The continued rout in commodity prices that has severely hit the mining industry in the past year can’t be considered a “normal” cyclical downturn, but rather, an unprecedented one, says Moody’s in a new report released this week.
The ratings agency, which recently placed 175 energy and mining firms at risk of downgrades, said the current environment is forcing miners to make fundamental shifts in the way they operate.
Moody’s sees little chance of a prompt recovery. On the contrary, it expects physical supply/demand imbalance to widen further, leaving the mining industry in extremely weak conditions.
“Stress on companies in the metals and mining industry could surpass what we saw during the 2008/2009 period,” the analysts note. “As a consequence, a wholesale recalibration of ratings is required.”
The prospects of further rating cuts adds pressure to a resources sector that led global bankruptcies in 2015.
Raw materials have sunk to multi-year lows amid growing concern that slowing growth in China will hurt demand for everything, from energy to metals.
Prices for most base metals peaked in 2012, with a subsequent gradual price decline in 2013 and 2014, which allowed companies to adjust mining plans and exploration expenses. However, Moody's notes that price declines accelerated sharply in mid- and late- 2015, and that has continued in the first few weeks of 2016:
Moody’s analysts say there is little hope of a prompt recovery. On the contrary, they expect the physical supply/demand imbalance to widen further, leaving the industry in extremely weak conditions and making a return to normality unlikely for several years.
“We expect the US dollar to continue to strengthen as interest rates rise, which will maintain pressure on base metal prices,” they write. “While some miners benefit from lower costs on weaker local currencies and oil prices, this is only delaying the supply adjustments needed to bring the industry back into balance.”