Lithium and Gold Shine Bright: The Lone Stars in H1 2023 Commodities Performance

The dawn of H2 2023 provides us with the opportune moment to reflect on the half-year performance of the commodities market. According to our regularly updated Periodic Table of Commodities Returns, just two commodities yielded positive returns during the first half of the year: lithium and gold.

Riding High on Lithium

In H1 2023, lithium carved out a 10.81% return, a performance that crowned it the best-performing commodity. It was also one of only two commodities to record a positive return during this period; the other was gold. Other commodities that we closely monitor witnessed a fall, triggered by a shrinking global manufacturing activity and an underwhelming economic revival in China, post three years of pandemic-induced lockdowns.

Lithium owes its commendable H1 performance to one key sector: batteries. This lightweight metal has been a top performer for two consecutive years—2021 and 2022—owing to its critical role in the burgeoning electric vehicle (EV) industry.

Q1 2023 EV sales hinted at a prosperous year for the sector, projecting a global sales figure of roughly 14 million vehicles. This potential increase of 35% from 2022 could elevate the global electric sales share to nearly 18%, as per the International Energy Agency (IEA).

China, the third-largest lithium supplier globally after Australia and Chile, continues to dominate as the largest EV market. Its EV giant, Tesla, boosted production by nearly 20% in June, contributing to the company’s record-breaking quarterly sales. With 93,680 cars rolling out of Tesla’s Shanghai factory, the monthly production witnessed a substantial surge from the 78,906 units in June 2022 and 77,695 vehicles in May.

Several auto manufacturers are transitioning from internal combustion engines to electric or hybrid models, further amplifying lithium’s demand. Lamborghini, for instance, has committed to a 1.8 billion euros ($2 billion) investment to establish a hybrid lineup by 2024, with plans to launch a fully electric model by the decade’s end.

Gaining Ground with Gold

Gold also had a positive run in H1, charting a 4.93% rise and outpacing most other major assets. Its sustained performance was buttressed by a stable U.S. dollar and continued demand from central banks. Gold’s appeal as a portfolio diversifier also grew during the mini-banking crisis that unfolded in March.

With central banks likely nearing the end of their interest rate tightening cycle, the Federal Reserve is expected to raise rates possibly one more time. This is predicted considering the strong jobs numbers posted in June, with the market consensus hinting at a mild economic contraction in the U.S., accompanied by sluggish growth in other developed markets, once the Fed holds its position.

Given its robust H1 performance, gold is anticipated to receive further support in H2 from several factors. These include India’s strengthening economy, potential Chinese economic stimulus, and continued hedging strategies. Should the risk of recession persist, gold could gain more value due to increased demand for high-quality, liquid assets, according to the latest report by the World Gold Council (WGC).

Downward Trend Across Most Commodities

The monthly Purchasing Manager’s Indices (PMIs) suggest that a recession may be looming, with the Global Manufacturing PMI declining for the tenth consecutive month to 48.8 in June from 49.6 in May. This dip reflects a reduction in factory output owing to fewer new orders and growing pessimism, affecting key regions such as the U.S., the eurozone, Canada, Japan, and others.

Commodity prices, which we believe are forward-looking economic indicators, primarily slumped in H1. Agriculture commodities dropped by 5.77%, industrial metals tumbled 9.55%, and energy commodities, including oil and natural gas, pulled back 11.56%. Only precious metals had a positive performance.

Cyclical segments of the global economy, such as construction and manufacturing—which heavily rely on metals like iron ore and copper—are currently grappling with recessions in various regions. A slowdown in China’s property market, directly impacting demand for construction materials such as steel, aluminum, copper, and nickel, also contributed to the declines.

The downtrend in oil prices, despite output cuts by the Organization of Petroleum Exporting Countries (OPEC), is primarily due to weak energy consumption, particularly in Europe, and China’s increased reliance on coal production amid an energy crisis.

Futuristic Outlook

Global oil demand is projected to plateau over the next decade before declining, due to increasing vehicle efficiency and a shift towards alternative energy sources, as per a recent report by BP. It predicts that emerging economies will slightly increase or maintain their oil consumption in the first half of the forecast period. In contrast, developed nations will witness accelerated declines. Consequently, emerging economies are projected to increase their share of global oil demand from 55% in 2021 to roughly 70% by 2050.

The story of H1 2023 was undeniably shaped by lithium and gold—the only commodities to chart a positive trajectory—each driven by unique market trends: the booming EV market and global economic uncertainties, respectively. However, most commodities stumbled, undermined by a contracting global manufacturing sector and declining demand. Investors may want to maintain their focus on lithium and gold, while adopting a cautious stance towards other energy commodities as the world advances towards a more sustainable future.

By: Frank Holmes, CEO and Chief Investment Officer