S&P Global Ratings adjusts metal price assumptions for iron ore, gold, aluminum, copper, and zinc

London (July 9)  S&P Global Ratings said yesterday that it has significantly raised its metal price assumptions for iron ore and has made adjustments of 5% or less to those for several other metals for 2019, 2020, and 2021, in a report published yesterday (see attached).

The company is raising its price assumptions for gold and lowering them for aluminum, copper, and zinc. S&P Global Ratings’ assumptions for nickel are unchanged.

"Although periods of price volatility in the metals and mining sector are to be expected, some moves for certain commodities recently have been pronounced and, in our view, are more likely to be sustained," said S&P Global Ratings credit analyst Simon Redmond. "Supply shortfalls for iron ore, market fundamentals for gold, weaker market sentiment for aluminum and copper, and our expectation for higher zinc supply underpin our revised assumptions."

Demand

"We project positive growth in demand for all of these metals and minerals," Redmond said. "Although we have recently modestly lowered our forecast for real GDP growth in the US and key emerging markets, macroeconomic conditions remain broadly supportive."

For this year, S&P Global Ratings now forecast GDP growth of 6.2% for China, 2.5% for the US, near 1.1% for the eurozone, and 1.2% for Latin America (excluding Venezuela). However, the downside is increasing not only due to uncertainties regarding the direct and indirect impacts of US and China trade relations but also US tariffs on EU cars, the possibility of a financing squeeze in a mature credit cycle, and vulnerabilities in emerging markets.

While we do not incorporate a downturn or recession into our base-case scenarios for 2019 and 2020, we continue to factor in the changeable and cyclical nature of the industry and when evaluating our credit ratios for producers. We do this, for example, by setting higher ratio thresholds when cash generation is strong.

Supply

"We expect supply growth for most metals, excluding iron ore, to remain muted or moderate over the next couple of years, based on modest capital expenditure and exploration in recent years," Redmond said.

Although we consider that our price scenarios for 2019 - 2021 could support the rates of return needed for higher CAPEX in the sector, most management teams continue to focus on cash flow, moderate leverage, and shareholder rewards rather than growth. We estimate that aggregate CAPEX across the mining industry this year will increase to be roughly 10% higher than in 2018, although this remains almost half the level of 2012.

S&P Global Ratings form their price assumptions based on market data, including spot prices and forward curves, stock levels along the value chain, and our views about market fundamentals, including but not limited to supply-demand forecasts by S&P Global Market Intelligence (a division of S&P Global, as is S&P Global Ratings), in accordance with our methodology (see FAQ: How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions, published 28 September 2018).

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