Heckyl Alpha Pulse

Simplifying Commodities Trading

Posted on October 29, 2015 Updated on October 29, 2015

Trading commodities has been the foundation of human economic activity through the ages, fundamental for our survival as individuals and fundamental for the sustainability of our economic and social systems. However, historically commodity trading has been the preserve of large traders, big commodity powerhouses and institutional investors. This is partly because understanding the nuances of commodities takes more effort than shares which is also why popular media coverage of commodities is minimal as compared to coverage of stocks – you see many more ‘experts’ commenting on stocks as compared to commodities.

Seasonality and Cyclical Trends

Commodities are driven by demand and supply which provides a basis for determining price directions. As commodities don’t have to deal with subjective issues like management quality (as in stocks), they move with their respective business cycles.

Commodities are broadly classified into agricultural commodities, metals and energy but even within these broad classifications, each commodity can exhibit its own trend.

Prices of agricultural commodities move in cycles both within a crop marketing year and on a longer term. The intra-year cycles correlate with the seasonality of the crops while the long-term cycles capture the pace at which fundamental supply demand mismatches can be abridged. The long-term cycles are shorter for some commodities like wheat and sugar as compared to others like rubber and coffee; rubber and coffee are plantation crops with a higher gestation period as compared to wheat and sugar.

Mined commodities (metals) have even longer cycles as development of mining projects involves higher costs and longer time periods. Mined commodities can have cycles lasting 10-15 years. As prices fall, mining activity gets limited to only the easy to mine areas but as prices increase, mining in difficult and low-reserve mines also become profitable. Recent news of massive cuts to zinc and lead production by Glencore by idling existing mines is a case in point.

Energy related commodities like crude oil are usually distanced from the ‘real’ demand and supply scenario and are heavily influenced by geo-political events.

Seasonality, long-term trend and event based analysis can help unearth hitherto hidden trading opportunities.

Power of Information

Commodities prices react to a large number of factors, which could be related to current or expected future demand, supply, transportation in/efficiencies, or a combination of all of them and more. Given the global nature of commodities trade, events and news from across the globe contribute to the dynamics of these factors – even seemingly unrelated events have a huge impact on commodity prices; Ebola in Africa led to higher cocoa prices in Europe in 2014 and hydraulic fracturing in US leads to a phenomenal jump in guar prices in India and Pakistan in 2011-12.

Everyday hundreds of thousands of news and opinions on related and seemingly unrelated events affecting publicly traded companies, commodities, and currencies, are made available in the public domain through news publications, blogs and social media. Sifting through all this data in real-time to determine the relevant ones is not humanly possible, let alone assessing the potential positive or negative price impact on the underlying. While the relevant information may eventually filter out, the time-advantage would have already eroded away and the trading opportunity lost.

Heckyl captures information from thousands of publicly available sources which feeds into the system where Heckyl’s proprietary in-house developed Sentiment Analysis engine efficiently and accurately computes a Sentiment for companies, commodities, and currencies – in real time to give you the edge. Read about the success when Heckyl’s Social Media Heatmap helped beat the Indian Market Mayhem. (Learn more about Sentiment Analysis in Finance.)

To know more, contact us at info@heckyl.com