Outlook for the global base metals industry remains negative – Moody’s

Economic slowdown in China and Brazil, muted conditions in Europe and a weak-recovery in the US will continue to pressure global base metal prices, Moody’s Investors Service said, adding its outlook for the global base metals industry remained negative.

Uncertainty regarding growth in China is one of the primary factors underpinning Moody’s negative outlook, withthe country accounting for more than 40% of global demand for most key base metals, it said in an industry report.

Weak global macroeconomic conditions and volatility in base metal prices have also dampened investorsentiment, which could pressure future growth rates.

“We expect base metal prices to continue to trade at lower levels, and expectations for slower growth and reduceddemand could result in further downside risk for the sector,” said Carol Cowan, a Moody’s Senior Vice President.

Moody’s notes that steeper price declines will flow through to companies’ earnings in 2015, resulting in a materialdecline in cash flow for many producers. Companies have reduced controllable costs such as capital expenditureand exploration expenses to boost liquidity, but such actions could pressure their credit profiles over the mediumterm if producers need to develop projects in a more costly or politically difficult climate.

Report Summary

» Weakening macroeconomic growth indicators and negative investor sentiment will continue to weigh on base-metals industry fundamentals in 2016. Slowing growth rates in China and Brazil, continued sluggishness in Europe, and a weak recovery in the US will contribute to a more muted demand picture and, importantly, less optimism about the pace of future growth.

» Base metal prices won’t materially change over the next 12 to 18 months in our view, and could face further downside risk. Prices remain on a downward trend in 2015, with a sharp drop in July and August, and continue to trade at lower levels, given expectations for reduced demand and slower growth rates.

» Cost curves have moved lower, but the steeper price decline will hurt earnings performance for the industry.The ability to cut capital expenditures and further reduce controllable costs will mitigate, but not offset, the pain.

» We could change our outlook for the industry to stable if purchasing managers’ indexes (PMIs) in Europe, China and the US, the key consuming regions, track between 50 and 55 (above 50 indicates growth) for at least two consecutive months, and if Moody’s global macro outlook is for GDP growth of between 3% and 4%. A positive outlook would require PMIs in the US, Europe and China exceeding 55 for at least three consecutive m months, and for Moody’s global macro outlook for GDP growth to be greater than 4%.


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