S&P Global Ratings is updating its price assumptions for four commodities to reflect shifts in both the economic outlook and futures curves. We are lowering our estimates for aluminum, thermal coal, and zinc, and raising them for gold. The revised prices differ from our previous assumptions by only 13% at most, except for thermal coal, where the difference is 24% for the rest of 2023.

We have lowered our Chinese 2023 GDP growth forecast moderately to 5.2% from 5.5%. Industrial activity and investment lag consumption and services as the Chinese economy continues to rebound. Globally, growth across the developed economies has avoided sharp slowdowns or outright recessions so far. Nonetheless, the steep cumulative hikes in interest rates in the face of persistent inflation perpetuate the risks to economies and the demand for commodities, notwithstanding strong employment rates (see "Global Economic Outlook Q3 2023: Higher For Longer Rates Is The New Baseline," published June 28, 2023).

For now, we continue to anticipate broadly supportive market conditions for most rated metals and mining companies. At the same time, macroeconomic uncertainties, higher interest rates for longer, and a paucity of attractive large-scale development projects don't give companies much incentive to expand.

Metal prices receded from their historic highs between late 2021 and mid-2022, but for the most part, this has not affected metals and mining companies' credit profiles. Companies have generally reduced the amount of debt they carry as it has become more expensive and market conditions have worsened. We anticipate that metals and mining companies will remain predisposed to undertake debt repayment and shareholder remuneration at the expense of growth. We also anticipate that they will remain focused on managing operating and development costs.

Revised Prices

Aluminum

We are lowering our price assumption by $100 per ton for the remainder of 2023. Our assumptions for 2024 and 2025 are unchanged. The revision reflects softer demand, but our view that prices will remain above historical averages over the next several years still stands. We expect a balanced aluminum market this year, as so far, softer industrial demand due to destocking trends has somewhat offset capacity closures resulting from high energy costs globally and power shortages in China.

Primary aluminum production in Europe and the U.S. remains at its lowest run rate in over 20 years. Over one million tons of smelter capacity have gone offline over the past 12 months in response to high energy prices. Production growth in South America and the Middle East hasn't been able to offset these declines. Additional capacity could be at risk due to uncertainty around obtaining sustainable power agreements and rising carbon costs.

All of this points to a more robust long-term outlook for aluminum prices as demand--accelerated by energy-transition investments--continues to outpace supply. Smelters with access to cheap or renewable energy will benefit from this strong demand growth. Furthermore, we expect the Chinese supply response to be muted because local governments will continue restricting carbon-intensive capacity growth to under the production cap of 45 million tons per year.

Gold

At more than US$1,900 per ounce over the past few weeks, the spot price for gold has been trending higher than we previously assumed. This is despite robust U.S. economic activity overall, and a market that is now pricing future U.S. Federal Reserve (Fed) hikes in a way that is consistent with rates staying higher for longer. Forward pricing now puts the Fed funds rate at over 5% at the end of 2023, taking the previously anticipated rate cuts off the table.

Our higher gold price assumption through 2025 reflects, in part, the persistence of higher costs around the world, along with ongoing geopolitical and financial market risks. As a result, we assume that the average price per ounce of gold will be US$1,800 for the remainder of 2023 (up from US$1,700 previously); US$1,700 in 2024 (up from US$1,500); and US$1,500 in 2025 (up from US$1,400).

The gradual decline we assume in the price of gold through to 2025 incorporates our view that 10-year treasury yields will remain higher than 3% during this period, well above pre-pandemic levels, and that core inflation will ease and decline to the low 2% area. As inflation declines and policy and market rates remain elevated, real interest rates should rise, which could strengthen the U.S. dollar and put downward pressure on gold prices.

While our higher gold price assumptions will result in stronger credit measures than we previously forecast for most of the gold producers we rate, we don't anticipate any imminent rating actions. Most of these issuers have benefited from several years of strong prices that have increased their cash flows sharply and improved their balance sheets. In these cases, ratings upside is more constrained by financial policy considerations than gold prices.

Furthermore, given the volatility of gold prices and mining companies' high operating leverage, we continue to incorporate the potential impact of lower gold prices on these companies' credit measures. Cost inflation, and in some cases, project execution risk, also remain notable headwinds that could pressurize the ratings on certain issuers if they occur alongside lower prices and no meaningful curtailment of discretionary spending over the next couple of years.

Thermal coal

We are lowering our price assumptions for 2023 as coal demand remains subdued, while the supply from coal-exporting countries is redundant. Thermal coal prices have been declining in the second quarter of 2023 due to oversupply in the market. Competition from Russian and South African coal also exert downward pressure on coal prices.

China's power consumption grew steadily after the country reopened in December 2022. Power consumption was up 5.2% year on year in the first five months of 2023. But thermal coal generation's share of the total keeps falling as renewables catch up. India's power consumption in the second quarter of 2023 declined year on year. Furthermore, both China and India are boosting domestic coal production to meet their demand.

Thermal coal prices will moderate in 2024-2025 as demand in China, India, and other Southeast Asian countries gradually peaks and demand from the EU and U.S. contracts. We continue to expect a delay in the global transition away from coal-fired power generation due to the current energy crunch. Our price assumption for 2025 is US$80 per metric ton as we believe that prices will continue to ease as supply rebalances and normalizes and decarbonization policies gain greater traction.

