S&P Global Ratings is updating its metal price assumption for 2024-2027, taking into account its expectations for lower economic growth around the world and lower inflation, but with persistent cost pressures to produce industrial metals (see "Economic Outlook U.S. Q4 2024: Growth And Rates Start Shifting To Neutral," Sept. 24, 2024, on RatingsDirect). Even with weaker indicators for some manufacturing and residential construction in 2024, demand is good for commercial construction and inventories remain tight for most metals. Prices are basically steady with those a year ago, with a moderate 5%-10% run-up in mid-2024.

Our assumptions for the next few years reflect generally supportive demand from construction and machinery investments, even as U.S. economic growth slows with interest rates returning to neutral levels. Furthermore, production costs for metals are intractably higher, so we expect higher trough prices in a downturn. At the same time, these persistently elevated operating costs and heavy sustaining capital expenditures could constrain the profitability of metals producers under a range of economic scenarios. We have been raising some longer-term prices to reflect structural pressures, even as near-term prices dropped from record highs.

Aluminum

We have revised upward our price assumptions for the rest of 2024 and our price assumptions maintain an upward sloping trajectory. Prices have bounced within a range of plus-or-minus 10% in 2024, ranging from $2,200 per metric ton (/mt) to $2,700/mt in recent weeks. Prices have been responding to lower interest rates, Chinese stimulus, record Chinese production, alumina production disruptions, and rising finished aluminum inventories. The market is likely to be in surplus again this year, despite significant capacity remaining curtailed in the U.S. and Europe, as the near-term demand outlook weakens.

Aluminum demand from packaging, automotive, transportation, and electrical transmission end-markets is improving. Building materials and construction remain weak but could be poised for a gradual recovery as interest rates decline. Profits and cash flows remain squeezed as alumina prices rise due to recent supply disruptions and because energy costs affect smelting assets that rely on market-based electricity.

Despite the tepid outlook, our view that prices will remain above historical averages over the next several years stands. We believe that costs could constrain the supply picture in the coming years, with aluminum's role in the green economy and energy transition driving longer-term demand growth and supporting our longer-term, higher price assumptions despite near-term weak macroeconomic sentiment.

Copper

After a couple of months of prices receding to sub $9,000/mt, copper prices have again gained momentum since mid-September 2024. Economic stimulus from the Chinese government to support growth, particularly in the real estate sector, coupled with the expectation of a strong growth in power demand from AI and the reduction in interest rates were the main drivers.

We are assuming prices average $9,200/mt for the rest of 2024 rising gradually toward $9,700/mt in 2027. The world's decarbonization trend and the need to build power infrastructure for renewables are also long-term growth factors for copper demand.

Supply of copper concentrate is likely to continue struggling to meet demand although that wouldn't necessarily translate into refined copper deficits because the global smelting capacity is expanding more decisively.

Nickel

We have raised our near-term nickel price assumption modestly but held our long-term prices steady at $18,000. Nickel might benefit from the large economic stimulus China announced on Sept. 24, 2024, and aimed, among other things, at the property sector, a large consumer of stainless steel. Higher demand from the Chinese economy, combined with some hurdles on the supply side, such as delays in nickel ore mining permitting in Indonesia that might result in a slower increase in Indonesia's output, could reduce oversupply in the next year and support the prices. We note, however, that there wasn't much movement in prices from delayed permitting in Indonesia and potential export restrictions from Russia indicating that there is little concern over supply side. We are holding our 2026 and long-term prices at $18,000, but believe that markets could be fundamentally oversupplied because output will likely outpace the growth in demand, limiting material price upside for the metal.

Zinc

We are increasing our zinc price assumptions modestly for 2025 onward. Most recently, zinc prices jumped to about $3,000/mt from $2,500/mt because of a squeeze in zinc concentrate. In our expectations, we think the jump in zinc spot prices in the recent months is likely a meaningful uplift and will support fundamental factors like the refined balance position. In our view, a surplus in the refined balance could remain in the near term, albeit at a reduced level for 2024.

We still anticipate turbulence within zinc demand from China, which has shown mixed signals since the beginning of the year and accounts for about half the global zinc demand. The recently announced Chinese stimulus package could provide support for bolstered prices; however, the longer-term demand outlook is mixed, and our price level reflects our moderated view of a mild uplift alongside other factors. Zinc treatment charges are nearing all-time lows, with profitability for smelters collapsing, in the wake of which, a 1-million metric ton cut on production was announced.

Gold

We raised our gold price assumption to $2,500 per ounce for the remainder of 2024 (up from $2,100), $2,300 in 2025 ($2,000), $2,100 in 2026 ($1,700), and $1,800 in 2026 ($1,700). Gold prices have risen considerably over the past few months, hitting all-time highs in recent weeks and a current spot price of about $2,670. We believe gold's ascent of late stems from heightened geopolitical risks, a higher-than-anticipated interest rate cut by the U.S. Federal Reserve (Fed), and uncertainty about the U.S. election.

Unease over a range of geopolitical factors such as the conflicts in the Middle East and Ukraine, and the U.S. election, likely support demand for gold as a safe-haven investment, in our view. Further adding to investors' appetite for gold was the Fed's 50 basis point cut to its overnight bank funding rate on Sept. 18, and signals that more rate cuts are likely, which could put downward pressure on the U.S. dollar and support gold prices from already record levels.

