China slowdown begins to hit, Moody’s announces ratings review of mining and oil firms

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A global commodities meltdown prompted by a slowing China is beginning to hit companies hard, with Moody’s Investors Service announcing it was placing as may as 175 energy and mining firms across regions on review for a possible credit downgrade. They include three mining and seven oil firms – and their subsidiaries — in South and Southeast Asia.

It said in a statement that its decision to put Vinacomin Holding Corporation Limited, Vedanta Resources plc. and Indika Energy Tbk (P.T.) for a review reflected Moody’s effort to recalibrate the ratings in the mining portfolio to align with the fundamental shift in the credit conditions of the global mining sector.

“Slowing growth in China, which consumes and produces at least half of base metals, and is a material player in the precious metals, iron ore and metallurgical and thermal coal markets is weakening demand for these commodities and driving prices to multi-year lows,” said Brian Grieser, a Moody’s Vice President — Senior Analyst.

“China’s outsized influence on the commodities market, coupled with the need for significant recalibration of supply to bring the industry back into balance indicates that this is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies,” he added.

Moody’s said credit conditions in the mining industry had deteriorated due to a continuing decline in prices of base metals, precious metals, iron ore and coal.

“In addition, the strong US dollar is a further factor contributing to weakening demand and driving prices lower since most metals are traded in dollars.,” it sad, adding this broad ratings review will consider each mining company’s asset base, cost structure, likely cash burn and liquidity, as well as management’s strategy for coping with a prolonged downturn and the ability to execute on same. The review will assess each company’s cash flow and credit metrics closer to our latest stressed price assumptions and the relative rating positioning.

Moody’s believes that this downturn will mark an unprecedented shift for the mining industry. Whereas previous downturns have been cyclical, the effect of slowing growth in China indicates a fundamental change that will heighten credit risk for mining companies.

Moody’s separately said that said oil prices have reached nominal price lows not seen in more than a decade and that the ratings firm expected them to recover much more slowly over the medium term than many companies expect. There was also a risk that prices might fall further.

“Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows,” it said in naming he following companies up for a review – Oil and Natural Gas Corporation Ltd, Oil India Limited, P.T. Pertamina (Persero), Petroliam Nasional Berhad, and PTT Public Company Limited, P.T. Energi Mega Persada Tbk and PTT Exploration & Production Public Co. Ltd.

Moody’s sharply reduced its oil price assumptions on January 21 in light of continuing oversupply in the global oil markets and demand growth that remains tepid. Lower oil prices will further weaken cash flows for E&P companies and the upstream portion of integrated oil and gas companies, causing further deterioration in financial ratios, including deeper negative free cash flow.

“Most companies are unable to internally fund sustaining levels of capital spending at current market prices. Current industry conditions also reduce the value of assets offered for sale and have made accessing capital markets more expensive for some companies and unavailable for others. While integrated oil and gas companies benefit from the profitability of their downstream operations, the upstream operations represent a much larger part of the capital employed and cash flow for most of these companies,” it said.

 

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