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NISM Certifications · NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities

An analyst compares a commodity's stocks-to-use ratio. Last year, ending stocks were 20 million tonnes against total annual use of 160 million tonnes. This year, production falls and ending stocks are projected at 12 million tonnes with use of 150 million tonnes. Which conclusion is correct?

The stocks-to-use ratio falls from 12.5 percent (20/160) to 8 percent (12/150). A lower ratio means a thinner supply cushion relative to consumption, which signals tighter availability and is typically supportive of higher prices.

  1. AThe ratio falls from 12.5% to 8%, indicating a tighter supply position that is typically price-supportiveCorrect
  2. BThe ratio rises from 8% to 12.5%, indicating a looser supply position
  3. CThe ratio falls from 12.5% to 8%, indicating a looser supply position that is typically bearish
  4. DThe ratio is unchanged at 12.5% because both stocks and use fell

Explanation

Last year: 20/160 = 12.5%. This year: 12/150 = 8%. A lower stocks-to-use ratio means less buffer against shocks, so prices tend to be supported. The option calling it looser reverses the interpretation, and the ratio is clearly not unchanged.

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