The situation
Aluminium prices are driven by more than industry fundamentals: broader market conditions, investor sentiment and macroeconomic trends all play a part. Understanding that relationship guides which leading indicators to test.
The challenge
- High volatilityPrice swings make risk hard to handle without a view of what drives them.
- Which indicators to test?With millions of series available, the question is where to start, and which indicators actually improve the forecast.
What Indicio did
- Searched leading economic data sources for candidate indicators, ranked by how often analysts use them.
- Tested the indicators with methods from econometrics and machine learning, keeping only those that improve forecast performance.
- Ran a library of multivariate models, each forecasting the indicators too, and ranked them by RMSE in and out of sample.
- Combined the best models into a weighted forecast, with a confidence interval and an explanation of the result.
The result
Top indicator: China's aluminium production
Growth in Chinese aluminium production signals supply that can outpace demand and lower prices.
Second: LME warehouse stocks
Aluminium stocks in London Metal Exchange warehouses show the physical supply available for delivery.
Third: US durable goods orders
New orders for aluminium and non-ferrous metals show demand from manufacturers.
No indicator forecasts needed
Each multivariate model forecasts its own indicators, so the user does not have to.