Standard & Poor’s has lowered its gold price assumption by almost 10% for 2014-2016, but raised its price assumption for zinc by 10%-20% during the same period.
“By contrast, we are not changing our assumptions for copper, nickel or iron ore,” said S&P analysts. “We expect favorable prices for copper and iron ore to persist over our forecast period, but our flat-to lower long-term assumptions incorporate the risk of incremental capacity over the next 18-24 months.”
“Nickel, for its part, continues to suffer from oversupply over our forecast horizon, as do aluminum and zinc, but prices could get a lift over the next several years as potential supply reductions from marginal producers and the uncertain effects of Indonesian export restrictions affect inventories,” they suggested.
S&P now assumes an average price of $1,250 per ounce of gold this year, and $1,200 per ounce in 2015-2016, which the analysts advised “could pressure ratings for some companies with persistently high costs after gold prices receded more than 25% in the past year.”
“A gold price below0 US$1,200 per ounce in 2014 is a key threshold for several gold miners, as we believe this price approaches the all-in cash costs for some producers (cash operating costs plus sustaining capital), sharply reducing cash flow available for growth investments or balance-sheet management,” they cautioned.
In the past year, S&P observed, “negative investor sentiment has tarnished gold’s historic role as a store of value, while the pullback of quantitative easing could threaten the inflation-hedge thesis. Incorporating our expectation of benign U.S. inflation of 1.4%-1.8% through 2015, we believe that gold prices will remain particularly susceptible to shifts toward higher U.S. interest rate expectations and a stronger U.S. dollar.”
S&P is maintaining its 2014-2016 price assumption for copper at $3.10 per pound. “Our price assumptions…compared favorably with average industry production costs—particularly for Latin American producers that have benefited from local currency depreciation—thereby supporting margins and capital investment in the sector. Our assumptions continue to incorporate the interplay of large expansion plans that could boost inventories and weaken prices with supply constraints, as miners are challenged to increase production due to falling reserve grades and stricter environmental costs.”
S&P also maintains its price assumptions for nickel at $6.75 this year and $7.25 for 2015-16 “because we expect nickel prices to rebound somewhat in 2014 and 2015 compared with the depressed levels of US$6.20-$6.50 at year-end 2013,” said the analysts.
“We estimated that more than 30% of global producers are currently loss-making, which we believe should compel them to curtail production in the near term,” they observed, adding that the Indonesian partial ore export ban should also contributed to nickel supply reduction.
S&P raised its price assumptions for zinc to 90-cents per pound this year and 95-cents/lb for 2015-2016 as spot prices respond to potential production curtailments and the possibility of lower mined and refined metal in 2015 and 2016. “Nevertheless, substantial inventories persist, likely limiting any sharp near-term price upside and creating a considerable downside risk in the event of weaker demand,” the analysts cautioned.
Price assumptions for iron ore have been maintained at $110 per tonne this year and $100/t in 2015-2016 because S&P expects iron ore prices to continue declining from last year. “We maintain our expectation that global demand for iron ore will rise by about 2% in 2014, primarily because of demand from China,” the analysts advised, noting that “volatility remains high as trading activity grows…”
iPad Version: Picture – A man carries a load of stones to break at a primitive gold mine in Panompa near Phichin: REUTERS/Damir Sagolj