TL; DR 🕐

Base metal and bulk mineral prices decelerated again in August. 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, is suffering from Long COVID and on the mat.
As we noted in the June and July Roundups, a bearish head and shoulders reversal pattern has materialised on the RBA’s monthly index of commodity price chart.
Well, the pattern completed in August with prices bearishly breaking out below the neckline, signalling a major reversal from bullish to bearish.
Liquidity is still absent from markets, broad-based China stimulus is nowhere to be seen, and price decelerations continue.
Interest rate cuts in the U.S. might come 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 - but we’re not there yet.
However, for there to be real price action and a reversal from bearish to bullish, we would need to see: (a) significant weakness in the USD (following rate cuts); as well as (b) the return of material demand from China, presumably after broad-based stimulus in China as well as a return of consumption. They will be your lead indicators.
In the meantime, for some thoughts on how WA business owners might want to position themselves, you can learn more here.

1. Base Metals 🔗🏮🔌

The rate of deceleration in base metal prices slowed a little in August, but the move was still a resounding 3,4% month on month price decline.

Since interest rate hikes began 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.

We now have three red price deceleration or second derivative ‘rate of change’ candles 👇

The trend remains down and bearish.

Copper in China continued in oversupply. Yesterday (2 September 2024) China reported total copper stocks of 167,900mt, compared to 96,700mt a year earlier, with Shanghai stocks up 104,000mt, Guangdong up 38,200mt, and Jiangsu up 27,900mt YoY.

A quick scan of LME prices indicates some growth from US$9,000/t at the start of the month, followed by declines and then back to ~US$9,000/t. Aluminium and Nickel both followed the same trajectory as copper, finishing close to where they started.

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

In August bulk minerals (mainly iron ore with some coal) witnessed the biggest month on month price deceleration since March, with price declines accelerating at 8%. In other words, prices are falling at their fastest pace, since March.

There’s still no reversal of the now 28-month downtrend that started in April 2022, one month after the first U.S. interest rate hike 👇

We’re still very much in the red. BHP and Mineral Resources have announced mine/smelter closure as well as 40% - 50% profit decreases. FMG has pushed out its transition plans, and we’ve seen a flotilla of negative closure and failed financing announcements by other industry players.

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$10,550/t (yesterday) and 77% down from July last year.

Yes, that’s an annual decline of 77%!

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.

Have you heard Samsung has perfected a new battery chemistry that uses silver—and the hits will simply keep coming.

Although not included in the data, uranium spot is around 25% down from its peak in January. And as Rick Rule says, ‘Sprott is Spot’, and that’s why I’m now benchmarking spot prices by referencing the price action in the Sprott Physical Uranium Trust.

4. Key question from the August 2024 data ✅

As I pointed out in the June and July Metals roundup, a massive head and shoulders commodity price reversal formation (i.e., bullish to bearish) has materialised. Here is the chart I showed you in June.

And here is the August chart, showing the completion and price break out below the black neckline.

That’s super bearish.

And while we are talking a price index as opposed to the price of one asset, it is suggesting that agricultural and mineral commodity prices when taken as a combined group, are now in a material price downtrend.

Like we discussed last month, the last big head and shoulders reversal that completed in 2013 (in the first chart) resulted in a clear shift from a bull to a bear market.

The year 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.

And on each occasion, the boost preceded a four-year head and shoulders reversal formation—and 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.

And we’ve now broken below the neckline into bearish price action territory.

Although we are getting closer to U.S. rate cuts with Powell signalling at Jackson Hole that the time has come—Philly Fed Chief Patrick Harker has said it will be slow and methodical.

5. Final thoughts

If the U.S. Federal Reserve signals a ‘for real’ start to a rate cutting cycle on 18 September, 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.

However, for there to be real price action and a reversal from bearish to bullish, we would need to see: (a) significant weakness in the USD (following rate cuts); as well as (b) the return of material demand from China, presumably after broad-based stimulus in China as well as a return of consumption.

They will be your lead indicators.

But if it’s just one 25 basis point cut and if China remains on the mat suffering from its Long COVID, the bearish price trend will continue well below the bear’s neckline.

Position your business strategy accordingly and feel free to reach out if you’d like to chat about this over ☕ and 🥐

See you in the market.

Mike

Metals roundup Aug ’24: No rate cuts, commodities break below neckline, lithium in 77% fall