Two commodity predictions for 2023 (Part 1)

Thursday, 5 January 2023 — Albert Park

[11 min read]

Dear Reader,

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 has in store, it doesn’t mean we can’t formulate an actionable plan based on sound principles.

Whether I’m right or absolutely 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!

Prediction #1

2022 started off with a bang for many commodities, iron ore, copper, nickel, and coal among others, soared on the back of Russia’s invasion of Ukraine.

While this was an unfortunate global event, it highlighted the historical influence of wars in 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, 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 uncertainly 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. Which leads me to…

Prediction #2

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 gives manufacturers the capacity to bring EVs to the masses.

The world’s largest car manufacturers from Tesla, Hyundai, Toyota, Ford, 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, 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 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 product 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 seven-fold increase over the coming years…that’s according to Benchmark Intelligence.

In my mind, the construction of three hundred gigafactories was the catalyst for 2022s 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.

Until then, have a great week.

Regards,

James Cooper,
Editor, The Daily Reckoning Australia

Dear Reader,

‘In the bleak midwinter
‘Frosty wind made moan,
‘Earth stood hard as iron,
‘Water like a stone…’

Christina Rossetti

The birds hung there for four days.

They had such beautiful feathers…gold, brown, red, and blue. But their necks were cocked at an unnatural angle, inasmuch as they were hanging by a string from a nail in the garage.

‘Shouldn’t you pluck them and clean them?’ we asked Elizabeth.

‘No…they should hang first.’

And so, they remained where they were. Hung by the neck…like criminals. Each time we passed, they seemed to reproach us. ‘We were pretty to look at. And we never did you any harm. And yet, you let us hang, like Mussolini and his lover.’

Christmas came softly to the Emerald Isle while much of the US was enjoying a white Christmas, with some of the lowest recorded temperatures.

My colleague Dan Denning lives in Laramie, Wyoming where the wind was sweeping over the plain and the temperature was falling below zero.

‘Dan, you need an in-ground house’, we suggested.

The Earth is always around 55 degrees. Dig down three feet and it never gets too hot or too cold. We learned the trick from Karl Hess, speechwriter for Barry Goldwater. It was he who wrote those immortal words:

‘Extremism in defense of liberty is no vice. Moderation is no virtue.’

‘The weather where you’re from seems horrible’, a man delivering gas opened a conversation. ‘I don’t see how you stand it.’

‘Well, it’s not like that all the time. We only get a storm like that one every few years. And we’re prepared for it.’

While we were exaggerating the prudence of the American people, it was 10:00am and as dark as Baltimore at midnight. Wind and rain flew against our faces. The delivery man didn’t seem to notice.

‘I guess the weather is why you’re here. It’s very mild in Ireland.’

Extreme threats

‘Very mild’, means different things to different people. It was 50 degrees as these words were exchanged…just as it is most of the rest of the year. But unlike the summer months, it was dark. The Irish do not freeze…not like they do in Montana; instead, they are severely deprived of Sunlight.

On rainy days, which is almost all of them, the Sun never rises and never sets. It gets progressively lighter…until noon…and then the light fades again.

Karl probably overstated the benefits of extremism. Out on the high plains…or in the high politics of Washington, DC, extremism may make things more interesting…but it is also a threat.

Later, fed up with Washington, Karl became a welder and built his own Earth-sheltered house in West Virginia. When we visited, we were enchanted. It was partially dug into a hill, with a glass wall on the South side.

‘I built this house for $11,000’, he told us proudly. ‘And the only heat I have is from the Sun…and this wood stove.’

Ever since, we’ve been fascinated by cheap, efficient houses. Not just cheap to build but also cheap to live in.

We were later intrigued by the ‘Earthship’ houses — built by an old friend out of tires and mud — in Taos, New Mexico. We decided to try it ourselves, but without old tires or the mud. Instead, we used ferro-cement, concrete reinforced with steel. It was the first house ever built like that in Maryland. And the last.

Maryland is not New Mexico. And the climate of the West — dry, with fairly large swings in temperature — is very different to the long sultry summers along the edges of the Chesapeake Bay.

Nevertheless, the house is a marvel…wisteria blocks the Sun in the summer…and lets it come in to heat up the house in the winter.

‘I was in that last weekend’, reported a friend. ‘I think someone left the heat on. I couldn’t figure out how to turn it off.’

‘Uh…there is no heat’, we explained.

It’s heated by passive solar…preserved by the deep Earth. You can’t turn it on…or off.

But here in Ireland, we found an entirely different project. When we bought our house, we found that it had the ruins of four more houses. One of them looked like it might be resurrected. The roof had fallen in, but the walls were still standing, more or less intact.

People spend a lot of money on housing. Some people can’t afford it. They are ‘bums’, ‘homeless’ people, or ‘unhoused’ people, depending on your politics.

And yet, in some places — with some imagination and elbow grease — housing can be remarkably cheap.

