Uncompensated demand writes scripts

It would seem that the stock market of nonferrous metals investigated the length and breadth. But all was not affected, perhaps most important - mechanics of forming prices. Analysts are generally operated on common phrases like: «the increase in world production of metals has led to price falls». And very few people thought about how to specify all this is happening in the market.

Typical scenarios of price
We know that in addition to stock market there is off the market, which in its volume often surpasses the first. Trading on the OTC market is carried out through random transaction, and by entering into long-term contracts with fixed or floating price. An indicator for the OTC market is the stock market. The price of metal on the London Metal Exchange (LME) establishes a narrow range of brokers, which meets four times a day for short «pyatiminutki».
They confer with each other, share ideas about what kind of price would be best to reflect the current market situation. As a result of such exchanges and quotation determined. It is clear that the processes that shape the price, proceed outside the hall, where brokers. To understand these processes, we have to look to the offices metallotreydingovyh companies, marketing service smelters in rooms large and serious investors.
Despite the fact that each trading day on the stock exchange is a unique and unforgettable, yet it can be argued that the market consistently, year after year, sold a few typical scenarios of the price. Let's look at them in order.

Scenario 1: demand is about the proposal
This scenario is kind of a starting point for the rest. Supply and demand roughly balanced, each buyer «aware» of the seller and the price makes minor fluctuations due to recurrent local time of market applications for the purchase and shipments of metal to sell.

Scenario 2: Increased demand pushes prices up
Imagine that the market is a new buyer, which must be purchased for the production batch of metal. But the market did not wait. What can we do to our hero? It remains a lot to offer for a higher price, thus interrupted application (contract) to purchase a less bright or more stingy buyer. The price starts to rise. If the volume, which came to market a new buyer is not very big, it's likely that the market did not notice the change in prices, no one will pay attention. In addition, the demand for relatively small quantities of metal can be satisfied by stock on the stock exchange.

For other events will develop, if the application (the contract) for the purchase is large enough (by the way, it would be interesting to investigate how many unplanned demand is able to absorb the market without a substantial increase prices). To meet their ambitions, the new buyer will take the market, but it will replace a buyer, which he «otbil» seller: it is also necessary to provide a metal! As a result, the merchant will be unsatisfied «interrupt» price from a third buyer, etc. Thus, the market formed by uncompensated demands, which, as baton will pass from one trader to another. Exchange price popolzet up, and market operators believe that the demand for steel is growing because of some macro-economic reasons.

The fault is all - the very uncompensated demand. In trying to determine the price of transactions (contracts), traders will focus on the past, the increased prices - this is human psychology. The market may enter a stage of reactivation - the price is rising because of the metal to buy, and buy the metal, because the price increases.

Theoretically, this process can continue indefinitely. In reality, the price will start moving on to influence a variety of hindering factors. First, some of the buyers may refuse to take the expensive metal, and thus the price will stabilize. It should be noted that, unlike the stock market, where each price level, other things being equal corresponds to a certain amount of money in the trading system, at the height of the commodity market price level depends on the ... duration of exposure to the market uncompensated demand!

Secondly, some of the manufacturers can «throw» on the market lot of metal, before quietly lying on the stock exchange, which would lead to stabilization of prices and reduce stocks (Fig. 1). It is this phenomenon we have seen in the market
aluminum in the April-June 2003.

Fig.1 The dynamics of exchange rates and stocks of aluminum on the LME in the April-June 2003 g.Ris. 1. The dynamics of exchange rates and stocks of aluminum on the LME in the April-June 2003

And third, the rise in prices may have stopped the commissioning of new production capacity or increase in load of old. However, these processes are usually strongly due to the fact that production systems have considerable internal inertia: the market may be in only a few producers. So it turns out that while the market does not appear excessive, or at least offsetting the offer, the price will rise. It is also worth mentioning the effect of «disintegration demand»: imagine that a new buyer «break» price is not one, but several traders. Those dissatisfied customers can drive the price up quite a long time - until the last one is not satisfied. Perhaps this is the situation we saw in the market of copper, which rose quotes whole of 2003, with uncompensated partial satisfaction of demand at the expense of stocks.

Scenario 3: increasing the offer price pushes down
This scenario mirrors the previous one. New vendor «displaces» from the market less than bright and tight-fisted «colleagues on shop», and as a factor retarding the fall, advocated an increase in stocks - not wanting to sell the metal at low prices, the producer surplus deposited at the exchange warehouses. It is this situation was in 2002 in the market of zinc (Fig. 2).

