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Metal Price Assumptions: Demand Surges But COVID-19, Trade, And ESG Concerns Flatten Output

S&P Global Ratings has raised its price assumptions for most metals for the second time since September 2020. We believe this will support favorable credit momentum for metals producers, which have benefitted from 2-3 years of financial restraint before prices began to rise sharply in mid-2020. Pandemic- and market-induced production cutbacks, as well as trade friction, have coincided with a surge in demand after a significant period of destocking. For example, spot prices for copper have hit their highest level in a decade only a year after dropping to near decade lows, highlighting the metal's fundamentally tight supply-demand balance amid improving economic fundamentals and long-term demand tailwinds stemming for the shift toward greater electrification. Production discipline and trade barriers are causing steel prices to reach all-time highs in the U.S. and Europe. Meanwhile, the resilience of demand in China remains critical for the sector. S&P Global Economics raised its assumptions for Chinese and U.S. GDP growth to 8% from 7% and to 6.5% from 4.2%, respectively, this month (for more info, see "Economic Outlook Asia-Pacific Q2 2021: Three-Speed Recovery Will Benefit From Faster Global Growth," and "Economic Outlook U.S. Q2 2021: Let The Good Times Roll," published March 24, 2021, on RatingsDirect).

S&P Global Ratings Metal Price Assumptions
--Revised assumptions (as of March 30, 2021)-- --Previous assumptions (as of Dec. 17, 2020)--
2021 2022 2023 2021 2022 2023
Aluminum ($/mt) 1,900 2,000 2,000 1,800 1,900 1,900
Copper ($/mt) 8,500 8,000 7,500 6,700 6,800 7,000
Nickel ($/mt) 15,000 14,500 14,500 15,000 14,500 14,500
Zinc ($/mt) 2,600 2,500 2,500 2,400 2,500 2,500
Gold ($/oz) 1,700 1,500 1,300 1,700 1,500 1,300
Iron ore ($/dmt) 130 100 80 110 85 70
Metallurgical coal ($/mt) 130 140 140 130 140 140
Thermal coal (Newcastle; $/mt) 70 60 60 60 60 60
mt--Metric ton (1 metric tonne = 2,205 pounds). oz--Ounce. dmt--Dry metric tonne. Source: S&P Global Ratings.

As expected, inflation, interest rates, and the strength of the U.S. dollar have been important factors in determining metals prices given the long-standing inverse relationship between metals and the U.S. dollar and the inherent inflation protection offered by these hard assets. Spot prices are outperforming our higher metal price assumptions in 2021, thus we expect a 15%-20% bounce in year-over-year revenue and more than a 20% increase in EBITDA almost across the board for commodity metal producers. That said, input costs, as well as local-currency costs versus the U.S. dollar, tend to rise with metal prices, which will limit some of their profit gains.

Output Responds To COVID-19, Trade, And Environmental, Social, And Governance (ESG) Concerns

Considerations like the emissions-intensity of metals production, the effect on local stakeholders, and managing assets in disparate jurisdictions are increasingly factored into producers' strategic decisions. For example, the U.S. thermal coal mining industry continues to shrink and has lost incremental access to the mainstream capital markets. Also, due to the heightened concerns around carbon emissions, we believe that some high-emitting blast furnaces that were idled during the pandemic may never resume production (see, "The Shape Of Recovery For Global Steel Companies Depends On ABC: Assets, Balance Sheets, China," published Dec. 1, 2020, on RatingsDirect).

The industry's outlook and response to the coronavirus pandemic mirrored the moves it implemented during the 2008 financial crisis and other sharp downturns--such as in 2013 and 2016--including closing plants to rebalance markets and reduce costs given the high fixed-costs involved in metals production. Therefore, our medium-term (over the next 3-5 years) price assumptions are mostly unchanged given the propensity for most metals to revert toward a mean that supports an adequate return for its producers over several cycles. At most points in the cycle, we anchor our views on industry production costs. For example, when prices dropped below breakeven costs for several metals in early 2020, our price assumptions for the next 2-3 years trended up. Now, our price assumptions slope down for the next few years because of the inherent tendency for metals shortages to be rectified through incremental production and even substitution.

We are using a moderating price assumption in the face of the euphoric near-term conditions not the least because these extraordinary cash flow gains are fleeting and often don't sustainably bolster producers' credit quality. First, their strong credit ratios will last only as long as metal prices remain volatile in the absence of debt reduction. Second, we expect that metal shortages could prompt higher capital and operating spending as these companies seek to increase their output while their cash flows are strong. Finally, the most aggressive corporate development decisions, such as risky greenfield projects or acquisitions with debt-funded premiums, often occur during phases of tight market conditions, perceived scarcity, and high price expectations.


