Moody’s metals and mining outlook turns negative

Moody’s outlook for the global metals and mining sector has turned negative, reflecting expectations that aggregate Ebitda will contract for the largest companies during the coming 12 months.

Steel prices remain above historical averages, but their recent plunge will significantly reduce steelmakers’ Ebitda and cash flow, the credit rating agency says.

Prices have softened due to supply-chain disruptions reducing global demand; Covid-related lockdowns and weaker residential construction reducing consumption in China; and inflationary cost pressures and higher interest rates weighing on sentiment and economic growth.

“Higher costs will likely keep prices above historical averages in some regions but may not keep profit margins at an elevated level. That is because producers are investing in ultra-low emissions upgrades and less-polluting production technologies, consuming more scrap and less-polluting metallics which could result in higher prices for these materials, and incurring increased carbon and higher energy costs,” Moody’s says in a report sent to Kallanish.

Significant capacity additions will also increase competition in the US and could lead to further price declines, it adds.

Iron ore producers’ Ebitda will meanwhile weaken with prices. Prices will remain in the lower half of Moody’s medium-term price sensitivity range of $80-125/tonne during the coming 12 months. Weakness in global steel production, particularly in China, and seasonally higher production volumes in Australia and Brazil will squeeze prices and, consequently, Ebitda for major iron ore producers, the agency observes.

In contrast to most base metals, iron ore inventories are increasing and premiums for higher quality iron ore are narrowing, an indication of surplus in the main markets.

“Metallurgical coal producers’ earnings, while also remaining elevated, will decline more than thermal producers’. That is because prices have already fallen materially from record levels as end-market demand weakens from the steel sector, particularly in China because of the country’s property-market slowdown,” Moody’s concludes.

Adam Smith Poland