Copper
Table 2
We are lowering our price assumptions for copper for 2020 and 2021 because we expect trade tensions and new tariffs to weaken global trade, mildly softening copper demand. We still believe the global industry will experience shortfalls of supply compared with demand and therefore continue to see an upside for prices, but our base case is now suggesting those deficits would be smaller than before.
Recent news about a strike at Codelco's Chuquicamata mine and other point-in-time supply disruptions may exacerbate price volatility sporadically, but we do not expect these to alter the market balance meaningfully. We now expect undersupply of less than 100,000 tons a year in 2020 and 2021. What's more, inventories have steadily declined, which we believe could support current spot prices longer or even push prices up further.
Gold
We have increased our assumption for gold prices for the rest of 2019, 2020, and 2021 to take into account recent market price increases and our more positive view of market fundamentals. Prices have meaningfully increased of late and exceeded US$1,400 an ounce (/oz)--prices not seen since 2013. In our view, the rapid recent ascent--in the context of relatively stable gold prices over the past several years--is due to a combination of factors. Of particularly note is weakening sentiment about global economic growth, U.S.-China trade uncertainty, and the resurgence of geopolitical concerns in the Middle East.
We modestly increased our price assumptions by US$50/oz through 2021 to US$1,300/oz. Our assumptions remain below current spot levels, as we are not convinced that the increase is sustainable. However, we maintain our positive price bias for prices, underpinned by anticipated interest rate cuts, notably in the U.S. We now expect the U.S. Federal Reserve to cut interest rates as early as September 2019. The European Central Bank and Bank of Japan have also become more dovish of late. In our view, the prospect of potentially lower interest rates, which historically negatively correlated with gold prices, is bullish for gold prices.
At the same time, prices have exhibited numerous fluctuations over the past several years, which are unpredictable. Clearly, the underlying sentiment that drives gold prices can change quickly. Moreover, the U.S. dollar remains relatively strong, and inflation in the U.S. is trending below the Fed's target rate of 2%. Mainly for these reasons, we are now taking a wait-and-see approach to further upside to our assumptions.
Iron Ore
Table 3
We are raising our expectations for iron ore prices to US$90/t for the remainder of 2019, US$80/t in 2020, and US$70/t in 2021 because we think supply is likely to remain tight and will see little relief because of the Vale dam disaster. In our view, it could take Vale up to three years to restore production back to 2018 levels. We note that seaborne supply-demand balances are tighter than the global totals.
Iron ore prices have found strong support since the event, exceeding and remaining above US$100 a ton (/t) in May 2019. Robust demand from China's steel-making industry is also underpinning the increase in prices. However, we expect spot prices to wane in the second-half of 2019 on the back of improved production from each of the majors, including Vale, which has since gained approval to resume operations at its Brucutu mine.
We see a declining price path, and our assumptions of US$80 per dry metric ton (/dmt) in 2020 and US$70/dmt in 2021 factor in our view that any increase in supply would be gradual. They also embed our expectation of slowing Chinese economic growth and incremental supply returning to the seaborne market.
We believe that Chinese domestic supply, existing inventory at ports, and scrap usage will fill the supply gap in 2019. At current spot prices, we expect marginal producers and higher-cost domestic Chinese mines will likely become economical and thus help fill the supply gap. We do not 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. We also expect a continued shift to electric arc furnaces within China, as scrap availability improves over coming years.
Nickel
Table 4
Our view about nickel prices for 2019-2021 remains unchanged, with $12,000 per metric tonne (/MT) on average for the remainder of 2019, $12,500/MT in 2020, and $13,000/MT in 2021. The reasons are the forward curve and supportive fundamentals for nickel, such as healthy demand in the stainless steel industry and our expectations for undersupply, as well as declining stocks.
Our assumptions take into account expectations for continued strong volatility stemming from U.S.-China trade disputes. Nickel prices climbed by 30% to $13,600/MT in March 2019 from the beginning of the year, but then fell to below $12,000/MT, with a recent recovery to the current spot levels of $12,700/MT.
Indonesia continues to issue export permits for nickel ore linking it to the progress of domestic miners in constructing smelters locally, with 71% growth in production in 2018. Recent flooding is likely to dent output, but we still assume an overall increase in production this year.
Zinc
Table 5
We have lowered our assumptions for zinc prices by US$100 a ton through 2021 because of our view that demand growth could slow somewhat. Trade-related disruptions and macroeconomic headwinds indicate potentially softer global growth in demand for the metal while supplies continue to grow. After years of undersupply, we will likely see a surplus in 2019 that could persist through 2021. What's more, we see new supply coming to market over the next two years.
Zinc will nevertheless continue to see an expansion in demand coming from growth in steel production, which we expect to increase 1.5%-2.0% over next two to three years after hitting record global production in the first half of 2019. Our expectation of lower Chinese GDP growth, especially together with slowing auto demand and the still relatively strong U.S. dollar, will mean upside for zinc prices could be limited--even if supply fails to match our expectations.
The supply surplus is likely to come from new zinc projects in Canada, Australia, and Mexico. According to S&P Global Market Intelligence, these countries are developing most of the world's new zinc projects, a few of which are already operational, and rest of which will be operational in the next two to three years. This new supply could increase the world's zinc production by up to 15%.
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