Fitch Ratings has lowered short-term price assumptions for aluminium, nickel, copper, zinc and thermal coal due to COVID-19 pressures on global economic growth and demand for natural resources.
Statement from Fitch Ratings:
We have raised assumptions for gold and kept iron ore and hard coking coal prices unchanged.
The global aluminium market will come under pressure from oversupply in 2020, so we have cut our short-term price assumptions.
The sector’s demand will be supressed due to weaknesses in auto production and construction, while Chinese supply increased by 2.4% in January-February 2020, according to data from CRU.
Two-thirds of 2020-2021 production growth will come from six low-cost plants in China, squeezing out higher-cost plants. The medium-term outlook is challenging.
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Production growth rates are likely to exceed demand growth, despite some market rebalancing owing to demand recovery and the expected closure of smelters in China.
We have therefore also trimmed our longer-term prices.
We have cut nickel price assumptions for 2020 on lower demand growth and increased nickel inventories.
The unchanged medium-to-long-term prices reflect a potential tightness in supply as Indonesian ore exports, now banned by the government, may not be fully replaced by other nickel suppliers, while we expect stronger long-term demand, particularly due to nickel use in batteries for electric vehicles.
Overcapacity in the copper market will put pressure on short and medium-term prices; the previously expected balance in 2020 is now unachievable.
While the present prices are below the costs of the 90th percentile mine of USD5,300/tonne, we expect a recovery in 2H20 helped by some mine closures amid the coronavirus pandemic.
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A more favourable view of long-term prices is supported by rising industry costs due to water constraints, operational challenges and declining ore grade and increasing copper usage in electric vehicles and renewable energy projects.
We have lowered zinc price assumptions for 2020-2021 and kept other prices unchanged.
Demand for zinc will decline in 2020 as China accounts for around half of global zinc consumption, while mine output will grow by more than 5%, assuming no protracted mine closures.
Production in China is expected to recover before demand, which is likely to result in sizeable inventories.
Gold prices are significantly influenced by investment flows and central banks’ purchases and sales as well as commodity market supply and demand.
Prices tend to increase in periods of financial market uncertainty, so we have raised our assumptions for 2020 and 2021.
Our unchanged mid-cycle price assumption of USD1,200/oz from 2022 reflects our view on the level at which investors are indifferent as to holding or selling gold in a benign risk environment.
We have cut thermal coal price assumptions (Qinhuangdao and Newcastle) for 2020 given increasing supply in China, which will outstrip demand growth.
Chinese coal production should be sufficient to meet domestic demand in the medium term, reducing its import needs. We have therefore widened the price discount between the Qinhuangdao and Newcastle price for 2020.
Iron ore price assumptions are unchanged. The prices are resilient so far as supply disruptions in Brazil and Australia during 2019 lowered inventory levels and Chinese steel production has remained relatively high despite the coronavirus.
Market prices will drop in 2H20 as a result of increasing output in Brazil and Australia later in 2020 and slower economic growth. We expect prices to decline to USD55/tonne in the long-term, which will squeeze out high-cost producers.
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Hard coking coal price assumptions are also unchanged. Year-to-date prices are supported by supply disruptions in Australia and China, as well as by the Mongolian coal export ban to China.
This is likely to be offset later in 2020 by high steel inventories and the weaker economy. Global demand will remain relatively flat in the medium term, while supply growth will come from recently commissioned mines and brownfield expansion, mostly in Australia and Russia.
We do not expect portfolio-wide rating actions following this price assumptions revision.
Fitch Ratings will analyse issuers’ financial performance on a case-by-case basis taking into account companies’ financial policies and flexibility in capex plans. Our decisions will be driven by our “rating-through-the-cycle” approach.