Certainly a case for selling when sp hits its high however selling before high so an institution can load up and make its 15% to 30% is silly, imo!
In 2 to 3 years when VALE returns to normal production.
What will the demand be then?
What will the shortfall be in the meantime?
What will the IOP get to?
What will the sp get to?
Anything constructive to add madam?
I'm sorry my contribution fails to meet your criteria for what constitutes "constructive" opinion.
But that's what you get when you participate in stock discussion forums such as this, I'm afraid: not all the posts from all posters will fulfil the constructive criteria as seen by all other posters.
However, since you asked, the answers (in bold font) to your questions are as follows:
In 2 to 3 years when VALE returns to normal production.
What will the demand be then? Don't know
What will the shortfall be in the meantime? Don't know
What will the IOP get to? Don't know
What will the sp get to? Don't know
Moreover, I strongly suggest that nobody knows.
Which is why, given the sheer extent and array of the imponderabilities involved in such a vexed conundrum, the best way to approach it is by thinking not in exact absolute terms (which is what your questions require), but to think in probabilistic terms; and specifically in terms what I call a Probabilistic Matrix.
It goes something like this:
1. When commodity prices are high ("high" being the level where the price received is at a level that is several times higher than the cost of producing a unit of such a commodity and when the commodity industry in question generates super-normal returns on capital), I consider the probability of the price of such a commodity to continue rising to be less than 50% (so, say 40% or 30%) and I consider the probability of commodity prices to fall to be greater than 50% (so, say 60% or 70%)
2. Conversely, when commodity prices are low (low being when the cash margins are reduced to, say, less than 100% above the total cost of production which, if you reconcile that with the capital intensity of bringing on a marginal unit of capacity in the iron ore industry means the industry is earning a Return on Invested Capital of around 20% which is where returns have historically been at the cycle troughs), then I consider probability of further falls in commodity prices to be less than 50%, (so say 40% or 30%), and the probability of gains in prices from such levels to be greater than 50% (so, say 60% or 70%).
(All rather perfectly reasonable and intuitive, I would have thought, and nothing too outrageous or controversial, so far, I trust)
But now comes the slightly tricky part which requires a modicum of mental plasticity:
Based on observing several cycles, there is great precedent for equity market investor behaviour to display distinct patterns at different stages of the commodity cycle.
Specifically, at commodity price troughs, a point is reached whereafter, the selling response in relation to specific commodity stocks becomes increasingly more muted , i.e., there is an observable reduction in the marginal propensity to sell. The financial market lexicon for this market psychology includes phrases such as "crowded selling trade", "seller saturation", "exhausted sellers", "fully stretched rubber band of negativity", "depleted pent-up selling" and the like.
By contrast, any rebound in commodity prices from these cyclical trough levels sees disproportionately greater buying pressure.
For example, at low levels of commodity prices, a yet further fall in the price of such a commodity might induce a fall in the price of a commodity stock of, say, X%. But a commodity price rise of a similar magnitude off this low base will result in a rise in the related stock of meaningfully more than X%.
Similarly, this same phenomenon is observable at the other extreme of the commodity price cycle, viz, when commodity prices are high, there arrives a point when even higher commodity prices fail to induce much further incremental buying (due to "buyer saturation", "crowded buying trade", "exhausted buyers", "fully stretched rubber band of positivity", etc.), yet small falls in commodity prices from these elevated levels induce much selling.
Put another way, after a certain period of time at the extreme ends of the commodity price cycle, the marginal propensity to buy greatly exceeds the marginal propensity to sell (at cycle troughs), and the marginal propensity to sell greatly exceeds the marginal propensity to buy (at cycle peaks), in response to directional movements in commodity prices at those respective cyclical extremes.
Which, when combined with the preceding self-evident discussion on high commodity prices being - probabilistically - more likely to fall than rise (and vice versa for low commodity prices), yields the Probabilistic Matrix for Investing in Commodity Stocks.
In closing, it might be useful to demonstrate by way of a few worked examples:
Industry ABC, the average cost of production is $20/unit.
Current commodity price is $25/t
(So, looks like commodity price trough)
1. Probability of commodity price falling = <50%, say 35%
2. Probability of commodity price rising = >50%, say 65%
3. Assume Marginal Propensity to Sell stocks should commodity prices fall further result in share price fall of X.
4. Marginal Propensity to Buy stocks should commodity prices rise is greater than Marginal Propensity to Sell stocks should commodity prices fall, so share price rise on rebound in commodity prices is greater than X, say 2X
Now, BUY or SELL decision is derived as follows:
Downside
= Probability of further commodity price falls multiplied by commensurate share price fall
= 35% times X
0.35X
Updside
= Probability of commodity price rises multiplied by commensurate share price rise
= 65% times 2X
=1.3X
=> Upside to Downside Ratio = 1.3X : 0.35X = 3.7 : 1.0,
which is favourable, so BUY.
Conversely, at the peak of the cycle, the situation might be deemed to be something like the following:
Upside
= Probability of further commodity price rises multiplied by commensurate share price rise
= 40% times X
0.40X
Downside
= Probability of commodity price falls multiplied by commensurate share price fall
= 60% times 2X
=1.2X
=> Upside to Downside Ratio =0.4X : 1.2X = 0.33: 1.0,
which is unfavourable, so SELL.
I hope that is constructive enough for you because that's about the limit of my constructive efforts.
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