Commodities Weekly

From scarcity to glut in battery metals – priced for a recession

Global commodities

Across major battery metals – cobalt, lithium and nickel – the apparent fundamental shift from scarcity to a glut has led to significant price declines year-to-date. We see this glut deepening in the second half of the year on strong supply trends across the complex, despite strengthening EV demand sales in China stemming from strategic EV price cuts, tax exemptions and targeted stimulus support. This should keep battery metals prices under pressure. We see this environment of low pricing as a favourable opportunity for the development of an ex-China supply chain which can provide raw materials compliant with the US Inflation Reduction Act (IRA) and the EU’s Critical Raw Materials Act (CRMA) (see here). Sustained upside is more likely to require China regaining positive momentum in industrial activity data and/or the start of a Fed easing cycle (see here). Critically, battery metals priced for recession today needs to be framed by the overarching structural bull market that we see for these commodities this decade – these battery metals will power the green global economy, facing a wave of demand comparable to that of bulk and base metals during China’s rapid growth in the 2000s following its accession to the WTO. This signals for us that the lower prices fall in the near term the more compelling the buying opportunity becomes on a mid-term horizon (see here).

 

Energy                                                                                                       

Oil is enjoying a healthy leg-up (but still well-below USD80/b) on a trifecta of positive developments: (i) the sheer quantum of the Saudi production cuts being digested by markets; (ii) China appearing to pivot into stimulus mode; and (iii) the US administration is planning to replenish more of its SPR. Yet, despite the current optimism, we have placed our constructive oil price trajectory under review. Meanwhile, in the European natural gas space, iterative outsized rallies seen in TTF prices in recent trading days mask fundamentals that remain buoyant, in our view.

 

Base metals

The critical copper-gold ratio – which has solid track record in pointing the way for rates – is currently signalling that US Treasury yields are too elevated and are likely to retrace in H2 2023. The decline in the ratio which has historically been consistent with a decline in Treasury yields, sends a clear message with the narrative that the Fed may have almost reached peak rates, in line with our US rates strategist.

 

Precious metals

The gold price is forming a bearish pattern by testing its first support (23.6% Fibonacci retracement level) – following the formation of a triple top by retracing three times from the same price. Gold’s future direction ultimately rests with the Fed as pause-and-see looms.

 

Bulk commodities

Iron ore seems overly exuberant given the abundant amount of risks. Steel output figures for May from top producer China is set to show a weaker performance, though prices may find some support should optimism over China’s central bank surprise cut garner traction.

 

Agriculture

US agribusiness Bunge agreed to buy Glencore-backed Viterra for USD8.2bn, creating a trading giant capable of competing with the world’s largest agricultural commodity traders.

 

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.