Metal Price Assumptions: S&P Global Ratings Sees Prices Moving With Supply Swings

Apr 10, 2019

Key Takeaways

  • We are maintaining our gold price assumption for 2019-2021 as U.S. interest rates pause, along with indications of slower economic growth and ongoing risks from trade friction.
  • We are raising our assumptions for copper and iron ore, reflecting steady demand, combined with tight supplies and limited prospects for output growth.
  • We are lowering our assumption for aluminum, as global over-production adds to inventories in early 2019.
  • Our assumptions for nickel and zinc are unchanged.

Table 1




Gold

S&P Global Ratings' gold price assumptions for 2019-2021 are unchanged, but the outlook for gold appears more favorable. Gold prices have slowly trended upward since mid-2018, and current spot prices are just above our average expectations for 2019. We believe the factors typically supportive of a stronger price environment are building, but we are not convinced that prices have increased sustainably enough to change our annual assumptions. Moreover, the disparity between recent prices and our assumptions (just over US$50 per ounce) is not sufficient to warrant a revision, particularly since we continue to expect periods of short-term volatility.

We expect market sentiment around the U.S. dollar and interest rates will continue to drive gold prices. Recent economic data reported in the U.S. is generally in line with S&P Global's expectations for slowing growth in 2019. S&P Global tempered its expectations with respect to U.S. economic growth and interest rate hikes (none expected in 2019) since our previous review. We also expect inflation will remain low, in the 2% area, over the next few years and GDP growth that should support relative U.S. dollar strength. Historically, higher rates and a strong U.S. dollar have negatively correlated with gold prices (albeit, with sentiment-driven fluctuations). A further escalation in trade tensions adds downside risk to S&P Global's growth expectations. In our view, continuing global market uncertainty, mainly related to trade and financial/currency markets, is likely to support gold prices. At this point, we view more potential upside than downside to our annual average price assumptions, which incorporates higher year-to-date prices and the upward sloping forward curve.


Aluminum

We are revising our aluminum price assumption downward for 2019 and 2020 while maintaining our 2021 price. Prices have trended down over the past few months due to weaker sentiment, reflecting global trade tensions and risks to growth. Firmer sentiment regarding tapering Chinese aluminum demand growth, reinforced by weaker Chinese manufacturing data and automotive sales over the past few months, as well as the removal of the Rusal sanctions in recent weeks, has deflated near-term price expectations.

Our price revisions to $1,900 per metric ton (/mt) in 2019 and $2,000/mt in 2020 also reflect our expectation of global supply output potentially increasing. Alumina prices have come down in recent months, following a sharp jump in prices in 2018 due to supply disruptions. This trend eases input costs for smelters and could potentially bring capacity back to the market, following declines in global output over the past couple of months. In addition, aluminum exports from China have been increasing, reaching peak levels in January, and are contributing to lower prices. We have held our 2021 price flat because we still think that a significant amount of capacity is currently producing at a cash loss, underpinned by a modest supply deficit and expectations of robust aluminum demand growth globally. In our view, a price of $2,100/mt corresponds to a healthy margin level for producers and should be sustained by continued global economic growth, further capacity rationalization, and slower smelting capacity growth from China.

So far, we believe that the U.S. tariff implementation has had more of a regional than a global impact on prices, demonstrated by current average premiums for physical delivery to the U.S. of about $430/mt, which have doubled in the last year, basically matching the 10% import tariff. Meanwhile, regional premiums of about $100/mt and $140/mt in Asia and Europe, respectively, are basically steady. We expect this divergence will persist while tariffs remain in place. 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.

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Copper

We raised our copper price assumptions, reflecting an expected minor deficit for 2019 that could increase through 2021. Trade wars could be a key demand and sentiment driver, but infrastructure development in Asia advances steadily while copper use for renewable power sources and electric engines is on an upward trend that could steepen. New copper projects continue to be developed, but incremental output remains modest, so that we expect some mild deficits through 2021 of less than 200,000 tons per year. Also, inventories have trended down recently, which should support current spot prices longer or even push prices up further. All in all, we believe copper prices have some room for further upside if deficits widen.


Table 2



Nickel

Our view on nickel prices in 2019-2021 is unchanged. Even though current spot prices are slightly above our 2021 assumption, nickel prices have demonstrated significant volatility in recent months, dropping as low as $11,000/mt just three months ago. We think that the key supportive fundamentals for nickel prices, such as healthy demand, an anticipated deficit, and declining stocks, have not changed greatly, but there is increased uncertainty stemming from U.S.-China trade dispute.


Table 3


Indonesia continues to issue export permits for nickel ore, linking it to the progress of domestic miners in constructing smelters locally, and even announced plans to become a significant hub for EV production (which are at an early stage, in our view). The Philippines has continued the implementation of stricter regulatory requirements for the miners, which led to lower production guidance for 2019. While this supports nickel prices, we continue to consider the sentiment of stainless steel production in China to be a material driver in the medium term.


Iron Ore

We expect near-term prices to remain well supported, with an estimated 3%-4% of the global seaborne market directly affected by lower output from Vale's tailings dam failure. Prices in 2019 have remained elevated since the event, but the current spot price may cool as sentiment wanes and seasonal restocking in China draws to a close. A sustainably higher price is likely to mount pressure for a supply response, but we do not expect meaningful incremental volumes from the global major iron ore producers due to near-term capacity constraints. At current spot prices, marginal producers and higher-cost domestic Chinese mines are likely to become economical and could help fill the supply gap.


Table 4



Our medium-term expectations maintain a declining price path toward US$65/dry metric ton in 2021, reflecting our view that any supply response would be gradual. Also, the gradual decline in iron ore price assumptions reflects our expectation of slowing growth in the Chinese economy and incremental supply returning to the seaborne market. Sustainably higher iron ore prices will be underpinned by continued demand from China's steel-making industry.

Supply disruption risks are an issue, since environmental regulations, licensing, and voluntary closures remain in the spotlight. At the same time, the commissioning of incremental Chinese domestic supply capacity may face its own challenges due to China's own environmental policy restrictions. We expect scrap usage, existing port inventory, and Chinese domestic supply to fill the supply gap in the near term. We also expect the continued shift to electric arc furnaces within China, as scrap availability improves over the longer-term.


Zinc

We maintained our zinc price expectations with a continued downward slope, which we believe indicates the expectation of new supply over the next two years. The current spot price is somewhat higher than our expected prices, likely because of tightness in zinc concentrate and limited smelting capacity, especially in China. As per S&P Global Market Intelligence, Canada, Australia, and Mexico are developing the majority of the world's new zinc projects, and these projects should be operational over the next two to three years. This new supply, if it starts commercial production as planned, could increase the world's zinc production by up to 15%, which would likely fill the market's current deficit, and turn to a surplus as soon as late 2019.


Table 5


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Date: April 10, 2019  | By Primary Credit Analyst: Donald Marleau, CFA, Toronto, S&P Global Ratings





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