Outlook Stable for Metal Producers Despite Price Weakness

The ratings outlook for most base metals producers remains stable despite a very weak outlook for prices, according to Fitch Ratings.

In its 2009 Global Base Metals Outlook, Fitch notes that severe demand declines for most metals in the second half of 2008 have resulted in rising stocks and falling prices. Producers have been taking production off-line and slowing expansion spending, but not enough to increase prices. In some cases, spot prices are lower than the marginal cost of production. The desire to conserve cash results in a focus on working capital management, and Fitch expects destocking to take some time in this lower demand environment.

Demand from China and other developing nations had previously driven strong growth in consumption, and indications are that growth will slow for at least the next 12 months.

Improvement in credit availability and implementation of fiscal stimulus programs could result in stronger demand in the second half of 2009, Fitch says. In particular, the Chinese government announced $586 billion of spending in November primarily aimed at infrastructure and earthquake reconstruction in Sichuan province.

KEY 2009 THEMES/EVENTS:

• Declining energy, fuel and feedstock costs should result in lower production costs. Unit costs will likely decline as high-cost, marginal production is idled.
• The U.S. dollar has strengthened as capital has been repatriated to the United States and as U.S. Treasury securities benefited from a flight to quality. An ease in risk avoidance or heightened perception of future inflation could put pressure on the dollar and result in higher dollar-denominated commodity prices.
• Capital spending for the sector likely peaked in 2008. Fitch expects capital expenditures to fall on average 5%-15% in 2009 and 35%-40% in 2010 on the back of weaker earnings and cash flow.
• While earnings are expected to decline in 2009 from robust 2008 levels, runoff of working capital and active management of capital budgets should partially offset the impact on free cash flow.
• China accounts for 20%-35% of the world’s consumption of base metals; recently announced stimulus should improve metals demand.

For details see Base Metals Outlook: Supply Response to Severe Demand Shock.