Global base metals outlook turns negative – Moody’s
Global credit ratings advisory firm Moody’s Investors Service has changed its outlook on the global base metals industry to negative, citing weakening macroeconomic growth indicators and investor sentiment.
In its report ‘Global Base Metals Industry: Economic Weakness and Copper Price Plunge Turn Outlook Negative’ Moody’s on Thursday said that weak economic statistics for China, which consumed more than 40% of the global base metals output, and continued European doldrums weighed negatively on the sector, despite the relative strength of the US economy.
“Our change to a negative outlook on base metals is driven by a combination of factors. Slowing growth in China’s gross domestic product (GDP), continued weakness in Europe and falling copper prices have all contributed to our revised outlook,” Moody’s senior VP and report author Carol Cowan said.
Despite base metals demand being relatively steady, growth prospects were muted. China’s economy continued to slow, with the GDP below government targets at about 7.3% growth in the fourth quarter last year and 7.4% for the year.
Tightened credit conditions, particularly for trade finance, and slowing investment in infrastructure, a key metal-consuming industry, contributed to weaker metal consumption.
Similarly the HSBC Purchasing Managers’ Index (PMI) for China registered 49.6 in December, down from 50 the previous month. Europe also continued to face challenges in its recovery.
While the Markit eurozone manufacturing PMI of 50.6 in December improved slightly from 50.1 the previous month, headwinds continued to challenge recovery there given weak manufacturing activity and demand levels, among other concerns, Moody’s said.
Moody’s reported that the US economy was solid, but was on its own not enough to counter global weakness. The US economy continued to grow, with a December 2014 PMI of 55.5, down somewhat from the 58.7 the prior month.
“Although the US economy is strong and consumption of base metals remains robust, it’s not enough to counter weakening global trends,” Cowan warned.
The International Monetary Fund (IMF) recently cut its forecast for global growth in 2015 to 3.5%, a modest increase from 2014, but a reduction from its 3.8% forecast in October 2014. The IMF also extended the lower growth rate forecast into 2016.
“That bodes ill for base metals consumption growth, which is closely tied to industrial production and GDP globally,” Cowan noted.
Meanwhile, the rapid fall in oil prices had hit copper in particular. Prices had fallen considerably since December, indicating a correlation not seen in recent years. As expected, copper prices traded sideways in 2014, with pressure to the downside.
In recent weeks, copper had lost roughly 14% from the $3/lb it averaged last month, falling to about $2.58/lb as of January 21. This was approaching the marginal cost of production in the industry, Moody’s noted.
“We believe the precipitous drop in copper prices is a combination of factors, including rebalancing by index funds of energy exposures, which would also impact copper in the equation; investor concerns over slowing global growth and uncertainty about growth in China; and concerns over an expected supply surplus this year as new production comes on line.”
While the confluence of these issues contributed to the copper price decline – which might be somewhat of an overcorrection – Moody’s analysts said they did not see a catalyst for a strong rebound in 2015 and expected average prices for the year to remain below $3/lb.
However, from a supply/demand perspective, Moody’s saw copper as remaining well positioned over the medium term, given its broad industrial applications, the ongoing reduction in grades and recovery rates, and the increasing time and challenges to bring new supply to the market.
Other metals had fared better than copper. Aluminium, nickel and zinc did not experience the same degree of price degradation. Although aluminium prices had retreated from gains made late last year, they remained within Moody’s’ expected sensitivity trading ranges, as did nickel and zinc.
However, lower fuel prices could result in aluminium smelters that were currently idled coming back on line, which would be a negative for the industry.
Further, the aluminium industry continued to have a large amount of metal tied up in financing transactions, which disrupted the physical market fundamentals and contributed to abnormally high delivery premiums globally.
Moody’s found that lower oil prices would benefit the fuel-intensive extractive part of the mining industry.
“We estimate that fuel accounts for roughly 25% of costs and that at a $52/bl oil price (for Western Texas Intermediate), fuel cost savings could approximate up to 8% compared with 2014. As oil declines below this point, savings will increase.
“Additionally, with the strengthening of the US dollar, producers in countries such as Canada, Australia and Brazil, will recognise further cost savings, allowing them to remain more competitive in a declining realised-metals-price environment,” Cowan explained.
The analyst noted that the base metals price outlook could impact producers such as Rio Tinto, BHP Billiton and Vale.
However, the lower oil price would only somewhat soften the impact of price degradation.
The credit ratings agency expected that all metal producers would suffer earnings and cash-flow deterioration in 2015.
Slower demand growth and new or restarted capacity would negatively impact performance for the industry, placing diversified producers such as Rio Tinto, BHP Billiton, Vale, Anglo American and Teck Resources, with exposure beyond base metals to markets such as metallurgical coal and iron-ore, under increased downward pressure on weak demand fundamentals and increasing supply into an already over-supplied market – notwithstanding their lower production costs.
“Companies with low-cost production profiles, solid liquidity positions and acceptable debt maturity profiles likely have some run room. However, the ability to further reduce costs, cut back or defer capital spending and employ other levers will be important considerations for ratings, given current market conditions,” Cowan said.
EDITED BY: TRACY HANCOCK