Investors and commodity traders are always on the lookout for new investment opportunities. As an alternative investment class that provides a hedge against factors like inflation, commodity investments are becoming increasingly popular amongst savvy investors. In essence, commodities are things that can be bought and sold, like agricultural products or raw materials used to make other things. A solid commodity strategy allows investors to diversify their portfolios away from traditional assets, thus reducing risk.
In 2021, the commodities market was a profitable choice for investors as prices for commodities like copper hit record highs. Following these investment trends, people entered 2022 feeling generally optimistic about making alternative investments.
This article will give a short analysis of the 2022 commodities market and suggest which commodities are expected to rise in 2023.
The first six months were an investor’s dream, with the global commodities index jumping 36% by July 2022. However, despite the initial excitement about commodities investments, macroeconomic factors caused unexpected turbulence and a temporary drop in commodity prices.
The Russian invasion of Ukraine in February 2022 sent shockwaves across the world — and commodity markets were no exception. Commodity prices rose to levels unseen for the past decade as Russia and Ukraine are essential exporters of several commodities like energy and agricultural products, emphasising existing pressure on the commodity markets after the Covid-19 pandemic.
Elsewhere, energy prices in some countries reached the highest point ever recorded during 2022. The Russia-Ukraine war severely disrupted global energy supply chains, as many countries rely on them for various commodities. Europe imports around 35% of its natural gas from Russia, for example, and panic after the outbreak of war caused energy prices to jump by about 60%. Among other reasons, talks of a global recession and a strong US dollar due to US Federal Reserve price hikes have contributed to the decline of individual commodity and precious metal prices.
As the world’s largest commodities exporters start to relax after almost three years of tough pandemic restrictions, we consider which commodities will rise in 2023.
Gold is one of many commodities that fluctuated in price during 2022. Although an initial price spike hit US $2,052 per troy ounce immediately after the Russia-Ukraine war, prices fell to roughly US $1,697 at the beginning of Q4 amid aggressive Fed hikes. The commodity posted a rally in November, staging a strong end to 2022 at US $1,845 per troy ounce.
The Federal Reserve System, known as the Fed, refers to the central bank of the US, and regulates the entire financial system and monetary policies throughout the country. As the Fed strives to maintain a target inflation rate of 2%, it must tweak target rates to either halt or stimulate economic growth. Interest rate hikes on reserved balances reached 4.4% in December 2022, citing inflation and the Russia-Ukraine war as reasons for commodity prices to rise.
Elsewhere, rising geopolitical uncertainties such as Russia requesting gold for crude oil are potential factors for further price fluctuations, and are triggering speculation about whether gold prices will rise or fall in 2023. Spot gold prices rose 0.6% per troy ounce ahead of Christmas as inflation showed signs of slowing down, but will still meet a second consecutive yearly dip due to fluctuating interest rates.
Strict Covid-19 restrictions from top consumer China impacted the demand for gold. Prices jumped to their highest level in six months on Tuesday, December 27 as China announced plans to scrap its Covid-19 quarantine rules for inbound travellers. This major step towards easing restrictions that have kept borders shut since 2020 has created market optimism.
Copper is a core component for electric vehicle (EV) batteries and appliances — and it is in high demand. China takes the lead as the highest global automotive market, in which battery electric vehicles account for 21%. In Europe, EVs take up 12% of the automotive market, with the US in last place at just 6%. However, this is set to change, and EVs’ share of global auto sales is expected to rise to 90% by 2050.
Commodity prices are sensitive to market changes and global news stories. Copper prices started the year at US $4.42 per pound, and inflation-adjusted prices reached their highest level ever recorded in March 2022. Prices fell sharply in Q2 and Q3, partly due to copper giant China’s zero Covid policy and uncertainty about when the borders reopen. As China is the world’s largest consumer of copper, concerns about construction and residential real estate market recovery also sparked dwindling demands. On a global scale, disappointing recovery figures to date are also due to growing reports of a worldwide recession.
As the third most widely used metal in the world, copper is always in high demand. Prices slowly increased during Q4, reaching US $3.81 per pound by the long Christmas weekend. Although some uncertainty remains, the outlook for 2023 is largely positive due to China relaxing its strict Covid-19 restrictions. Copper prices are expected to rise again in 2023, however low reserves may cause demand to outweigh supply.
Iron ore is a combination of minerals used to make steel. A staggering 98% of the world’s iron ore goes towards making steel for construction, engineering, and even surgical tools. The largest producers of iron ore are Australia, Brazil, and China, which total 63% of global production.
China is the top importer of iron ore and purchases around 70% of the world’s seaborne iron ore. The property industry accounts for around 40% of the country’s steel and iron ore consumption. Due to the strict pandemic policies, China’s iron ore imports dropped 8.5% in Q1 2022, reflecting market uncertainty. Lockdowns and restrictions curbed construction projects and effectively closed down many industries for extended periods over 2022, causing demand for iron ore to decline.
In December after China announced its plan to relax the domestic pandemic policies, spot price for 63.5% iron ore (CFR Tianjin) jumped around 12% to about US $115 per tonne over the month, reflecting optimism in economic recovery. Construction sites and manufacturers have resumed business since the announcement, which has kickstarted the country’s need for iron ore. This jump in demand will continue into 2023, although prices may experience initial turbulence as China battles rising Covid-19 cases. Iron ore output is expected to increase 3.5% over 2023 as the post-lockdown appetite for building materials stabilises.
A key component in batteries for electric vehicles, worldwide demand for lithium has jumped in recent years, making many investors want to invest in lithium. Australia, Chile, and China are jointly responsible for over 85% of the world’s lithium mining. Lithium prices surged in 2022, with bullish movement resulting from an increased focus on electric vehicles, and manufacturers are still scrambling to obtain enough lithium to satisfy demand. In fact, demand has outweighed supply this year, driving global lithium shortages.
Lithium carbonate prices (99.5% Li2CO3 min, battery grade) traded in China tumbled around 8% to about CNY 532,500 per tonne in December, as talks emerged that China may cancel energy battery subsidies for suppliers in 2023. Lithium prices are sensitive to market conditions in China, and investors may be in for a bumpy start to 2023. On one hand, relaxed pandemic policies will see demand for electric vehicles increase. On the other, the recent Covid-19 outbreak threatens to jeopardise any hope of a short-term recovery.
It has been a rocky year for commodities trading, especially precious metals, but some of the main macroenvironmental factors influencing their stability are set to stabilise in 2023. China’s recent relaxation of pandemic restrictions will help to stimulate demand for commodities like iron ore, as many industries get back to work after long periods of lay-offs. Prices for gold, copper, iron ore, and lithium are expected to rise, making alternative investments the best sectors to invest in 2023.
Price references are taken from Trading Enconomics and intended to provide you with a reference only rather than as a basis for making trading decisions.