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S&P Global Ratings Cuts Copper And Zinc Price Assumptions And Lifts Those On Nickel And Gold

S&P Global Ratings Cuts Copper And Zinc Price Assumptions And Lifts Those On Nickel And Gold

Table 1

Revised Metal Price Assumptions Versus Previous Assumptions*
Revised assumptions (as of Oct. 9, 2019) Previous deck (July 5, 2019)
Metal Rest of 2019 2020 2021 Afterwards Rest of 2019 2020 2021
Aluminum $/ton 1,800 2,000 2,100 2,100 1,800 2,000 2,100
Copper $/ton 5,900 6,000 6,100 6,100 6,300 6,500 6,700
Nickel $/ton 17,000 15,000 15,500 16,000 12,000 12,500 13,000
Zinc $/ton 2,400 2,300 2,300 2,300 2,600 2,500 2,400
Gold $/oz 1,450 1,400 1,400 1,300 1,300 1,300 1,300
Iron ore $/dmt 90 80 70 65 90 80 70
*Ton--metric ton (1 metric ton = 2,205 pounds). Oz--ounce. Dmt--Dry metric ton.

S&P Global Ratings is updating its price assumptions for the relevant metals of its rated portfolio. We continue to see a general weakness in demand for industrial metals, due largely to slower growth in the U.S., China, and EU, partly because the trade disputes between the U.S. and China have been hurting global trade flows. As a result, we're lowering our price assumptions for copper and zinc. Major central banks have responded to cooling economic growth by lowering interest rates, which is lifting gold prices.

We view chances of a near-term global recession as relatively moderate, and assign a probability of 30%-35%, though this metric has doubled compared to a year ago. Still, geopolitical tensions are likely to keep undermining growth prospects and adding volatility to commodity prices, so we will keep adjusting our price assumptions regularly. For more details on our methodology to determine price assumptions, please see "FAQ: How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions," published Sept. 28, 2018. For additional insights into our views on global growth and credit conditions, please read "Faltering Economic Growth Adds Risks To Global Credit Conditions," Oct. 1, 2019.


We're keeping our aluminum price assumptions unchanged. Prices have held between $1,700 per metric ton (mt) and $1,800/mt over recent months despite expectations of a 1.0/million mt - 1.5/million mt deficit in 2019, while global inventory levels are reaching record lows.

Our price of $1,800/mt for the rest of 2019 continues to reflect our view that global trade tensions and the potential risks to global growth are weighing on aluminum prices in the near term. We have maintained our price of $2,000/mt and $2,100/mt for 2020 and 2021 respectively, because we believe long-term fundamentals are robust, including the expected supply deficit, low inventory levels, and expectations of solid aluminum demand growth globally. The global aluminum cost curve has come down as a result of lower alumina prices. Alumina and the LME aluminum price have been trading recently in the ratio of 16%-17%, in line with historical levels, which should provide a respite to smelters following the sharp alumina price spike in 2018. However, at current prices of about $1,750/mt, we note a significant amount of capacity is currently producing at a cash loss, which may lead to further capacity curtailments, further supporting a price recovery. In our view, our longer term price assumption of about $2,100/mt would correspond to a healthier margin level for producers and should be supported by slowing--but ongoing--global economic growth, further capacity rationalization, and China's slower smelting capacity.

We currently believe that the U.S. tariff implementation has had more of a regional than a global impact on prices. This is seen in current average premiums for physical delivery to the U.S. of about $0.18/lb ($400/mt), which has more than doubled in the past two years, basically matching the 10% import tariff. Meanwhile, regional premiums of about $90/mt and $150/mt in Asia and Europe, respectively, have been steady. We expect this divergence to persist, and the recent tariff exemption on Canadian aluminum won't likely to affect the Midwest premium at this stage. These premiums are contributing to U.S.-based producers' realized (all-in) prices, but adding costs to downstream aluminum consumers in a range of industries from automotive to consumer products.


