TORONTO (miningweekly.com) – The contraction in base metal prices and related commodities, which have shown a declining trend since 2013, has accelerated in recent months owing to a culmination of macro and industry-specific factors, prompting risk management firm Moody's Investors Service to lower its commodity price assumptions.

The firm on Thursday explained that a perceived sharper-than-expected slowing of the Chinese economy, limited supply response from commodity producers, overcapacity in global steel markets, reduced energy costs and the strong dollar were creating “unprecedented adverse” conditions for these commodities, driving prices down to levels close to those seen in the 2008/09 financial crisis, but with more drawn-out recovery prospects.

Moody's cut the price assumption for copper in 2016 to $2.35/lb, down from $2.50/lb in 2015. Prices were expected to recover to $2.60/lb in 2017. Nickel prices were expected to fall to $4.80/lb in 2016, down from $5.25/lb in 2015, with price recovery in 2017 expected to lift the commodity again to $5.25/lb.

Iron-ore grading 62% purity in China was discounted $5/t to $45/t in 2016 and 2017, while zinc was expected to trade at $0.80/lb in 2016, as compared with 2015 prices of $0.85/lb, and $0.90/lb in 2017.

China’s rate of growth, export levels and infrastructure investment were important drivers in metal demand expectations. Heightened uncertainty as to actual growth rates in China had caused sentiment toward base metals to turn increasingly negative. While prices generally had shown a flat to declining trend since 2013, a more dramatic contraction had been in evidence since June, with August seeing significant downward movement.

As China now consumed a significant amount of base metal production, Chinese growth expectations and the consequent demand for base metals played a critical role in metal commodity price movement. Moody’s had recently revised its 2016 gross domestic product (GDP) growth forecast for China downward to 6.3% from 6.5%.

Further, economic conditions in Europe remained weak, Brazil and other major economies were experiencing negative GDP growth and the US, while showing acceptable statistics, was slowing, with the August purchasing managers index at 51.1 compared with 52.7 in July.

Because industrial production levels and GDP growth expectations were key indicators of the fundamental demand for base metals, Moody’s had lowered its base metal price assumptions in light of lower global and Chinese growth expectations for the balance of 2015 and 2016.

As comparable economic drivers and the importance of China’s steel output growth rates also applied to seaborne iron-ore and metallurgical (met) coal prices, Moody’s had also lowered its price assumptions for these minerals.

The price assumption changes did not result in immediate rating actions; as each company’s rating would be evaluated on a case-by-case basis.

DIMMED OUTLOOK
Moody’s noted that there was little impetus seen that would materially reverse the recent slide and the firm expected prices to remain in these lower ranges for a longer timeframe. However, each metal within the complex had different dynamics, which would determine how supply/demand fundamentals played out.

Further, certain metals – aluminium and copper in particular, being deeper markets – were also affected by hedge-fund investment activity and financing transactions. “We expect the aluminium market [to] remain challenged by oversupply and the risk of unwinding of financing transactions,” Moody’s advised.

The firm also continued to view copper as well positioned over the medium term, given declining ore grades and lower recovery rates. Overall, the market would remain volatile and sensitive to changes in, and expectations for, economic and global growth rates and investment fund activity.

While metal prices had contracted sharply since June, the cost curve had also moved down on currency devaluations and lower energy costs. As a result, high-cost capacity, which would normally exit the market in a downturn, remained in production, thereby exacerbating the oversupply conditions, especially for aluminium, copper, met coal and iron-ore.

Nonetheless, the cost benefit from US dollar strength for non-US producers and low oil prices would mitigate but not offset weak prices, Moody’s said.

However, the stronger US dollar would make metal purchases more expensive in local currency terms and potentially drive prices and demand downward.

Moody’s base metal price assumptions for 2016 assumed that conditions would remain relatively unchanged from current levels, although stabilising on announced and expected production cutbacks, while 2017 would show some improvement on a more balanced supply/demand position and improving global economic fundamentals.

Met coal and iron-ore prices had similarly showed sharply declining trends. Moody’s met coal and iron-ore price assumptions reflected expectations for a continued slower growth rate in Chinese steel output, down 1.6% year-on-year through July, with further net increases in iron-ore supply, which would maintain pressure on iron-ore prices. The modest improvement in met coal assumptions expected unprofitable production coming out of the market in 2017, Moody’s said.