TL;DR 🕐

The change in commodity prices in May was an outlier.
The downtrend is back.
Over the past year, the index has decreased by 4.1% in SDR terms, with lower iron ore, thermal coal, lithium and base metal prices.
April’s massive surge in the Copper price and subsequent reversal in May and June appears to confirm Chinese stockpiling. On the other hand, LME copper has popped over the last 5 days.
But most notably, a bearish head and shoulders reversal pattern has materialised on the RBA’s monthly index of commodity price chart. This could be worth a thought, no?
While liquidity is withdrawn from markets, price deceleration is likely to continue.
Metals Roundup will be back in August.

1. Base Metals 🔗🏮🔌

Base metals were smashed in June, with prices decelerating by 3.5% month on month - making a near on 900 basis point turnaround from May 👇

Copper in China continued to be in oversupply, with the Yangshan copper premium hugging the zero plimsoll. Nickel was clobbered, again.

Most LME Base Metals were down between 5% and 6% in June - suppressed by high inventory and warrant levels.

China is on the mat, regardless of the green transition narrative. That said, LME copper has popped since the beginning of July.

2 Bulk minerals - inch by inch, no help from Asia 🧱👷‍♀️🌉

The May price acceleration was an outlier, and in June we were back to the red candles.

That means there’s still no reversal of the 24-month downtrend in prices that started in April 2022, one month after the first U.S. interest rate hike 👇

Expect weakness at or closure of higher cost mines while higher rates and USD for longer prevail and while liquidity is being withdrawn from markets.

3. Energy minerals (ex-coal and oil) ⚗🧲☢

The July 6, 2023, price high for LME Lithium Hydroxide CIF was US$46,046.

Today, it has crumbled even further from last month, printing at US$12,250, and 73.3% down from July last year.

As I’ve been saying for months in this Metals Roundup, it’s going to take more time for the price deceleration trend to unwind.

The question now is whether technological advances and product substitution will occur before ‘EV/battery metal’ prices can reach their historical all-time-high.

Today, uranium is fetching US$88/lb, still quite a pullback from the US$106/lb highs.

4. Key takeaway from June 2024 ✅

Just one takeaway today.

After four years in the making, a massive head and shoulders reversal formation (i.e., bullish to bearish) has materialised, and is about to complete in the chart below.

First, unlike the NLC metals only (rate of price change) charts, the RBA chart is an index series chart, where the index includes both agricultural and mineral commodities.

Minerals dominate, and while some minerals and food commodities are exposed/share common impacts from global macro factors, they are all subject to unique supply and demand, tradability and geopolitical influences.

Second, a head and shoulders formation is often a signal for a bullish to bearish price trend reversal.

What that means is that the RBA index is suggesting agricultural and mineral commodity prices when taken as a combined group, may go into a material price downtrend.

Still, in light of major investment banks recently raising their commodity price forecasts, doesn’t this chart make you go, hmmm?

Well, if it doesn’t, then you’re a diehard bull and there’s literally no hope for you 😂

What now?

If you consider the last big head and shoulders reversal that completed in 2013 - you can see it resulted in a clear shift from a bull to a bear market.

But what started the bullish price trend back in 2009 and again in 2020, before both of those left shoulders formed?

Put simply, it was liquidity. Cool, creamy, good old-fashioned net central bank liquidity.

If you look at the troughs which I’ve circled in blue, on both occasions the left shoulder was formed after a year or two of massive liquidity injection. The first was the Geithner/Bernanke/Paulson bailout of the GFC. The second was Powell’s death star hijack and blast in response to COVID.

Most other countries followed, so you’ll probably see the same in other charts.

On each occasion, the U.S. Treasury and Fed worked together. On each occasion, the boost preceded a four-year head and shoulders reversal formation. On each occasion the right shoulder completed after policy tightened/liquidity was withdrawn.

And what’s happening now? A quick net liquidity check using my TIFFIT framework indicates that while the Fed’s balance sheet decreased by ~$200 billion over the past 3 months, an additional $30 billion in liquidity was withdrawn via the TGA/reverse repo accounts.

It means net liquidity is still decreasing, with ~$230 billion over the past 3 months removed.

And what that means is that subject to short-term demand/supply profiles and geopolitical factors; RBA commodity prices, as a complex, should weaken further if:

Net liquidity continues to decrease, the dollar stays stronger, and emerging markets find it more difficult to refinance debts and buy commodities.
China continues to slow down without major stimulus, and hoard dollars.

On the flip side, if the U.S. and China inject significant liquidity into markets, i.e., if they each engage in QE Infinity regardless of the acronym they choose their next injection, bail-out, or program - commodity prices should rise.

Finally, given the sheer amount of global debt that needs to be refinanced/rolled this year, as well as the U.S. elections and China’s four-year old flu, maybe liquidity won’t be too far away.

Feel free to reach out if you’d like to chat about this over ☕ and 🥐

Aussie Metals Roundup will return in early August.

See you in the market.

Mike

Metals roundup June ’24: After 4 years, another head and shoulders reversal materialises