The U.S. decision to impose tariffs to a large portfolio of Chinese exports into the U.S. has triggered a large sell-off in copper positions that made the price dip deeper. Prospects for weaker imports of refined copper from China and the yuan depreciation are likely to keep downside pressure for some time. These factors are mainly driving our decision to revise copper price assumptions downwards to slightly below $6,000/ton for the remainder of 2019 and to $6,000 and $6,100 for 2020 and 2021, respectively.

Downside potential for copper prices is probably low, assuming no drastic changes to the global trade flows. We expect a mild deficit for concentrate copper in 2019 with chances of becoming ever more pronounced towards 2021 as supply constraints are becoming more frequent. Prospects for large greenfield projects such as Quellaveco and Tia Maria in Peru are getting gloomier, due to the social and political opposition to these projects--a recurrent issue in some parts of Peru--a country that supplies nearly 10% of the world's copper supply.

Table 2

Global Copper Supply-Demand Balance
(kt) 2017 2018 2019 2020 2021
Production 22,946 23,679 24,211 24,926 25,560
% change year on year 0.8% 3.2% 2.2% 3.0% 2.5%
Consumption 22,979 23,723 24,199 24,926 25,642
% change year on year 1.9% 3.2% 2.0% 3.0% 2.9%
Balance (33) (45) 12 (1) (82)
Stocks (no. of weeks' consumption)
Total stocks 12.9 12.4 12.2 11.8 11.4
% change year on year (2.4) (3.7) (1.8) (2.9) (4.2)
LME 3 month ($/t) 6,200 6,545 5,984 6,043 6,245
% change year on year 27.3 5.6 (8.6) 1.0 3.3
Data as of Oct. 3, 2019. Acknowledgements: Historical figures draw in part on the work of International Copper Study Group and World Bureau of Metal Statistics. Sources: S&P Global Market Intelligence; COMEX; London Metal Exchange; Shanghai Futures Exchange; Thomson Reuters


We have increased gold price assumptions for the second time this year. We now believe the recent strength in gold prices is likely to largely persist through 2021. The upward revision reflects our views of more tepid macro-economic outlook and expectation for lower real interest rates. Spot prices have trended positively since May 2019, with several sharp increases and a recent peak of just over $1,550/oz, a six-year high.

We now assume an average gold price of $1,450/oz for the rest of 2019 and $1,400/oz in 2020 and 2021. Our outlook for gold prices improved following our July review, when we assumed an average price of $1,300/oz through 2021. Since then, S&P's expectations for U.S. economic growth have been tempered and the Federal Reserve cut interest rates in September. The cut was mainly in response to a persistently weak global industrial and U.S.-China trade spat. We assume the historical inverse relationship between interest rates (i.e. 10-year Treasury yields) and gold prices will persist, lending support to our price assumptions.

Our assumptions are modestly below prevailing prices; we incorporate the potential for market sentiment to quickly change and lead to short-term volatility. We also believe prices beyond 2021 will average $1,300/oz, trending toward what we consider a long-term average level.

The gold price forward curve is basically flat (compared to a modest upward slope in past periods). In addition, S&P currently expects a slight uptick in nominal U.S. interest rates next year--albeit with lower real rates--which we believe should limit sustained appreciation.

Iron Ore

Our view of iron ore prices for 2019-2021 remains unchanged, with $90/dmt on average for the remainder of 2019, $80/dmt in 2020, and $70/dmt in 2021.

After reaching its highest price level in five years due to supply disruption stemming from Vale S.A.'s dam disaster, iron ore prices have since fallen sharply to levels that are in line with our price assumption of $90/dmt for the remainder of 2019.

About half of the 93 million tons per annum (mtpa) of iron ore supply has been brought back online since Vale's disaster, and 30 mpta is expected to restart by the end of 2019 (via dry processing) with about 20 mtpa to return over the next two to three years.

