EMEA metals, mining sector faces tough year ahead-S&P
The persistent pressure on the credit quality of metals and mining companies based in Europe, the Middle East and Africa (EMEA) will cause the credit metrics of many Standard & Poor’s rated metals and mining companies to materially weaken this year.In fact, S&P Credit Analysts Alex Herberg, Andrey Nikolaev, Paulina Grabowiec and Trevor Pritchard suggest credit quality could also remain strained in 2010.In a recently published analysis, the analysts said "mining companies face a period of low prices and reduced production, which we anticipate will lead to sharp falls in profitability and cash flow generation in 2009. Combined with a legacy of debt-financed acquisitions by certain players, including Rio Tinto, Xstrata, and Anglo American, we believe that this is likely to considerably weaken credit quality in the sector this year. Such weakening is reflected in the downgrades among these leading diversified miners."The analysts noted that prices for exchange-traded base metals "have fallen significantly." Meanwhile, despite production cuts, "inventories-especially in aluminum-have risen to multiyear highs.""Aluminum producers face a particularly difficult market environment, as prices have fallen to below the costs of production," said S&P. "We therefore expect producers to report very weak profitability-possible losses and cash flow generation during 2009, mainly because input costs take time to decline. This has been reflected in widespread rating downgrades in this segment, including Western Europe’s largest producer Norsk Hydro."Meanwhile, as economic conditions have deteriorated and demand shrinks in the steel sector, the analysts anticipate that the balance of pricing power for bulk commodities of iron ore and coal "will shift from producers to consumers, which could lead to significant contract price falls.Noting that discussions between Australian iron ore producers and Chinese steelmakers have not been concluded, the analysts suggested "that there is a wide difference between the prices that the two sides are willing to accept. We factor into our ratings a meaningful decline in contract prices this year."In addition, we expect contract thermal coal prices to decline sharply in 2009 from about $150 per tonne in 2008," the analysts forecast."As the report points out, we expect economic conditions to remain difficult in the coming months," they said. "There is a limited visibility on future trading levels due to the uncertainty regarding the length and depth of the global showdown, and the timing and strength of any economy recovery.""This lack of visibility is a key factor behind the strong negative bias in the metal and mining portfolio. We also remain concerned about weak liquidity, especially for speculative-grade issuers."In their analysis, S&P also rated the EMEA Metals and Mining Sector from strongest to weakest. Among the top five strongest companies, ranked in order, are Arcelor Mittal, ranked first; Rio Tinto, second; Anglo American, third; Xstrata, fourth; and SSAB Svenskt Stal AB.South Africa’s Gold Fields and Russia’s Norilsk Nickel ranked among the top ten strongest companies.