Climateer Investing: "Using Satellites to Forecast Metals and Commodity Prices"

Friday, March 1, 2019

"Using Satellites to Forecast Metals and Commodity Prices"

Here's another one of those stories that slips so easily into gear that you don't even realize you're off and running.
From Nanalyze:

You can be a tech firm with the most innovative product on the planet, but the only way you’re going to sell that product is if people know about it. You can spend loads of money paying some mediocre PR firm to cold-call 1,000 different media outlets with a “pitch” – essentially a request for journalists to do free work – or you can try to spread the message yourself on platforms like Medium.

It’s a shame that most the content on Medium is inane drivel, because there are some real valuable articles that get passed by for promotion in favor of hard-hitting thought leadership pieces like “I Met a Nazi on My Vacation.” We occasionally come across good Medium articles while doing research, but this time, one was sent to us by the Chairman and CEO of RS Metrics, Maneesh Sagar, who thought we ought to take a look at the work his company is doing with using satellite imagery to forecast the supply of metals. It’s nothing short of fascinating, so let’s dig in.

RS Metrics
We first came across RS Metrics in our article on 8 Satellite Data Startups Doing Geospatial Analysis where we briefly talked about how they use satellite data for business intelligence. They’ve since started to productize their offering into four main areas:

RS Metrics products – Source: RS Metrics

We’ve talked before about how firms are using satellites to count cars in store parking lots, so nothing really new to talk about there. We’ve also looked recently at how satellite imagery is being used for commercial property valuations. As for Tesla, monitoring the number of Tesla vehicles being produced or keeping an eye on Elon Musk’s receding hairline both sound cool, they’re pretty limited use cases. The product we want to talk about is Metal Signals.

Metal Signals
Before we dig into what Metal Signals does, we first need to understand the basic use case which involves going back to Economics 101 and thinking about supply and demand in the context of commodities. Most retail investors are completely oblivious to the world of commodities, where traders use real-time newsfeeds to gauge the impact of real-world events on the supply and demand for commodities. Every bit of information can be used as an advantage when it comes to trading, but only for a very short period of time. There’s actually an entire theory around this idea – something you MBAs should be quite familiar with – called the efficient market hypothesis. We can see your eyes glazing over, so let’s get back to talking about how we can make money with commodities.

Supply and Demand
In much the same way that you can trade stocks, you can also trade commodities. Consequently, any additional information you can use for trading, that may not be so widely available, gives you an information advantage. Since commodities move in response to fluctuations in supply and demand, being able to predict supply or demand gives the trader an advantage. Predicting supply seems a whole lot easier because that means looking at all the metal laying around waiting to be sold. RS Metrics describes this as follows:

Historically, base metal prices maintained a strong relationship to the change in inventory of metal stocks stored at exchange-approved warehouses used by the London Metals Exchange (LME) or Chicago Mercantile Exchange (CME). These are commonly known as “on-warrant” storage facilities.
In other words, just measure the inventory of all metal stored in the warehouses that store metal and there you have it. The problem is, not all metal stockpiles are being stored in these approved warehouses.

Measuring Supply
This is where things start to get really interesting. RS Metrics has developed a solution that actively monitors more than 400 global smelters (places where ore is turned into metal), terminals, and storage facilities, to see just how much metal is actually being produced and stored. Here’s an example of nearly 850,000 tons of aluminum stored “off-warrant” – in other words, under the radar – in an Aluminicaste facility in San José Iturbide, Mexico....MUCH MORE