Our revised gold price assumptions reflect our view that prices could remain elevated for several years, although recede from record highs. The assumption we use for corporate credit analysis declines toward gold's long-term average, which is near the price many issuers use to plan new investments. We recognize the case for a sustained higher long-term average price, but gold prices often retrace for several years from record levels. Therefore, our assumptions for many commodity metals will often point down from peak levels and up from trough levels. The gradual decline we assume in the price of gold beyond this year incorporates our view that 10-year treasury yields will remain higher than 3%, well above pre-pandemic levels, and that core inflation will decline to the low-2% area. As inflation declines while policy and market rates remain elevated, sustained positive real interest rates could pressure gold prices further.

Although our higher gold price assumptions will strengthen credit measures for most gold producers we rate, we don't anticipate imminent rating actions. Most of these issuers have benefited from several years of strong prices that increased cash flow sharply and improved their debt leverage, while they distributed excess cash to shareholders. In these cases, business risk or financial policy considerations constrain ratings upside. 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 factors that could pressure the ratings on certain issuers if they occur alongside lower prices and no meaningful curtailment of discretionary spending over the next couple of years.

Iron Ore

We are holding our price assumptions for iron through 2026, while extending our price forecasts to 2027. The recent Chinese government central bank stimulus and specific measures to support the property market have provided price support to iron ore. After the Iron Ore Index (IODEX) 62% Fe fines benchmark traded down to the $90 per dry metric ton (/dmt) level, spot prices have rallied to levels aligned with our 2024 assumption of $110/dmt. China's dominance as the largest global steel producer with output plateauing at about 1 billion metric tons, means Chinese demand for iron ore remains the main driver of iron ore pricing. Hence, in the near term we take the view the Chinese stimulus measures are likely to support prices for 2024 and into 2025 in a manner consistent with current futures prices. We also believe that downside risks for iron ore prices are likely to continue into 2026 and 2027.

The main source for risks for steel demand and iron ore prices reflect the potential for the structural problems in the Chinese property market to persist. We note that the Chinese property market consumes about 250 metric tons of steel now (a bit more than 25% of total production), which is about 100 metric tons less than when the property market was at its peak before the pandemic. If measures aimed at absorbing the glut of unoccupied homes and boosting consumer confidence--thereby giving impetus to the property market and hence stabilizing demand in the home construction sector--prove anemic, steel demand from property construction and consequently for iron ore could continue to weaken.

The soft outlook for the home construction sector increases the importance of the infrastructure and industrial sectors to provide a compensating demand source for steel, for example through increasing exports of vehicles. In addition, we note China is set to export about 100 metric tons of steel in 2024--the most since 2016--which is proving to be a key channel for Chinese steel producers. Geopolitical risks in the form of tariffs on steel and the auto sector, particularly electric vehicles (EVs), could constrain steel production and hence iron ore demand.

We also see supply-side risks to iron ore pricing emerging in the next 24 months. This is coming from the major iron ore producers, which are likely to add incremental supply. We see Rio Tinto Group's Simandou project in Guinea beginning to add material supply in 2026 into 2027. We anticipate this lift in supply, in the absence of a material lift in demand from China, will likely begin affecting future iron prices in the next few years.

Met Coal

We lowered our 2024 price assumptions for metallurgical coal to $220/mt. Prices plummeted to $180/mt in September 2024, down from about $250/mt in July 2024 because of lackluster demand from the Indian and Chinese steel mills. Spot prices have rebounded to $200/mt in recent weeks, buoyed by optimism surrounding the Chinese government's stimulus package. We anticipate that post-monsoon restocking demand in India will also support the prices in the near term.

While Chinese steel production in 2025 is likely to remain below 2024 levels, we forecast a 3.3% increase in global steel production outside of China in 2025 compared with the projected 1.4% growth in 2024. A major part of this will come from India, Europe, and North America. The ramp-up of recently added steel capacities of about 12-15 million metric tons in India could boost demand for metallurgical coal above 100 million metric tons in 2025. A substantial portion of this coal will be imported from Australia, supporting seaborne prices in 2025.

We maintain our view that prices decline toward market-clearing cash costs in 2026 and 2027, consistent with our approach for most metal price assumptions. That said, any unforeseen supply disruptions worldwide could result in prices higher than our assumptions.

Thermal Coal

We assume thermal coal prices will average at US$135/mt for 2024 because we view the demand for Newcastle Australia thermal coal will be relatively stable for the rest of the year. Winter restocking is expected to support thermal coal import demand, which will underpin thermal coal prices. China's coal import has continued to rise in 2024 despite slower industrial demand and higher hydropower input. Domestic coal production declined in the first eight months of the year amid tightened safety checks and environmental standards. Seaborne thermal coal prices are reasonable compared with domestic prices. India's and Vietnam's strong demand outlooks will also be supportive of thermal coal prices but India imports less high-grade coals. That said, these countries have been diversifying their coal supplies, such as importing from South Africa and Russia.

We assume thermal coal prices will moderate in 2025-2026 as demand in most Asian countries gradually declines, except for India and some southeast countries. As the main importers of Australia's high-grade thermal coal, Japan, Korea, and Taiwan account for more than half of Australia's thermal coal. These countries' thermal gap will continue to shrink as the power generation from other energies, such as nuclear, will pick up. Our price for 2026 is US$90/mt because we believe that prices will ease as both demand and supply continue their decline in light of these countries' decarbonization targets.