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Fitch Revises Mid-Cycle Metals and Mining Price Assumptions.

London: The upward revision of aluminium, hard coking coal and thermal coal price assumptions in Fitch Ratings' latest review reflect expected supply constraints. In contrast, we lowered our zinc pricing assumptions due to new volumes entering the market and alleviating the current supply tightness. Long-term assumptions for gold, nickel and iron ore are unchanged or revised upwards slightly. We do not expect the updated pricing assumptions to trigger multiple rating actions.

Our raised iron ore price assumption for 2018 reflects the strong start to the year, with the actual price averaging USD74/tonne for the first three months. This average price is in the 98th quartile of the cost curve according to CRU, so there is plenty of room for prices to fall. We believe this will happen in the second half of 2018 as companies such as Vale, Roy Hill and Rio Tinto add volumes to an already oversupplied market. The trend of falling hot metal production from China will be a constraining factor on prices over the medium to long term.

We expect the copper market to be roughly balanced to a small surplus over the next two years, but increasing deficits thereafter. The growth in electric vehicles - although remaining a relatively low percentage of overall copper demand - will be an important contributory factor.

Our long-term aluminium price assumptions incorporate the expected return of Rusal's aluminium to the market after a change in the company's ownership in a manner satisfactory to the US Office of Foreign Assets Control, which would allow the lifting of sanctions within a few months. We would then expect prices to moderate, compared to the sharp increases following the announcement of sanctions against the company and its controlling shareholder. Nevertheless, the long-term price assumptions revision reflects a better supply-demand situation than previously expected.

Nickel price revisions reflect our expectation that the market will stay in deficit until 2022, with decreasing stocks over this period. As with copper, electric vehicle demand will be a factor: CRU forecasts nickel demand from batteries to be around 221,000 tonnes in 2022, up from an estimated 106,000 tonnes in 2017. This growth will cause the battery sector's share of total nickel demand to rise to over 8.0%.

We have lowered our zinc assumptions in the longer term. This is based on new supply entering the market. We expect rising zinc concentrate supplies to begin to alleviate some of the current tightness in the second half of 2018. By 2019 concentrate availability should comfortably exceed that of smelting capacity, and concentrate inventories should start to recover. With demand growing only marginally, the zinc market is likely to return to surplus.

Near-term hard coking coal price assumptions reflect supply constraints, which Fitch believes will be alleviated by additional supply from Australia and Mozambique. Fitch assumes prices will converge on marginal costs in China rather than marginal costs in the US in the longer term.

We do not expect multiple rating actions following these price assumption revisions. Higher price assumptions for some metal and minerals could improve expected credit metrics for some miners, but this could be offset by higher capital expenditure and dividends. We will continue to analyse credits case by case, particularly weighing potentially improved profitability and operating cash flows against management's financial policies and investment discipline.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Aug 9, 2018
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