We see a declining price path, and our assumptions of $80/dmt in 2020 and $70/dmt in 2021 factor in our view that any increase in supply would be gradual. The assumptions also incorporate our expectations of China's slowing economic growth and incremental supply returning to the seaborne market.

We don't expect any meaningful incremental volumes from the global iron ore majors due to near-term capacity constraints, even if prices were to rise sustainably higher. Over the long term, we expect a continued shift to electric arc furnaces in China, given that scrap availability will rise over coming years.

Table 3

Global Iron Ore Supply-Demand Balance
(Mil. tons) 2016 2017 2018 2019 2020 2021
Global crude steel production 1,630 1,700 1,807 1,820 1,834 1,856
Year-on-year growth (%) 0.9 4.3 6.3 0.7 0.8 1.2
China crude steel production 808 845 928 907 894 887
Year-on-year growth (%) 1.2 4.5 9.9 (2.3) (1.5) (0.7)
Global iron ore demand 1,962 2,046 2,176 2,191 2,208 2,235
Year-on-year growth (%) 0.9 4.3 6.3 0.7 0.8 1.2
Global iron ore supply 2,082 2,157 2,187 2,179 2,270 2,339
Year-on-year growth (%) 1.1 3.6 1.4 -0.4 4.2 3.0
Global balance 120.2 110.4 11.5 (11.6) 61.7 104.3
Year-on-year growth (%) 4.7 (8.2) (89.6) (201.2) (631.7) 69.1
Total seaborne iron ore demand 1,466 1,528 1,624 1,589 1,610 1,639
Year-on-year growth (%) 3.1 4.2 6.3 (2.2) 1.3 1.8
China iron ore import requirement 1,076 1,082 1,190 1,094 1,073 1,067
Total seaborne iron ore supply 1,513 1,568 1,598 1,516 1,562 1,610
Year-on-year growth (%) 5.2 3.6 2.0 (5.2) 3.0 3.1
Seaborne balance 47.7 39.8 (26.2) (73.5) (48.5) (28.5)
Data as of Sept. 27, 2019. Sources: S&P Global Market Intelligence; S&P Global Platts; China National Bureau of Statistics; CuSteel; Indian Trade Classification; World Steel Association


Indonesia's recent announcement to impose an export ban for nickel ore starting in 2020--two years earlier than originally planned--led to a sharp spike in nickel prices, which climbed to more than $18,500/ton four weeks ago. To reflect this volatility and the affected forward curve, we have revised our view on nickel prices up to $17,000/ton for the remainder of 2019, $15,000/ton in 2020, $15,500/ton in 2021, and $16,000/ton in 2022.

We currently believe the major bullish impact is likely to be relatively short term, with market stabilizing through 2020. The demand stemming from the stainless steel industry, though showing supporting healthy statistics recently, is susceptible to fluctuations driven by trade tensions, and we deem the current level of nickel prices to be unsustainable for the steel producers. The stockpiles of nickel, though declining in 2019 (LME stock is down by 50kt to 156kt since the beginning of the year), are enough to cover the moderate market deficit in the next couple of years, in our view.

In addition, the elevated prices might spark new investments in nickel production in the next couple of years, with the Philippines increasing production in 2020 despite ecologically-oriented initiatives.

Table 4

Global Nickel Supply-Demand Balance
(Thousand tons) 2016 2017 2018 2019 2020 2021
Primary output 2,013 2,045 2,229 2,378 2,318 2,405
Year-on-year change (%) 2.5 1.6 9.0 6.7 -2.5 3.7
Primary use 2,033 2,184 2,327 2,422 2,474 2,527
Year-on-year change (%) 8.4 7.4 6.6 4.0 2.2 2.1
Market balance
Balance (19.8) (139.0) (98.6) (43.2) (155.9) (122.0)
Total stocks 991 852 753 710 554 432
Year-on-year change (%) (2.0) (14.0) (11.6) (5.7) (22.0) (22.0)
LME three-month ($/t) 9,648 10,472 13,187 14,087 16,500 16,250
Year-on-year change (%) (18.8) 8.5 25.9 6.8 17.1 (1.5)
Data as of Sep. 18, 2019. e--estimate. Primary includes refined nickel. Acknowledgements: Historical figures draw in part on the work of International Nickel Study Group and World Bureau of Metal Statistics. Sources: S&P Global Market Intelligence; S&P Global Market Intelligence; International Stainless Steel Forum; London Metal Exchange; Shanghai Futures Exchange; Thomson Reuters


