S&P Global Ratings raised several of its metal price assumptions for 2024-2026, reflecting generally supportive demand, tight supply-demand balances for a few metals, and rising costs across the board. Perhaps most telling, we have raised some longer-term prices to reflect structural pressures, even as near-term prices dropped from record highs.

Table 1

As mine-by-mine data are compiled for 2023, we see a rise in the cash production costs of most metals, notably gold and metallurgical coal. We've raised our third-year price assumption for gold three times in the last year, and our base-case assumption is above $2,000 per ounce for the first time ever. The long-standing inverse relationship between gold and the U.S. dollar has been disconnected for about two years because geopolitical risks supporting higher gold prices are overwhelming the currency considerations. On the other hand, if that historical negative correlation resumes, we would expect either lower gold prices or a weaker U.S. dollar.

For metallurgical coal, cash production costs around the world are higher. It also appears major producers are keen to preserve capital and harvest cash, rather than invest to increase output or lower unit costs.

Credit quality in metals and mining appears to have levelled off after a long run of improvement. We still have a favorable credit outlook bias for several steel producers around the world, but the credit outlook for mining companies has stabilized at a higher level as we expect more spending to sustain output, growth, and acquisitions.

For further information on our approach and use of these price assumptions, see "Credit FAQ: How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions," published April 20, 2023.

Aluminum

Our price assumptions for aluminum remain unchanged. The overall global macroeconomic outlook remains mixed with muted demand in Europe and China. Aluminum demand from packaging, automotive, transportation, electrical transmission end markets is improving, but building materials and construction remain weak.

Aluminum premiums have ticked up slightly as inventory levels remain tight and end-user demand is gradually improving. Despite persistent supply constraints, we expect a balanced supply-demand picture this year. However, with the increase in alumina pricing and sticky energy costs, profits and cash flow are being squeezed for 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 still stands. Elevated energy and raw material costs have pressured smelters globally. More than 1 million metric tons (mt) remains offline in Europe and the U.S. Furthermore, we expect supply growth from China will remain muted. Local governments continue restricting carbon-intensive capacity growth to below the production cap of 45 million metric tons per year. We anticipate this globally constrained supply picture and aluminum's role in the green economy and energy transition will drive longer-term demand growth and support maintaining our longer-term, higher price assumptions despite near-term weak macroeconomic sentiment.

Copper

We raised our price assumptions on copper to $9,000 per metric ton for the rest of 2024 and $9,200 for 2025 and 2026. Spot prices have moved up sharply since February 2024 due to a series of supply disruptions and good demand globally. The prospect of growing demand from renewable energy sources (infrastructure and the electric vehicle industry) supports our higher long-term price trajectory. Our longer-term assumptions for copper contrast with other metals because of the modest upward slope from currently good price levels.

Supply-demand is tight, with inventories at about eight weeks of supply for most of the last two years. The long-term demand outlook is robust, so prices never dropped as much as most metals in recent swings, and they rebounded from downturns faster than most.

A tight market balance has been disrupted by the shutdown of the Cobre Panama mine in December 2023, which added to supply cuts from Chilean state-owned Corporacion Nacional del Cobre de Chile (Codelco; BBB+/Stable/--) in 2023, and more recently from a strike at Codelco's Radomiro Tomic mine following a fatal accident. Also, copper smelters in China have been under pressure due to high copper concentrate prices forcing a portion of less-efficient producers to idle capacity or to switch to scrap. Despite that, we expect global smelter production to outpace concentrate production through 2027, which might add to inventories modestly in the next year or two.

Nickel

We have maintained our nickel prices at $16,000 per metric ton for the rest of 2024 because we believe that short-term downside risks to nickel prices remain significant, despite a recovery to around $19,000 over the last few weeks.

In our view, delays with nickel mining permitting in Indonesia could ease in the second half of the year. This would remove limitations on Indonesian output, one of the key factors pushing prices higher recently. We believe that with lower or no mining limitations, Indonesia can fully meet expanding demand with a healthy surplus.

Also, we have yet to see how large the impact of the U.S. and U.K. ban on Russian nickel will be. The ban will result in Russian metal being unavailable at the Chicago Mercantile Exchange and London Metal Exchange. However, fundamentally, we believe that Russian metal will likely find its way to the global market, although with more complex logistics.

We maintained prices at $17,000 per metric ton for 2025 and $18,000 for 2026. We believe that fundamentals for long-term prices have not changed as market surplus gradually shrinks due to higher demand, which will result in price increases.

Zinc

We maintained our price assumptions on zinc for 2024-2026 at $2,500 per metric ton. Most recently, the zinc prices hiked to above $2,700 on the zinc concentrate squeeze, but since the beginning of the year, they largely floated at $2,300-$2,600 per metric ton. We believe the jump in zinc spot prices in recent weeks could be temporary. Therefore, we stuck to fundamental factors for our zinc assumptions, such as the refined balance position, which could be in surplus over the next three years as seen in 2023, and zinc demand fluctuations in China, which have shown mixed signals since the beginning of the year.

Gold

We raised our gold price assumption to $2,100 per ounce for the remainder of 2024 (up from $1,900); $2,000 in 2025 ($1,700); and $1,700 in 2026 ($1,600). Gold prices have risen considerably over the past couple of months, hitting all-time highs in recent weeks with a spot price of just above $2,300.

