TL; DR 🕐

Base metal prices slowed again in July. No surprises there. Interest rates are still high and the USD still strong, making new developments expensive (strangling any meaningful supply response) while the world’s biggest consumer of resources, China, remains in a funk (keeping a lid on demand).
Hmmm?
As we noted in the June Metals Roundup, a bearish head and shoulders reversal pattern has materialised on the RBA’s monthly index of commodity price chart. Well, the pattern continued in July and the right shoulder looks like it has completed. Hmmm?
Liquidity is still absent from markets, and price deceleration continued in July.
The big question now is whether interest rate cuts in the U.S. will come quick enough to neutralise the bearish chart pattern, cheapen the cost of capital, weaken the USD, juice up emerging market economies, and light a fire under copper and other bases.
And unless the Yen carry trade unwind actually breaks something and/or we see a mid-meeting cut, we’ll have to wait until the Federal Reserve’s next FOMC meeting on September 18 to find out.
Metals Roundup will be back in September.

1. Base Metals 🔗🏮🔌

The rate of deceleration in base metal prices sped up again in July, as suggested by the prior month data, and LME pricing.

Specifically, prices decelerated at a faster pace of 4%, and on top of that the RBA revised the June index meaning that prices decelerated at an even faster pace in June (i.e., 3.5% revised to 3.6%).

In other words, prices decelerated faster in June than first thought, and even faster in July. And it’s this second derivative of the monthly change, i.e., the pace, or rate of change that is the important thing to note.

Since interest rate hikes bean in 2022, base metal prices have decelerated 60% of the time, and at a significantly higher quantum than the price accelerations which have occurred, only 40% of the time.

Check out the return of the red ‘rate of change’ candles 👇

Copper in China continued in oversupply, however on 12 July 2024 the Yangshan copper premium (warehouse warrant) bounced off the zero plimsoll and is now trading around USD43/t. Interesting. Maybe things are looking up with Chinese manufacturers, but it’s only one print and I’m keen to see where we end up in August. As always, there can other reasons for a one-month outlier. A quick scan of LME prices indicates a bounce from US$8,800/t end of month to over US$9,000/t on 1 August, but as of last Friday, it’s now back under US$9,000/t.

Aluminium was belted in July. And while there was a pop on 25 August, it got clobbered, again, as did Nickel.

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

Conversely for bulk minerals, the rate of price deceleration slowed in July, although prices were still in long-term downtrend.

There’s still no reversal of the 27-month downtrend that started in April 2022, one month after the first U.S. interest rate hike.

We’re still in the red and mines are closing 👇

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 an insipid US$11,530/t, and 75% down from July last year.

Yes, that’s an annual decline of 75%!

The price deceleration continues and while it has slowed, it’s still there, nonetheless. The question now is whether technological advances and product substitution will occur before ‘EV/battery metal’ prices can recover.

Although not included in the data, uranium is fetching US$84.25/lb (spot) and US80.5 (contract), still quite the pullback from the US$106/lb high.

4. Key question from the July 2024 data ✅

As we pointed out in the June Metals roundup, a massive head and shoulders commodity price reversal formation (i.e., bullish to bearish) had materialised and was about to complete in June. Here is that chart.

The pattern continued in July, as per the updated chart below 👇

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

And like we discussed last month, 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. 2013 was the start of Dollar Vader - a long-term secular strengthening of the greenback that has continued until today.

We also concluded that what started the bullish price trend back in 2009 and again in 2020, before both of those left shoulders formed, was liquidity. Cool, creamy, good old-fashioned net central bank liquidity! 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. 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? Liquidity is still decreasing, the TGA has increased, and we are yet to see money supply increase although it is fair to say the M2 money in the U.S. is in a slight uptrend, and election spending from Treasury might follow.

We are getting closer to U.S. rate cuts and if and when that happens, the USD will to a degree, weaken, and that will be stimulative for emerging markets, China and commodities.

But the cuts may not be as deep as markets anticipate which I’ve been saying for quite some time.

5. Will rate cuts save the day and avoid commodity prices hitting the mat?

Firstly, are rate cuts and a weaker USD close?

U.S. non-farm payroll hires appeared to decline materially in July. However, the decline is only one month and might not be signalling a surprise slowdown (at odds with Fed Chair Powell’s view) and might instead be a bump on the road caused by Hurricane Beryl. Secondly, the monthly average over the quarter was still well above Powell’s ‘neutral’ hiring rate of 100k per month. Those caveats aside, unemployment in rising.

The August non-farm payroll and unemployment prints will become some of the most important economic numbers that we will see, this year.

And once those (and inflation) data points are in, Fed Chair Powell will either hold firm, or opt for a September cut.

The September cut comes into play if he feels his ‘soft landing’ is at risk, but a September cut with more to follow (including a 50-basis point cut in September) are already priced into markets, as is some early weakening in the USD against a number of other currencies. There is also the potential for a mid-meeting cut.

Unless the Yen carry trade unwind actually breaks something and/or we see a mid-meeting cut, we’ll have to wait until the Federal Reserve’s next FOMC meeting on September 18.

6. Final thoughts

If the U.S. Federal Reserve signals a ‘for real’ start to a rate cutting cycle, mining and metal bulls will be out in force cheering a lowering of the cost of capital and a weakening of the USD, which is currently a key impediment for supply responses and for emerging markets to go long industrial metals.

Finally, if you’re in town this week you will no doubt hear more about it at Diggers & Dealers - that’s if you can wade through the Dutton/Beasley dog and pony amidst a plethora of gold digger presentations.

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

Aussie Metals Roundup will return in early September.

See you in the market.

Mike

Metals roundup July ’24: Will rate cuts come in time to stop Head and shoulders?