Fig.2 The dynamics of stock prices and the stocks of zinc on the LME in January-August 2002 g.Ris. 2. The dynamics of stock prices and the stocks of zinc on the LME in January-August 2002

In favor of the hypothesis of increasing the stock as a retarding factor shows a slight extent of the fall. Please note: I am not saying that the price drops due to the fact that stocks in warehouses are rising. Just the opposite: if they do not grow, the price fall would be greater. Pending the fall occurred spasmodically. Why? From my point of view, the entire fault - the activity of small and medium-sized speculators, who, under the influence of a variety of events trendokorrektiruyuschih artificially «swing» price. For the sake of justice it should be noted that these variations do not have any serious impact on the market trend: they simply have given the trend characteristic «sawtooth» form.

Sometimes prolonged downturn in prices has resulted in the price of metal falls to levels that many producers simply «washed away» from the market. For examples of a long walk is not necessary: it is enough to remember about China's actions in the market of magnesium.

Scenario 4: The market is beginning to play in improving
It is a situation we would observe if a large trader (a group of traders) will be playing at increasing. In this case, they are buying the metal, and hold him, creating problems for those buyers who come to the market after them. In this case, stocks in the stock exchange, where speculators bought the metal gets, the rise and uncompensated demand pushes the price up. It is for such a scenario, developments in the nickel market in August-October 2003 (Fig. 3).

Fig.3 The dynamics of exchange rates and stocks of nickel on the LME in the August-October 2003 g.Ris. 3. The dynamics of exchange rates and stocks of nickel on the LME in the August-October 2003

The situation could get worse.
First, some consumers of the metal because of a fear of price rise, the metal will start to buy in store (this is how Ford was a company in the market of palladium in 1999-2000.). Secondly, some manufacturers, because of something only they understood the reasons, can stop the flow of metal on the market, depositing their produce in exchange warehouses, and taking a loan against collateral zadeponirovannogo metal. They can understand. Indeed, why would it sell it, why knock the price? Quotations grow to cover routine expenses, you can sell less metal than before. As a result of sharp price rushes up. And if until then the behavior of the market was in a sense, understandable, and movement forwards and futures, it was quite understandable, since the beginning of dramatic growth becomes all upside down. Quotations forwards falling below the spot.

Why? The point is that in such a situation, an absolute majority of the market prices seem to be prohibitively high, and they have no desire to enter into a futures on an even more fantastic prices. This phase in the development of the market, I would call the «abnormal» or «paradox». It is in the anomalous phase is nickel market since the beginning of June 2003 to make any predictions in this situation it is very difficult.

Scenario 5: the market is beginning to play down
Suppose that large speculators are beginning to artificially bring down the price by selling the metal to the stock yards. His stocks are falling. «Honest» Dealers do not find their seats. Price flies down (Fig. 4).

Fig.4 The dynamics of exchange rates and stocks of aluminum on the LME in March-April 2003 g.Ris. 4. The dynamics of exchange rates and stocks of aluminum on the LME in March-April 2003

It should be noted that this scenario is rarely an option, and the duration of its very low on time. A careful reader can reproach me that I have not considered the option when the market is reduced sentence, and the option, when declining demand. However, in my opinion, these options are described by scenarios 2 and 3.

What should I do?
After all of the above, there is a natural question: «And what is the benefit of all these calculations in terms of forecasting?» Unfortunately, it must be noted that, despite making some clarity to this issue, one problem remains in the forecast. What's the problem? The thing that has not lifted the issues relating to the recognition of the transition of one scenario to another. The situation is complicated by the fact that official statistics on the LME is not clear how to move the price within days. If these data were available, then it could take advantage of an ancient Japanese technique, the Pace for the first time it was tested on the product market. So, take the turning model «Evening Star». It is clear that the candle with a short body indicates that the market has a new big seller, a long black candle says (not even said a shouting!) That demand an end to the uncompensated, and the problem starts from vendors (I do not reservation, namely, from sellers, not buyers - we are in the product market). Consequently, the trend is likely to change! But, unlike the rice market in the XVII., London Metal Exchange XXI Century did not give us the data. Well, have to follow the relative spot, forward and futures, and at the same time work towards the provision and description of patterns of change scenarios.

One factor encouraging. In my opinion, the results can yield the following approach to forecasting. Analyst primarily trying to determine, on a scenario evolving situation on the market? He then, on the assumption that this scenario would be further developed (think about the uncompensated demand or suggestion - until these factors are not neutralized, the price will move in the same direction), to make predictions. This is followed by a return to the beginning of the algorithm, the analyst focuses attention on an important question: Is there no clear signs of this shift to a new scenario? If so, the forecast is adjusted. If not - that remains in force the old forecast.

Constantine Tsarihin