Global metals and mining 2016 outlook only worsens

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There are grim forecasts around. If a fall in Chinese demand for steel is not enough, the prices of iron ore are expected to fall below $40 a tonne due to high stockpiles, creating further ripples in the already beleaguered global commodities space.

The China Metallurgical Industry Planning and Research Institute rang the alarm bells it said it believes Chinese iorn ore demand which fell 0.4 per cent in 2015, will decline by 4.2 per cent in 2016 to around 1.07 billion tonnes.

According to the Australia and New Zealand Banking Group Ltd (ANZ), the price of iron ore is set to fall below 40 U.S. dollars per tonne this week as stockpiles have reached their highest in seven months,

Iron ore prices have fallen in the past year as slowing Chinese economy has triggered a demand slump even as inventories and low-cost production from the worlds biggest suppliers such as BHP Billiton, Rio Tinto and Vale.

“A strong build in inventories and weak steel markets continue to weigh on the iron ore market,” ANZ said in a statement, adding the prospect of sub-40 U.S. dollar a tonne prices looked likely this week.

Fitch Ratings earlier said the outlook for the global mining sector in 2016 was firmly negative, reflecting its view that Chinese demand will continue to weaken in the coming year and that commodities will remain deeply unpopular with investors.

It said in a statement that the slowdown in Chinese demand had already created substantial oversupply in some commodities, including iron ore and aluminium, and that this trend was expected to continue in 2016 as the Chinese economy undergoes a gradual deleveraging and transition from investment to consumer-led growth.

Average prices for these two commodities are therefore likely to be lower in 2016, as are prices for copper and zinc. Nickel could prove an exception to the trend, due to mine closures and falling Chinese nickel pig iron production, but this is far from certain,” Fitch said.

According to Fitch, most mining companies now have weak credit profiles for their current rating, and this is reflected in the fact that most large international mining companies are on Negative Outlook or Rating Watch Negative.

“We expect companies to continue to focus on cost control and short-term liquidity management in 2016. But they will find it harder to use cost cuts to aid debt reduction because the falling diesel prices and beneficial exchange rate moves that helped them in 2015 are unlikely to be repeated,” the Fitch statement said.

Big reductions in capex budgets are similarly largely complete, it said, adding this meant more mining companies were likely to come under increasing pressure to cut their dividends to boost free cash flow in 2016 following relatively modest reductions in shareholder returns so far.

 

 

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