Where is the price going?

“Where is the palm oil price going?” someone just asked in the room.
Others chuckled.

This question was asked in nearly every meeting. The CEO of the company proceeded to explain the factors that are affecting the palm oil price in short term. Seasonal supply factor. Fluctuating demand. Potential weather risk. Substitution by other edible oils. etc.

The factors described tended to be quite general, and everyone in the room was already aware of them. So, what the CEO just said might not add much value to what we already knew. It’s really how much weight he gave to each factor. Everyone has different weighting, however, the CEO may not be better than you in assigning the weight even though he has been in the business far longer than you are and knows it inside out. It’s not that they are not competent, but predicting price movement in short term is really speculation activity.

You can substitute “palm oil” with any other commodity. It’s the same.
“where is the coal price going?”
“where is the cement price going?”
“where is the crude oil price going?”
“where is the iron ore price going?”

When no one else asked this question near the end of the meeting, I would ask this question. I believe other analysts were also waiting for someone in the room to ask this question. Being an analyst, you cannot be embarrassed to ask any question related to the business, sometimes even stupid question. It may be stupid to you, but not to others, and vice versa.

Your intention is to learn a little bit more about the business with each question. The CEO certainly knows better than you in the business. So, you hope to learn something new each time you ask. When you are doing an analysis on a company, you need information, as much as possible, to make the best informed decision you can.

You also listen to what questions other analysts ask. That tells you what things others are interested to find out and those may be the things you have overlooked.

So, don’t be afraid to ask questions to management if you get the chance. Once you know the business better, you have asked many questions in the past, you will start to ask better questions, smart questions, important questions, to help you make better decision.

Back to the question above. Everyone is reluctant to ask, but everyone is interested to know the answer. After all, if we do get the “true” answer, that is the most important piece of information to make decision. Price move has the biggest impact to the profit number. Price increase/decline can go directly to the bottomline, affecting EPS, hence the share price.

Crude oil price fell from $105/bbl to $50/bbl in few months. More than 50% drop. If you are an oil producer, your revenue will likely fall by that much, and your net profit will fall even more. IF, you get to know what would cause this fall before it actually takes place, you’d make tons of money.

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