Fitch Ratings Raises Iron Ore Price Assumptions, Cuts for Copper, Aluminium

Iron ore production disruptions and lower projected market deficits for copper and aluminium in 2019-2021 are the main drivers of our updated mid-cycle metals and mining price assumptions, Fitch Ratings says.

The upward revision of iron ore price assumptions since our last update in October 2018 reflects supply disruption following Vale’s tailings dam failure at Feijao. This disruption will reduce net iron ore supply from Brazil by about 30 million-50 million tonnes a year, out of a total 40 million-60 million tonne reduction factored into our assumptions for 2019-2020. We forecast that the remaining Brazilian supply reduction will be from Usiminas, Companhia Siderurgica Nacional (CSN) and Gerdau. Vale expects to update its production guidance with its results announcement on 27 March 2019.

The level of supply disruption would fall if other iron ore producers increased output. However, disruption could be exacerbated in 2020 if Anglo American’s Minas-Rio does not secure an operating licence to lift its tailings dam wall by 20 metres over the next 12 months.

The cut to our copper price assumptions in 2019-2021 reflects a change from our previous assumption that the market will move to progressively larger market deficits over this period. This is based on a combination of lower assumed global copper demand, particularly impacted by weaker demand from China, and a firmer project pipeline that will lead to larger new supplies and lower assumed disruptions at existing operations. We no longer expect material deficits during this period.

The downward revision of aluminium price assumptions is driven by smaller projected market deficits and lower aluminium demand growth outside China. We expect that Chinese semi-finished and finished producers will increase exports as a way to sustain production, reducing the global deficit. Aluminium demand in China is weakening in key areas, such as automotives, where sales fell 2.5% yoy in 2018. According to CRU, export-led growth was the main driver of a Chinese primary aluminium demand increase of 4% in 2018, masking a sharp decline in domestic-led demand. Aluminium and aluminium product exports from China grew by 15% yoy in 2018, despite the introduction of tariffs by the US.

Our price assumptions are not commodity price predictions, but are used to provide a range of foreseeable operational and financial profiles commensurate with a rating level that would remain constant through mining cycles. Fitch’s projections are developed over a three-to-five-year time horizon. For the first three years, we typically use conservative market-based commodity prices. For the remaining period, the price assumptions trend towards our long-term price.
Source: Fitch Ratings