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Metal Price Assumptions: Gold Shines, While Slow Recovery Flattens Other Metal Prices


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Metal Price Assumptions: Gold Shines, While Slow Recovery Flattens Other Metal Prices

Table 1

Revised Metal Price Assumptions Versus Previous Assumptions
Revised assumptions (as of July 1, 2020) Previous assumptions (as of March 17, 2020)
Rest of 2020 2021 2022 Rest of 2020 2021 2022
Aluminum (US$/mt) $1,600 $1,700 $1,800 $1,700 $1,800 $1,900
Copper (US$/mt) $5,900 $6,100 $6,200 $5,800 $6,100 $6,200
Nickel (US$/mt) $13,000 $13,500 $14,000 $13,000 $13,500 $14,000
Zinc (US$/mt) $2,000 $2,100 $2,200 $2,100 $2,200 $2,200
Gold (US$/oz) $1,650 $1,400 $1,300 $1,500 $1,400 $1,300
Iron ore (US$/dmt) $85 $70 $65 $75 $70 $65
Metallurgical coal (US$/mt) $130 $160 $160 $150 $160 $160
Thermal coal (Newcastle, US$/mt) $60 $70 $70 $65 $70 $70
mt--Metric ton (1 metric ton = 2,205 pounds). oz--Ounce. dmt--Dry metric ton.

S&P Global Ratings again raised its near-term price assumptions for gold and made minor adjustments to other base metals such as copper, iron ore, zinc, and aluminum. We also cut our base-case price assumptions for coal.

With the Western World still in different stages of lockdowns, and the Eastern World emerging from theirs but still far from resuming full-blown industrial production, most metal prices are struggling to recover to pre-COVID-19 levels.

We expect the path to recovery to be slow and with missteps until a vaccination program is well developed and extensive. For further details, we recently published a commentary titled "COVID-19 Heat Map: Post-Crisis Credit Recovery Could Take To 2022 And Beyond For Some Sectors," on June 24, 2020, which discusses that the path to recovery for corporations around the world, from a credit perspective, won't occur until after 2021 for most sectors.

While speculation is taking a decisive role supporting some metal prices such as copper, gold is by far the asset that most preserves its value in times of crisis. As a result, we recognize that with a meaningful uptick to our near-term price assumptions for gold, but have kept a more conservative estimate for the following years, but still under the assumption that the developed world's monetary stimulus will continue, which tends to support gold prices.

The pandemic-related recession has put suppliers to the test. There have also been unexpected disruptions such as adverse climate events and judicial-imposed production bans in the case of Brazilian iron ore giant Vale S.A. (BBB-/Negative/--), as well as stoppages of inefficient smelting aluminum assets. Suppliers' capacity contractions--which contained price drops triggered by falling demand--have definitively contributed to moderate price drops for metals like aluminum and zinc and to sustain prices high for iron ore. At this point, we don't assume there will be future impediments for suppliers to deliver metals, or at least not in a way that could affect prices permanently, but it's a risk that cannot be ruled out entirely. Copper and zinc mines were temporarily shut down in Peru and China due to the pandemic; COVID-19 resulted in worker fatalities at the Chilean state-owned company Corporacion Nacional del Cobre de Chile (Codelco; A/Negative/--); and Vale's temporary shutdown of its Itabira iron ore complex was also due to the virus (mandated by a judicial order).

We note that since our March price revision article, we have been adding assumptions for Australian Newcastle hard coking coal and Newcastle 6,000 kcal/kg thermal coal prices, both on a free-on-board (FOB) basis. Forward-price benchmarks for these commodities enable us to provide better predictability for our assumptions consistent with our methodology (see "FAQ: How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions," published Sept. 28, 2018). We've used similar assumptions for several years, so it's important to emphasize that we make important issuer-by-issuer adjustments to these benchmarks for quality, transportation, and regional supply-demand factors. These benchmarks can be reliable underpinnings for our assumptions for numerous issuers around the world, but we rely on contracts, where possible, to derive our financial forecasts, which remains the norm for many domestic utilities.


