development of price, depending on the amount of price history that is available.

To the right side you see an example of the type of chart that we are using for our analysis of markets for raw materials and intermediate substances.

The lower part of this chart shows how price – displayed on the vertical axis – evolved over time – on the horizontal axis. The chart shows an interpretation of price targets, as well as of price trends of different size and duration. Matching letters of different size and colour reveal these trends. In addition trend changes are indicated by divergences between the price graph and the momentum indicators, shown in the two bands along the top of the chart.

This is the format of our service

Whenever we analyse a raw material or intermediate substance we provide you with a set of charts on various time frames (quarterly, monthly, weekly, daily) with a written explanation of our interpretation, and future price targets we expect to be met. The initial analysis will then be followed by periodic updates that monitor developments that occurred since the previous analysis. These updates will outline the status of trends at short-, medium-, and long-term time frames, and also include price levels that are important to price progression as well as potential failure points.

To the right side you see another example of our analysis of the long-term development of the Thomson Reuters Core Commodity CRB Index, going back to 1997. The Index is a weighted average of some 19 important commodities. Here you see our interpretation of a quarterly chart. Each bar represents the price range during a period of one quarter. This long-term perspective allows for a better assessment of the short-term price development within its broader context.