We're cutting our zinc price assumptions by $200 per ton, reflecting our view of greater chances for a slowdown in demand for the rest of 2019 and 2020, primarily as a result of the ongoing trade-related disruptions and expectations for soft economic growth.

In addition, main zinc projects in Canada, Australia, and Mexico will expand supply by 15% in the next two to three years, but a portion of this increase has already occurred in 2019, which is contributing to the price reduction. The new supply is likely to be lower-cost quartile, thereby reducing the cost curve and that will likely act as a cap for medium- to long-term zinc prices. We assume flat prices starting in 2020, because growth in demand would meet supply growth rates.

We continue to expect steel production to grow at 1.5%-2.0% in next two to three years after hitting record global production in 2018.We expect demand for zinc to grow at similar rates. Expectations of slower GDP growth in China, especially auto demand cooling, and still strong U.S. dollar will mean that the upside potential for zinc could be limited, even if the supply fails to match our expectations.

Table 5

Global Zinc Supply-Demand Balance
(Thousand tons) 2016 2017 2018 2019 2020 2021
Refined output 13,572 12,986 13,171 13,571 13,662 13,759
Year-on-year change (%) (2.1) (4.3) 1.4 3.0 0.7 0.7
Refined use 13,658 13,255 13,226 13,208 13,417 13,626
Year-on-year change (%) 0.9 (3.0) (0.2) (0.1) 1.6 1.6
Market balance
Refined balance (86.0) (269.5) (55.0) 363.0 245.0 133.0
Total stocks 1,497 1,228 1,173 1,536 1,781 1,914
Year-on-year change (%) (5.4) (18.0) (4.5) 31.0 16.0 7.5
Three-month LME ($/t) 2,101 2,890 2,892 2,523 2,479 2,467
Year-on-year change (%) 8.4 37.5 0.1 (12.7) (1.8) (0.5)
Data as of Sept. 12, 2019. e--estimate. Acknowledgements: Historical figures draw in part on the work of the International Lead and Zinc Study Group and World Bureau of Metal Statistics. Sources: S&P Global Market Intelligence; London Metal Exchange; Shanghai Futures Exchange; Thomson Reuters

Related Research

  • Global Credit Conditions: Ebbing Growth, Rising Risks , Oct. 1, 2019
  • Credit Conditions Latin America: Policy Uncertainty Undermines Growth Prospects, Oct. 1, 2019
  • Credit Conditions Asia-Pacific: China Slows, Trade Tensions Blow, Oct. 1, 2019
  • Credit Conditions North America: Rising Recession Risk Adds To Trade, Rate Uncertainty, Sept. 30, 2019
  • Credit Conditions EMEA: Lingering in the Lowzone, Sept. 30, 2019

This report does not constitute a rating action.

Primary Credit Analyst:Diego H Ocampo, Buenos Aires (54) 114-891-2116;
Secondary Contacts:Simon Redmond, London (44) 20-7176-3683;
Donald Marleau, CFA, Toronto (1) 416-507-2526;
Elad Jelasko, CPA, London (44) 20-7176-7013;
Jarrett Bilous, Toronto (1) 416-507-2593;
Sergei Gorin, Moscow (7) 495-783-4132;
Vishal Kulkarni, CFA, Singapore (65) 6216-1047;
Danny Huang, Hong Kong (852) 2532-8078;
Clara McStay, New York + 1 212 438 1705;
Additional Contact:Minh Hoang, Sydney (61) 2-9255-9899;

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