Welcome back and wishing you a very happy New Year!
As we kick things off, I thought it would be a good opportunity to share some of my 2023 commodity predictions with you.
With markets on pause (somewhat) this month, it’s a great time to mull over some of the big themes for this year: How will 2023 look for commodities broadly? Which metals will outperform? Should you focus on producers or exploration stocks?
That’s what I’ll be covering today as I give you my TWO bold predictions for commodity markets in 2023…including some actionable ideas for your portfolio.
While no one truly knows what the next 12 months have in store, it doesn’t mean we can’t formulate an actionable plan based on sound principles.
Whether I’m right or wrong, I’ll be using this analysis as part of an end-of-year review to see how it all plays out.
So, let’s get started!
2022 started with a bang for many commodities — iron ore, copper, nickel, and coal soared on the back of Russia’s invasion of Ukraine.
While this was an unfortunate global event, it highlighted the historical influence of wars on commodity prices.
However, the spike was short-lived.
A far bigger economic factor was set to roil global markets…inflation.
As the effects of broken supply chains and staff shortages during the pandemic filtered through the global economy and drove inflation to new highs, central banks took unprecedented steps to rein in this raging beast.
As we all know, the Fed helped drive global equities to major lows throughout the second half of 2022. This included MOST commodities.
However, 2022 was characterised by some outliers.
There was crude oil which continued its strong run from 2021…not surprising, really, given OPEC’s reluctance to increase oil output despite pressure from the US.
But did anyone see the lithium rise coming?
Very few would have predicted the enormous outperformance of this commodity.
Benchmark Mineral Intelligence’s Lithium Index gained almost 150% through 2022.
Just to put that in perspective, the S&P/TSX Global Base Metals Index posted a modest 4.5% and the S&P GSCI Precious Metals gained just under 3% over the same period.
Lithium’s performance last year was staggering.
So, could we be in for another year of immense outperformance in just one or two commodities?
I don’t believe so.
Instead, I think we’ll see broad growth among mining stocks thanks to growing sentiment for commodities.
I’m sure that prediction falls in the face of most market analysts RIGHT NOW.
After all, the US is facing extreme recession risk this year…according to Bloomberg, economists now claim a 70% chance of recession in 2023 for the world’s most important economy.
At face value, that does not bode well for stocks or commodities.
With economic headwinds stemming from surging interest rates, high inflation, the end of fiscal stimulus, and weak export markets, the picture for 2023 looks bleak.
But even if the world’s largest economy suffers a larger-than-expected recession in 2023, the market will be looking well ahead.
You see, a recession in the US means the Federal Reserve will be forced to pause or even start reducing rates in 2023.
I believe this will be enormously bullish for markets, particularly commodities.
Coupled with that, China is looking to resume its pre-COVID growth ambitions.
With the Chinese Government totally backflipping on its zero-COVID policy, don’t be surprised to see multiple rounds of stimulus filter through to the construction and manufacturing industries this year.
With recent protests against the multiyear lockdown, followed by total loss of control of the virus, which has spread rapidly among China’s 1.4 billion population, President Xi Jinping has hit a political low in his popularity.
Expect to see every measure possible as he tries to regain confidence among the populace. Stimulus packages will be his most important weapon.
This will be a boon for copper, coal, and iron ore.
Now, I’m certainly NOT taking the mainstream view here. In its latest research report, Wood Mackenzie predicts softening demand for commodities in 2023, particularly base metals.
The global research and consultancy firm expects weaker sentiment for commodities with a year-on-year decline in average prices across the metals and mining industries in 2023.
Recession, high inflation, and high rates are all reasons that Wood Mackenzie remains bearish on commodities for the remainder of this year.
That is the accepted view from most market observers.
But in my mind, these opinions fail to account for the market’s ability to price in future growth potential.
With recession comes lower rates.
Lower rates will once again provide the catalyst for business growth and higher asset prices.
Again, this seems to fall in the face of common sense against the current uncertainty hitting the global economy.
But markets don’t price in RIGHT NOW…they always look ahead.
If lower rates come through by the end of 2023, expect to see equities rising months before this happens.
It’s quite possible that mining stocks will be recording new all-time highs by the second half of 2023.
That is my most important prediction for this year. This leads me to…
Right now, the EV market is still very much in a multiyear uptrend.
According to Benchmark Intelligence, there are more than 300 gigafactories under construction across Asia, Europe, and the US.
What is a gigafactory, you might ask? It’s a name designated to the giant manufacturing plants being built to mass produce electric vehicle (EV) batteries.
Why is that important?
The construction of these factories is tangible proof that the global economy is committed to rebuilding a global fleet of passenger cars using the Li-ion battery technology.
No longer is this just some environmental ideology or far-flung idea set to take place in 10 or 20 years.
It’s these industrial-scale gigafactories which give manufacturers the capacity to bring EVs to the masses.
The world’s largest car manufacturers, from Tesla, Hyundai, Toyota, Ford, and BMW, among others, have committed themselves to electric far more rapidly than most anticipated.
This has been the catalyst for a surge in lithium stocks in 2022.
Yet the market has been asleep to other minerals needed in battery manufacturing.
Cobalt, rare earths, nickel, and copper will all perform well.
However, there’s one mineral in particular that might repeat lithium’s 2022 performance (or even exceed it) thanks to strong demand and far greater supply constraints…battery-grade graphite.
Graphite is the premium product for EV battery anodes.
Yet, it might surprise you that despite graphite falling in the shadows of lithium’s popularity last year, more graphite is needed in an EV battery (by weight) than any other mineral.
It is astounding…Li-ion batteries need more graphite than lithium!
Yet where will manufacturers source all this anode material?
Unlike lithium, graphite producers have not been the beneficiary of enormous investor capital over recent years.
While lithium explorers have unlocked vast new reserves, suitable graphite deposits remain scarce.
Lithium production is set to ramp up in a big way over the next two years, thanks to new discoveries across Chile, Argentina, Canada, and Australia.
But a crisis looms for vehicle manufacturers in sourcing similar quantities of graphite.
What’s more, the world’s supply of this important mineral is almost exclusively restricted to China.
Benchmark Intelligence states that China was the world’s largest graphite producer in 2021, with 820,000 metric tons (MT)…according to the US Geological Survey, the country accounted for 79% of world graphite mining in 2021.
That is a dominating statistic and a key reason global manufacturers should be worried about future graphite supply.
Lack of supply coupled with concentrated risk is made worse through China’s highly polluting techniques for purifying graphite products in the EV market.
The Washington Post conducted an investigation highlighting the problem. You can read about that here.
Widespread contamination of its river systems has been accepted by the world’s ‘green’ vehicle manufacturers.
But this cannot last.
Consumers will demand ethically sourced raw materials as part of the ‘green agenda’ in transitioning to renewable energies.
This will place even greater pressure on this critical mineral, particularly when you consider that demand for battery-grade graphite is set to see a sevenfold increase over the coming years…that’s according to Benchmark Intelligence.
In my mind, the construction of 300 gigafactories was the catalyst for 2022’s exuberance for lithium stocks.
But graphite continues to be overlooked…I think this will change in 2023…let’s wait and see.
Stay tuned next week as I share my final two predictions for this year.
Editor’s note: James will be releasing part two to subscribers of The Daily Reckoning Australia on Thursday next week. To get this sent directly to your inbox, as well as daily updates on an array of topics such as the commodities boom, geopolitical tension, and wealth preservation, be sure to sign up for The Daily Reckoning Australia. Do so by clicking here.
For Money Weekend