We believe this increase in large part stems from rising tensions in the Middle East increasing demand for gold as a safe-haven investment, despite the U.S. dollar strengthening--traditionally a headwind for gold. The ongoing Russia-Ukraine war and deteriorating relations between China and the U.S. over the issue of Taiwan further heighten geopolitical risks and could support elevated gold prices through most of this year. These risks are likely to persist and contribute to the strong demand for gold from many central banks around the world, most notably in Asia, as they look to reduce their U.S. dollar exposure.

The gradual decline we assume in the price of gold through 2026 incorporates our view that 10-year treasury yields will remain higher than 3%, well above pre-COVID-19 pandemic levels, and that core inflation will decline to low-2%. As inflation declines while policy and market rates remain elevated, sustained positive real interest rates could pressure gold prices further. We assume prices will ultimately settle at about $1,700 per ounce in 2026, up modestly from our long-term assumption of $1,600 earlier this year. This stems from our view that higher costs will persist, particularly with respect to labor, and that a price below $1,600 would cause cash losses for some mines, considering that all-in production costs are trending more than 30% higher when compared to 2019.

While our higher gold price assumptions will strengthen credit measures more than we previously forecast 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 balance sheets, while they distribute excess cash to shareholders. In these cases, business risk or financial policy considerations constrain ratings upside more 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 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 retained our price assumptions for iron through 2026. Prices have traded around our 2024 assumption of $110 per dry metric ton (dmt) after a bull run from late 2023 when the Iron Ore Index (IODEX) 62% Fe fines benchmark peaked at a 19-month high of over $140 per dmt. Given China's dominance as the largest global steel producer at about one billion metric tons, Chinese demand for iron ore remains the main driver of iron ore pricing. Hence any geopolitical tensions with China could have an outsized impact on the iron ore market (see "Geopolitical Risks Rise On Iran-Israel Conflict Expansion Despite Immediate Reprieve", published April 15, 2024).

China's seeks to constrain steel production as part of its efforts to decarbonize its economy, which means we expect 2024 steel production to be flat at best. At this point, we don't expect growth from other markets to sufficiently offset the influence of sluggish demand from the Chinese property sector (historically about 30% of steel demand).

Nevertheless, steel demand has benefited from strength in the Chinese manufacturing and infrastructure sectors, which continue to grow, thus supporting near-term steel demand. Also supporting iron ore demand are stronger steel exports, as producers look for markets to maintain mill throughput and offset domestic surpluses. We expect China's GDP growth to slow to 4.6% in 2024 (from 5.4% in 2023), edge up to 4.8% in 2025, and return to 4.6% in 2026 (see "Credit Conditions Asia-Pacific Q1 2024: India, Southeast Asia Advance As China Slows", published Dec. 4, 2023).

In 2024, we expect incremental, additional supply from the three major iron ore producers based in Western Australia's Pilbara region. Meanwhile, Brazil-based Vale S.A. (BBB-/Stable/--) reported production that was slightly ahead of consensus for the quarter ended in March. This lends confidence it will achieve its full-year forecasts of 310-320 metric tons, a flat result compared to 2023 and evidence of the company's focus on profitability over production growth.

We note Rio Tinto anticipates that its Simandou project in Guinea will produce first ore in 2025, before ramping up to 60 million metric tons over 30 months. We anticipate this lift in supply, in the absence of a material lift in demand from China, will likely begin affecting future iron prices during the next few years.

Metallurgical Coal

We maintained our 2024 and 2025 price assumptions for metallurgical coal. Prices dropped to about $240 per metric ton from $340 per metric ton in January 2024 because of subdued demand in China and India.

Perhaps most notable, we increased our price assumptions for 2026 to $200 per metric ton from $160 per metric ton. This reflects structurally higher market-clearing cash costs, general inflation in the mining sector, as well as higher royalty rates in Australia. Our assumptions also account for the likelihood of unforeseen supply disruptions caused by adverse weather events and geopolitical conflicts.

Our assumption of $270 per metric ton for the remainder of 2024 is higher than the current spot price because we anticipate a rise in Indian steel demand during the second half of the year. In our view, a resumption of construction activity after the general elections could support steel consumption. While Chinese steel production in 2024 will likely remain below 2023 levels, we expect global steel production to grow 1.3% compared to last year's 0.2% increase, mostly from India, Europe, and North America.

Thermal Coal

We assume the thermal coal price will average at USD 120 per metric ton for 2024 as demand for Newcastle Australia thermal coal appears to soften. Japan, Korea, and Taiwan account for over half of Australia's high-grade thermal coal exports. These countries' thermal gap will continue to shrink as power generation from other energies, such as nuclear, start picking up.

China and India will continue their imports from Australia, but their share in Australia's thermal coal output is down to about one quarter. We expect China's demand to remain stable, although its thermal power generation growth will slow with high renewable growth. Despite higher domestic coal output, China still has a good appetite for Australian imports to offset the declining quality of domestic thermal coals. India's strong demand outlook will support thermal coal prices, but India imports less high-grade coal. Furthermore, these countries will continue to diversify their coal supplies from places like South Africa in 2024.

We assume thermal coal prices will moderate in 2025-2026 as demand in most Asian countries gradually declines, except for India. This reflects our expectation that the global transition away from coal-fired power generation will regain its pre-COVID-19 pace. Our price for 2026 is $90 per metric ton as we believe that prices will ease as both demand and supply continue their decline in light of these countries' decarbonization targets.