by Raul de Frutos on NOVEMBER 21, 2016
In bear markets, it is quite easy to source your metals.
As prices fall, there is no need to hedge/buy forward. Simply buy material as you need and by the end of the year you will have met your spending budget easily. Your boss will tell you: you did a great job! That’s what happened from 2011 until this year.
But things are different in a bull market. You can’t just buy when you want as if your budget can’t take it. This is exactly what has happened this year. All industrial metals have risen in price and most buyers got caught (not our subscribers, of course). So once you identify you are in a bull market, you know you are going to need to hedge/buy forward to minimize your risk (and lower your cost). The question is: when do you hedge/buy forward in a bull market, is any price good?
No, it is not. In a bull market you need to find the right time to lock in your purchases and any bull market offers several opportunities to buy at an attractive price. In this post we are going to give one of the two situations we often use in our monthly reports to buy forward/hedge your metal during bull markets:
July was a great moment to buy tin forward after a price consolidation. Source: MetalMiner analysis of Fastmarkets.com data.
After a price rally (most of the time), prices need to digest their gains. This is because investors that bought the metal now sell it at a profit. The volatility, measured from high to low, will be great when sellers rush to take profits. But, when sellers become scarcer the price correction become less dramatic, and volatility decreases. Once prices have taken some time to digest the previous rally and there are not more sellers in the market, buyers take control again, pushing prices higher. Once we see momentum picking up a good opportunity to buy forward presents itself.
In the chart above we see how tin prices consolidated (in this case for four months) following a nice price rally during the first quarter. Price volatility contracted showing that sellers became scarcer. In July, our subscribers were told to buy six-12 month’s worth of demand as momentum picked up.
June and now November were great opportunities to buy nickel forward after price consolidations. Source: MetalMiner analysis of Fastmarkets.com data.
Similarly, nickel had two price consolidations this year. One at the end of June and one now at the beginning of November. Both consolidations, combined with the bullish sentiment across the industrial metals complex and a bullish narrative of supply shortfall in the nickel industry, were clearly a great time to hedge/buy large quantities of this metal.
The beginning of November was a great moment to buy copper forward after a price consolidation. Source: MetalMiner analysis of Fastmarkets.com data.
Finally, copper is another good example of price consolidation. The metal traded in a narrow range for five consecutive months. Volatility contracted as investors were pouring money into the industrial metals complex. It was time to get ready for a price run. Our monthly subscribers saw a great opportunity to buy forward when prices were at $5,050 per metric ton, lowering their average price cost and minimizing their price risk at the right time.
This bull market might just be beginning. Don’t think you are too late to implement a solid sourcing strategy. These are just a few examples of the many opportunities we’ve seen this year to protect your budget and buy at a lower price than your competitors.
In the next part of this post, we’ll talk about another big opportunity to buy metal in a bull market: price pullbacks.