Aluminum prices have continued to rebound strongly since the end of 2020 underpinned by a robust recovery in aluminum demand across all regions, supply constraints, and the potential for a weaker U.S. dollar. We have revised our price assumptions upwards by $100 per ton. Most recently, aluminum prices reached $2,250 per ton, which is a level we have not seen since 2018. However, we expect prices to decline from these levels throughout 2021 due to the remaining excess inventory overhang given the disruption to downstream industries in 2020, particularly aerospace.

We expect aluminum consumption to bounce back and rise by 7% this year on a robust recovery in automotive and manufacturing demand in Europe and the U.S., as well as the healthy outlook for green energy infrastructure investment. However, the upside for prices could remain muted because it appears that there are sizable inventories of aluminum, unlike several other metals, as well as some latent capacity for a production restart.

Measures to curtail production and rationalize supply are still modest, leaving the industry with surplus capacity. China's announced production capacity limit of 45 million tons, which could lead to a cap on supply, may support aluminum prices over the long term. As the industry increasingly focuses on the carbon emissions intensity of aluminum production, producers may curtail additional capacity outside of China in the future.


We continue to forecast a strong rise in the demand for copper in 2021 of more than 5% year over year, which will widen the deficit between production and demand above 200,000 tons. Under such a scenario, we assume strong copper prices of $8,500 per ton for the rest of 2021, moving down to $8,000 per ton in 2022 and 2023 as the deficit narrows given our expectation for an increase in mine supply.

Plans to energize the U.S.' economic recovery may also provide support to metals prices, though this could be partly offset by rising interest rates over the medium term because rising rates tend to reduce infrastructure investment and strengthen the U.S. dollar. Still, our base-case forecast incorporates a gradual adoption of electric vehicles that leads to at least 1% of additional demand from 2022 onwards, potentially increasing by 2.0%-2.5% under a fast-adoption scenario.


We are maintaining our price assumptions for nickel because new technology for producing nickel sulfate, an important ingredient in the production of lithium-ion batteries, from low-grade nickel pig iron (NPI) could materially expand the resource base for the battery sector, which is one of the key drivers of nickel prices recently, thereby easing the upward pressure on prices. Until now, companies produced nickel sulfate from high-grade nickel (about 40% of primary nickel supply in 2020) while cheaper low-grade nickel, such as NPI (about 45% of primary nickel supply in 2020), was primarily used in the production of stainless steel. The announcement by Tsingshan Holding Group in early March that it would start producing high-grade nickel matte, which could be converted into nickel sulfate, from NPI--with supplies to two Chinese battery manufacturers of up to 100,000 tonnes of matte (approximately 70,000 tons of nickel) a year beginning as early as October 2021--has led to a correction in nickel prices given the potential for additional supply. This compares with the just below 250,000 tons that the battery industry consumed in 2020.

We believe that in the near term nickel prices will be sensitive to updates related to the progress of this technology's adoption, which, in itself, is not entirely new but has never been applied at such scale. Environmental considerations will also be important for the environmentally driven battery industry because this new production technology appears to generate considerably more greenhouse gases, as well as sulphur dioxide, than more traditional processes. Over the longer term, strong nickel demand from the stainless steel industry could lead to competition for NPI from the battery sector, which could increase prices further, especially if the expansion in the Indonesian NPI supply lags expectations. This could lead to lower profitability for NPI conversion to nickel matte because the process is costly, which would make primary nickel more cost competitive.


We have raised our assumption for zinc prices by $200 per ton for 2021 and maintained them for 2022-2023. This continues to reflect the positive sentiment stemming from the recovery of the world economy as the COVID-19 pandemic subsides, with less certainty around the strength of growth in the later years. We continue to believe that the potential for new supply will translate into relatively limited further upside potential for zinc prices starting next year.


Our gold price assumptions remain unchanged at $1,700 per ounce in 2021, $1,500 per ounce for 2022, and $1,300 per ounce in 2023 and thereafter. Gold prices have gradually moderated since peaking in the second half of 2020. This follows the marked appreciation in the prices of most of the mined commodities we follow. Average gold prices are now just slightly above our assumption for this year.

In our view, the introduction of COVID-19 vaccines and a stronger-than-expected economic recovery, namely in the U.S., have weakened the appeal of gold as a safe haven asset. The recent outflows in gold-backed exchange traded funds highlight the reduced investor demand for the metal. In addition, prices have now returned to pre-pandemic levels after peaking at just over $2,000 per ounce in the second half of last year.