We revised down our aluminum price assumptions by about 6% to $1,600 per ton for 2020, with a sharper rebound in 2022. Aluminum prices declined to below $1,450 in April for the first time since 2016, due to a sharp drop in aluminum demand from automaker shutdowns and expectations of a global recession because of the coronavirus pandemic.

The downward revision in our near-term price assumptions reflects the increasing surplus of aluminum building up in global supply chains because production has remained relatively flat despite the shutdown of downstream industries. In the next few months, as demand begins to recover and automakers ramp up production, prices could remain muted until excess inventories go through the supply chain. While some producers globally had announced closures of uncompetitive smelter capacity before the pandemic, further capacity curtailments are likely needed to help rebalance supply and demand over the next few years. At current spot prices of about $1,600 per metric ton, roughly one-third of smelter capacity faces cash flow deficits, which may lead to additional capacity closures and support a price recovery over the longer term. However, this may take some time due to the length of time it takes to shut down a smelter and the costs involved.


Our copper price assumptions are essentially unaltered from our last review. We adjusted the base-case price for the second half of 2020 to reflect the trajectory we expect the prices will have in the second semester, but we've kept the slope of the curve the same: moving upwards towards $6,100 per ton in 2021.

Although our macroeconomic expectations for 2020 are materially weaker than before and the pace of the recovery will be slower than originally expected, Asian demand for copper is recovering fast due to lockdowns easing and government stimulus. Asian economies make up nearly 55% of total copper demand. The recent surge in Chinese purchase manager indexes (PMIs), as well as other indicators of economic strength such as electricity consumption and fixed asset investment levels, confirm the recovery. However, our assumptions remain vulnerable to a potential second wave of the virus, which at this point is uncertain.


We maintained our nickel price assumptions through 2022. We still believe that industry fundamentals remain supportive for nickel, because the export ban from Indonesia should support prices as long as demand picks up. Although we forecast that global GDP growth in 2021 will partly offset the 2020 slowdown, we conservatively factor in only gradual price recovery for nickel. However, we realize that there is a non-negligible probability of a more rapid improvement.


We have lowered our zinc price assumptions for the rest of 2020 and 2021. This reflects our view that demand will continue to remain subdued. Our revised price assumptions are closer to the existing spot and forward curve price levels. We believe that the high degree of uncertainty about demand will lead to volatile zinc prices.

London Metal Exchange (LME) three-month prices have averaged about US$2,030 per ton (t) as of June 2020. In our view, this price uptick is driven by the reopening of the Chinese economy and stimulus package announced by the Chinese government for infrastructure and urbanization growth. The zinc price increase was also supported by the weaker U.S. dollar. In our view, demand growth from China will be supplemented by the restarting of the U.S. and European economies in the second half of the year. However, fear of a second wave of COVID-19 infections and the slow pace of global economic revival will continue to weigh down overall demand recovery.

We expect large zinc producers will ramp up production as the pandemic-induced lock-downs are lifted. In the first quarter of 2020, the top 20 zinc producers reported combined production of 1.36 million tons of zinc-in- concentrate; about 4.9% higher than the same period last year. Of this production, Glencore PLC (BBB+/Stable/A-2) was the largest contributor with about a 12.7% production increase. On the other hand, Zijin Mining Group Co. Ltd. (BBB-/Watch Neg/--) and Nexa Resources S.A.'s (BB+/Stable/B) production lagged due to the COVID-19-related mining shutdown. Considering the lower metal prices, we expect supply will be curtailed to some extent once mining resumes. Despite that, we forecast it will continue to exceed demand and will pressure the mined metal price. Built-up inventory and subdued demand will continue to depress prices in 2021.


We've increased our gold price assumption to US$1,650 per ounce (/oz) for the rest of 2020, an increase of US$150/oz from our previous assumption. Our assumptions for 2021 (US$1,400/oz) and thereafter (US$1,300/oz) are unchanged. In our view, the near-term outlook for gold remains strong, and prices are showing no sign of reverting from the positive year-to-date trend. Gold recently approached US$1,800/oz for the first time in close to a decade, and our near-term price assumption could prove conservative. However, we believe market sentiment can quickly change, as illustrated by numerous short-term price fluctuations that aren't always driven by fundamentals typically correlated to gold prices. For now, we prefer to evaluate the sustainability of the current upswing before adjusting our future assumptions upward.

