Ultimate Guide to Investing in Resource Stocks & Commodities by Craig Lang

Author:Craig Lang
Language: eng
Format: epub
Publisher: tropicala holdings
Published: 2015-08-15T00:00:00+00:00

Why the pinch-point is powerful

When cycles are near turning points, inventories can move below or above their pinch-point very quickly. To understand this hyperbolic price movement, consider the “stocks-to-use” measure of inventories:

Inventories (weeks) = stocks (tonnes) / shipments (tonnes / week)

As a cyclical recovery begins, commodity stocks (inventories) in absolute terms (tonnage) start falling, whilst at the same time shipments are increasing with demand. So the numerator (stocks) and denominator (shipments) move in opposite directions - mathematically this means this stocks-to-use (weeks) ratio can change substantially and do so very quickly.

For example a 10% decrease in stocks occurring at the same time as a 10% increase in shipments, results in an 18% decline in stocks measured in weeks. A 20% decrease in stocks combined with a 20% increase in shipments results in a 33% decline in stock weeks.

So movements below (and subsequently back above) the pinch-point typically happen faster than the market expects in both the early stages of recoveries and downturns. This is why pinch-point curves can be very powerful tools for analysing near-term commodity price risks.

Let’s consider two examples that highlight the power of pinch-point analysis.

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