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.
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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