Deep and dark

This is the first time we have spent Christmas in Ireland. Our family is spread out…between the US and Europe. Usually, we return to the old family farm in Maryland for the holidays. But this year, we decided to make it easier on the European contingent of the family…especially our son and his growing family in Dublin.

Those are the circumstances which led us to go through the winter in these northern latitudes. And herewith, a little memoire of ‘nollaig shona’, Christmas in Ireland, 2022.

The holiday began a few days before the family arrived.

‘Don’t go in there’, we said to Elizabeth, trying to protect her delicate sensibilities. She had just come from a visit to the neighbours, where she was given two dead birds.

‘They were shot by a poacher. He gave several of them to Jim [the neighbour]. He gave us a couple.’

‘Do you know how to pluck and clean them?’

‘No, but I’ll look it up on YouTube.’

They were beautiful animals. Pheasants are raised by the thousands at a nearby farm, and then released. Hunters pay good money to blast away at them, killing hundreds at a time.

‘I don’t see the sport in it’, Jim had commented earlier. ‘They’re practically tame.’

Some of them get away. Like refugees, they make their way to our property…pecking at bugs and seeds…and happy to be alive.

The two hanging in the garage survived the general slaughter. But then, the poacher got them.

‘Why does Jim call him a poacher?’ we asked.

‘McCreedy?’

‘Is that his name?’

‘Yes, he came to our door too and asked to hunt on our property. I asked Jim. He said that if it was McCreedy we were best off giving him permission. Because he’ll hunt anyway. He’s a poacher. Apparently, everyone knows it. But if you give him permission, he’ll give you some of the meat.’

The Christmas spirit

In the library was a chimney sweep, bent to his work, but exposing a ‘plumber’s crack’ as deep and forbidding as the headwaters of the Nile, which is why we suggested to Elizabeth that she stay out.

He was a jolly man, with a large torso mounted on very narrow hips, and a fleshy face topped by hair that had gone grey but been dyed grey, probably at home...perhaps while watching a soccer match.

‘Ah ghan gimtchsmal’, he had said on his arrival.

We presumed he was speaking English, but we had no idea what he meant to say. Seeing his chimney brushes in his left hand, though, we showed him to his work…and gradually began to comprehend his dialect.

‘You’re not getting up on the roof?’

‘Noo…tat wool only poosh it dune an make it moor compact.’

His method was to run brushes up from the fireplace. We had tried that ourselves, without success. But he knew his business. When he encountered the same obstacle we did, he changed the brush for a sort of claw, and rammed it so hard up the chimney that, when it finally broke through, it knocked the wire chimney cap off. And then, ‘whoosh…and thump’…a large bird’s nest, along with chunks of brick and ceramic chimney liner fell into the fireplace. Dust rose in a cloud.

‘I tink we got it’, said our man, Liam Daley.

We had set up a Christmas tree in the library. We needed the fireplace to work. Three sons, one daughter-in-law, and one grandson were coming. We had to be ready for them. Mr Daley did the job, charging us 60 euros.

Things are expensive in Ireland. But the cash-and-carry local economy can be surprisingly cheap. Mr Daley thought he was overcharging us. But he had come out from the city, brought his tools with him, and spent the best part of the morning at the house. 60 euros — just a little more than US$60 — seemed reasonable.

The work completed, we escorted Mr Daley up the road to the aforementioned cottage. It has a main fireplace, with a chimney that has a straight shot to the outside. But a second small fireplace in the bedroom runs in a dog’s leg pattern to meet up with the main chimney on top of the roof. This second chimney was clogged. Again, Mr Daley cleaned it out and charged us another US$20.

Celtic nan

Now, at least, we were ready for company. Our house is small — with three bedrooms. And the rooms are small, it would be hard to add another cot. So the youngest of our sons would stay at the cottage.

‘You’re the first person to stay here since Nan Donovan died’, we told him.

‘Nan Donovan was old when we were young’, Jim explained.

‘She lived alone in that house, with no electricity, no heat, no running water, no toilet, and dirt floors. But that was the old Ireland. People were poor. It was only after we joined the European Union and became the “Celtic Tiger” that people had any money. And by then, Nan was in her grave.

‘I remember walking home from school…this was the 1960s...we walked to school back then…and Nan would stand at her gate, waiting for us to come by. She just wanted someone to talk to. But we were not very nice about it; we just wanted to get home. So, we were probably rude…or unfriendly; I don’t remember.

‘But then, Nan died about 40 years ago…and the house was abandoned. The roof caved in, I guess it was about 20 years ago. And I thought I’d never see smoke from that chimney again.’

We were showing the house to him and his daughter-in-law, who were out for a walk on the road. The fire was burning bright. And our son had hung up ‘fairy lights’, which took the edge off of our LED kitchen lamp. He had also put on some contemporary music. So the house was warm and welcoming.

More to come…

Regards,

Bill Bonner,
For The Daily Reckoning Australia