The sentiment for gold has been decidedly positive since late-2018. In our view, this has primarily reflected the weaker outlook for global growth. More recently, concerns related to COVID-19 and low prevailing interest rates globally have contributed to stronger gold prices. We assume the historically inverse relationship between interest rates (i.e. 10-year Treasury yields) and gold prices will persist.

Our price assumptions for the rest of this year and thereafter are conservative relative to prevailing prices (which have traded close to or above US$1,700/oz since April 2020). However, we are in a period of significant volatility--both in commodities (particularly oil) and financial markets globally, and that volatility influences gold prices. In addition, gold has historically exhibited an inverse correlation with the U.S. dollar, but both remain relatively strong. In our view, a stronger-than-expected economic rebound could temper the outlook for gold. We have reflected most of the recent strength in prices in our near-term assumption, but continue to expect gold will revert toward our longer-term price assumptions in the next couple of years.

Iron Ore

Iron ore has navigated COVID-19 relatively unscathed thus far. No shipments have been turned away from Asian ports since the COVID-19 outbreak sparked the first lockdowns around Chinese New Year. Iron ore prices are up about 30% from price lows at the start of the year.

We have raised our assumption for iron ore for 2020, which reflects our expectations that pent-up Chinese demand and Brazilian supply disruptions will keep iron ore prices elevated in the second half of 2020. The ramp-up of industrial activity in China, together with stimulus and policy measures aimed at rebooting China's economy, are likely to boost demand in the short term.

We maintain our view of a declining price path over the medium term because we assume that seaborne supply will progressively increase in 2021 and 2022. This includes the gradual resumption of production from Vale's disrupted mines and the commissioning of a number of expansion projects that will increase supply and lower prices.

Metallurgical Coal

The recent weakness in the oceanic-transported coking coal price was largely due to reduced steel production in India and Japan. India's steel production in April and May combined saw a 50% year-on-year decline, while Japan saw a nearly 30% drop. On the other hand, China's steel production has been holding up so far this year, even during the pandemic, and Korea's production turned positive in May. Although China's steel product inventory level remains above prior years, it's already halved from the peak in March, signaling recovery in both construction and auto demand.

We believe steel production in India and other Asia-Pacific countries is bottoming out and demand should gradually improve in the second half of 2020, though more slowly than we previously expected. As a result, we're lowering our coking coal price assumption for the rest of 2020 to US$130/ton from US$150/ton and keeping our assumptions for 2021 and 2022 unchanged at US$160/ton.

Thermal Coal

Similar to metallurgical coal, the thermal coal price was also dragged by weakened demand in India, where thermal power generation fell by 25% year-on-year in April and May combined. Korea's coal-fired power generation was still in negative territory in April, but the drop has narrowed since then. China recorded 9% year-on-year growth in thermal power generation in May, the highest monthly growth rate in two years.

Since we expect demand in Asia to improve more slowly in the year's second half, we trimmed our thermal coal price assumption to US$60/ton from US$65/ton for the remainder of this year, and kept our assumptions for 2021 and 2022 the same at US$70/ton.

This report does not constitute a rating action.

Primary Credit Analyst:Diego H Ocampo, Buenos Aires (54) 114-891-2116;
Secondary Contacts:Donald Marleau, CFA, Toronto (1) 416-507-2526;
Simon Redmond, London (44) 20-7176-3683;
Jarrett Bilous, Toronto (1) 416-507-2593;
Minh Hoang, Sydney (61) 2-9255-9899;
Danny Huang, Hong Kong (852) 2532-8078;
Clara McStay, New York + 1 212 438 1705;
Mikhail Davydov, Moscow + 7 49 5662 3492;
Harshada Patwardhan, Singapore + 65 6597 6152;

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