Zinc

We are lowering our price assumptions for zinc for 2023-2025. This reflects the existing forward curves, headwinds from the property sector in China, and uncertainties about zinc consumption developments in the EU. The positive momentum in the first quarter 2023 did not continue in the second quarter, when zinc prices hit three-year lows.

For the second half of 2023, our assumptions are slightly more optimistic than the spot prices, although they don't approach the highs of year-end 2022. The moderation in our medium-term zinc price assumptions continues to reflect our view that the supply and demand deficit should decrease in the coming years, notably with an increase in supply in 2025.

Unchanged Prices

Metallurgical coal

The current spot price for metallurgical coal is US$233 per ton, lower than our price assumption of US$250 per ton for the rest of 2023. This is because of the uneven recovery in Chinese steel demand post-lockdown. China's steel output declined for the second consecutive month in May 2023, after a sharp increase of about 20% in March 2023.

Despite weaker Chinese demand, we believe that the price of metallurgical coal could remain well supported going into the later part of 2023. This is because we expect a strong rebound in steel demand in India following the seasonally weak monsoon quarter from July to September. A rise in infrastructure spending will drive this demand. This will support metallurgical coal prices as India accounts for 20% of global seaborne trade.

Moreover, the recent improvement in steel mill margins in China, together with some market optimism that the Chinese government could unveil new economic support measures, could further support prices and demand for the remainder of 2023. Beyond 2023, we maintain our view of a declining price trajectory as China's steel output will gradually fall to reduce carbon emissions by 2030.

Copper

Downward pressure on copper prices persisted throughout most of the second quarter of 2023, as global economic growth slowed down and the U.S. dollar strengthened. However, prices have been gaining momentum since May, as Asian demand has picked up and market expectations of additional rate hikes have diminished, at least in the short term.

We now expect surpluses of around 300,000 tons in the concentrate market in 2023 and 2024 and a mild deficit in 2025, so demand strength and supply discipline are likely to continue to influence the price trajectory. However, we signal an increasing chance of downward pressure and more volatility ahead.

Inflation is also playing a large role in price upticks as operating costs climb. Recent trends show that cash costs could climb by more than 10% in 2023 compared to 2022 levels, and by close to 20% compared to those of 2021.

Iron ore

A moderation of China's recovery from its zero COVID-19 policy is the reason for our 2023 GDP forecast cut to 5.2% in 2023 and 4.7% in 2024. This moderation has caused iron ore prices to fluctuate at around $110 per metric ton in recent months. Accordingly, we hold our price forecasts unchanged as of June 2023.

While macroeconomic factors support steel production, such as the normalization of the Chinese housing market in the richer, upper-tier cities, Chinese policymakers are keen to contain overall leverage and are taking measures to rein in financial risks. This entails a supportive, but not significantly expansionary, macroeconomic policy in China.

As a result, while the key Chinese market will support demand to some extent, we don't expect a material increase in steel production in the next few years. We forecast that China's crude steel capacity will stay at 1.05 billion metric tons-1.10 billion metric tons per year in the next two years, with production at just over 1.0 billion metric tons. Over the medium to longer term, the government's ban on new capacity increases to achieve higher energy efficiency and lower carbon emissions will weigh on the Chinese steel sector.

On the supply side, we expect a modest increase in capacity. The three major iron ore producers based in Western Australia's Pilbara region continue to add capacity, undertake feasibility studies for replacement mines, or plan to add capacity in future. One such capacity addition is Fortescue Metals Group Ltd.'s Iron Bridge mine, which will produce 22 million tons of magnetite concentrate. On the other hand, we expect Brazil-based Vale S.A. to maintain volumes as it prioritizes profitability over material growth in production.

Nickel

We are maintaining our nickel price forecast for the rest of the year at US$20,000 per metric ton because it reflects lower demand than we expected in China for stainless steel, nickel's primary use. This has resulted in lower prices recently. Nickel is currently trading at around US$19,750 per metric ton. Still, we don't expect prices to decline meaningfully below the current levels until the end of the year, as trade volumes and stock levels in the nickel market remain moderate, which adds some premium to the price.

Despite lower stainless steel demand, nickel stocks at London Metal Exchange warehouses remain low, which should also prevent prices from falling materially below their current levels. We are also maintaining our nickel prices for 2024 and thereafter, as there have been no material changes in fundamental factors. We expect Indonesian supply to rise steadily and outpace demand growth, leading to a healthy surplus in the market over the next few years.

Related Research

• Global Credit Conditions Q3 2023: Higher For Longer Will Fuel Ratings Divergence, June 29, 2023
• Global Economic Outlook Q3 2023: Higher For Longer Rates Is The New Baseline, June 28, 2023
• Economic Research: Economic Outlook Asia-Pacific Q3 2023: Domestic Demand, Inflation Relief Support Asia's Outlook, June 26, 2023
• S&P Global Ratings Lowers Hydrocarbon Price Assumptions On Moderate Demand, June 22, 2023
• Credit FAQ: How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions, April 20, 2023
• S&P Global Ratings' Metal Price Assumptions: Short-Term Fundamentals Remain Favorable Despite Volatile Conditions, April 10, 2023