Tyre Asia – May-June 2018

Tyre Asia April/May 2018 117

Anil Mishra is the MD & CEO of National

Multi Commodity Exchange (NMCE). He is an

expert on commodity trading, supply chain

management and trading in derivatives. He is

also an international speaker, presenter and

writer. The views expressed here are of the author

and not that of the Exchange

Anil Mishra

Time Correction in

commodity price

ReAR VIeW

What is Market Correction?

Whenever market rallies it is bound to

correct which means it will fall in price.

A market correction has traditionally

been defined as a fall in the value of the

commodity that is greater than 10%

but less than 20%. If the fall in value is

greater than 20%, it is called a market

crash. If the fall is less than 10%, well

it is simply the daily functioning of

the markets and is normal fluctuation.

Market doesn’t move only in one

direction. correction implies dip in

prices. corrections are a relatively

amicable way to solve the problem of

an overheated market. crashes cause

unparalleled investor agony. corrections

are also painful but most investors

survive them. Market correction can

happen price wise and/or time wise:

1. Price correction – The commodity
   prices do correct and fall in prices.
   example: like rubber has corrected from
   the highs of Rs 220 Rs/Kg. to Rs 120/
   Kg but over longer period of time. Most
   people understand this concept.


2. What is Time Correction?

Time correction, is when the price

of commodities stay stagnant for an

extended period of time, let’s say, two

to three years. In this scenario there has

not been any explicit fall in the value

of the commodity. The value remains

in narrow range. however, implicitly

investors have lost time value of money.

If the money invested in the commodity

was simply parked in a bank, it would

be earning interest and therefore

growing at a rate of return higher than

zero. Implicitly the investors have lost

money and there has been a correction

in the value of the commodity. Since the

correction was caused by the passage of

time, it is called a “time correction”

Though it doesn’t look like price

correction but it has in reality corrected

in price over time because it has not

even earned the value of carrying the

cost of the commodity. To that extent it

has corrected in price and this is called

time correction. correction in time

means the market can just go sideways.

When commodity prices rally

exponentially in short period of time

• then they undergo long period of
  underperformance (time correction)
  which allows fundamentals to catch
  up with prices. Time correction can
  be very painful for Long-term Buy and
  hold Investors. Time correction is just
  Law of nature. every exciting long day
  is followed by long night. every exciting
  phase is followed by long dull phase.

Time Correction: How

Markets reconcile to

dominance of Bulls and

Bears!

Booms and busts have now become

a normal part of the business cycles.

Due to supply demand mismatch, the

value of commodity is expected to rise

and fall depending on the shortage or

abundance of supply. When supply

is not able to match the demand of

commodity, the price of commodity

rises, which encourages producer to

produce more and later the balance is

achieved. When balance is achieved the

market goes sideways for long period

of time and the price of the commodity

doesn’t increase in any meaningful

way. The holder and producers of

the commodity feel the effect of time

correction. Though on face of it the

price of the commodity doesn’t fall

but in real terms the holder of the

commodity has realized less because his

additional cost of holding was not paid

off. hence he felt the correction in price

for holding the commodity for longer

period of time. The price stagnation is

actually a hidden correction called Time

correction, which disincetivises the

investors or distributors or producers

for holding the commodity.

In this article, we will have a closer look

at the concept of time correction and

how it affects the marketplace.

Leverage and Time

Correction

An investor’s wealth can be seriously

eroded if they face a time correction

while being leveraged. consider the

case of investor who has borrowed Rs

100 to buy and hold the commodity

at 10% interest. In the first few years

the interest will be close to Rs 10 per

year since almost all the principal is

due. hence, such a person is paying

almost Rs10 to hold. hence, if the price

of commodity does not rise more than

10% in the given period, they end up

making a loss. If commodity prices stay

stagnant for 3 years, the investor stands

to lose Rs30 in the way of interest paid

or interest foregone. This is a fall in the

value of an asset.

Leverage amplifies the rate at which

investors lose money in the case of

a time correction. In the absence of

leverage, Rs 30 would be a notional loss.

In the presence of leverage Rs 30 is an

actual out of pocket cash loss. If a large

number of investors do not have the

cash flow required to sustain this time

correction, it could lead to foreclosures

and even cause a price correction or

even a crash in the marketplace.

It is therefore true that prices do not

have to fall for investors to lose money.

even if they simply stay stagnant,

investor wealth can be seriously eroded.

Why Do Time Corrections

Occur?

Investor ego: Markets usually have

investors with deep pockets that

influence the direction in which the

market moves. Sometimes both bulls

and bears have deep pockets and

neither is willing to relent. A small rise

in price quickly puts the bears in action

whereas a small fall in price quickly puts

the bulls into action. Since neither is

willing to relent, a stalemate seems like

a natural solution.

Fundamentals catch Up: Also, since

time correction is not recognized by

mainstream economics yet, it does

not attract negative publicity. The

underlying factors such as income

and rising demand for the commodity

quickly catch up and the price which

was inflated a few years earlier can now

be justified with the higher incomes.

The understanding of time correction

is extremely important to investors,

especially the ones who make leveraged

bets since it has a very real impact on

the cash flows and could potentially

bankrupt them.