We believe the relative strength of the U.S. dollar, higher long-term interest rates, and relatively benign inflation expectations have been the main causes of the recent decline in gold prices. In addition, gold's historical inverse relationship with oil appears intact following the recent rally in crude prices, which is consistent with our forecast for a strong economic rebound this year. S&P Global Economics recently materially revised their real GDP growth assumption for the U.S. to 6.5% (from 4.2% previously) in 2021. We expect the faster pace of growth, steady increases in interest rates, and relatively stable inflation (about 2% annually) will limit future price appreciation. Over the next couple of years, our gold price assumption returns to what we view as the long-term average level of about $1,300 per ounce.

Iron Ore

We have raised our assumption for iron ore prices to an average of $130 per dry metric ton (dmt) in 2021 to reflect our view that iron ore prices will likely remain robust before tapering from currently elevated levels during the second half of 2021. Iron ore prices set a new 10-year high in March 2021 by reaching $178 per dmt as Chinese steel output has remained at a historic run-rate high of more than 90 metric tonnes (Mt) per month of crude steel as of January 2021, which is an increase of 6.8% compared with January 2019. This momentum has continued after China set a historic record of about 1.07 billion tonnes of production for full year 2020 with the ramp-up of industrial activity post-COVID-19. This is in keeping with our expectation that Chinese demand may continue to rise by 1%-2% while steel production in the rest of the world increases by about 8% in 2021 as the global recovery continues to gather pace. We anticipate that the global seaborne supply deficit could deepen further in 2021 while the timing of the resumption of activity at Vale's disrupted mines remains uncertain and will likely to continue to support prices over the next 12 months at least.

We have also raised our assumptions for iron ore to $100 per dmt in 2022 and $80 per dmt in 2023 to reflect our view that the seaborne market will remain tight in the coming years. In our view, global demand will continue to outstrip supply over the next 1-2 years. At current prices, the vast majority of high-cost, fourth-quartile producers with cash costs of above $100 per dmt are generating healthy profits. We believe that high-cost marginal producers will likely be forced out of the market as Vale's disrupted supply gradually returns, which will lead prices to decline toward the marginal cost of supply.

Metallurgical Coal

Global steel production continues to rebound and rose by 4.8% in Janunary 2021 on the back of the ongoing economic recovery. Chinese steel production remained robust and rose by 12.9% in the first two months of the year. That led to a spike in the seaborne met coal price to over $160 per tonne in late January, which is the highest level since March 2020. However, prices have softened lately to around $110 per tonne on the expectation for decreasing incremental demand amid a well-supplied market. The Chinese government has also stated that it plans to curb steel production and reduce the country's 2021 output below 2020 levels, which we believe could be difficult to achieve depending on how strict the government's measures are. It also depends on the recovery in China's consumption, which still lags the 7%-8% annual growth rates it reported before the pandemic. A normalization of China's consumption will give the government more leeway to reduce its reliance on infrastructure investment to support the economy, thereby limiting the rise in steel production.

We maintain our met coal price assumptions of $130 per tonne for the rest of 2021 and $140 per tonne for 2022 and 2023, which is up from the average of $124 per tonne in 2019 but still below the 10-year average of $167 per tonne. Any loosening of China's import ban on Australian coal will pose some upside to our price assumptions. China's cost-and-freight met coal price has remained above $200 per tonne year to date.

Thermal Coal

Newcastle thermal coal prices have risen from a low of $48 per tonne in September 2020 to $92 per tonne in mid-March on the ongoing recovery of thermal power generation in the region. Nonetheless, we believe these prices may not be sustainable when growth rates begin to normalize in the second half of the year. Therefore, we raised our price assumption for the rest of 2021 by $10 per tonne to $70 per tonne while maintaining our assumptions for 2022 and 2023 at $60 per tonne. These prices are below the 10-year average of $81 per tonne to reflect our more bearish view for thermal coal as countries seek to reduce their carbon intensity.

This report does not constitute a rating action.

Primary Credit Analyst:Donald Marleau, CFA, Toronto + 1 (416) 507 2526;
Secondary Contacts:Simon Redmond, London + 44 20 7176 3683;
Jarrett Bilous, Toronto + 1 (416) 507 2593;
Ozana Breaban, London + 442071763302;
Clara McStay, New York + 1 212 438 1705;
Diego H Ocampo, Buenos Aires (54) 114-891-2116;
Danny Huang, Hong Kong + 852 2532 8078;

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