Weak global demand will constrain Latin American metals and mining sector’s performance this year, Standard & Poor’s advised Monday.
“Sluggish demand and oversupply remain key risks for most metal commodities,” said S&P Credit Analysts Rafaela Vitoria and Diego Ocampo. “We expect metal prices to continue to drop in 2013, as a result of oversupply and slowing demand, which will pressure credit metrics.”
In their analysis, S&P observed that the outlook on the Asia Pacific region is critical to the metals and mining sectors. “Our base-case outlook expects growth in the region to hold steady or pick up slightly in 2013 and 2014. China’s real GDP could expand 7.9% in 2013, and 8% in 2014,” said the analysts.
“The region’s economic growth should lead to increased demand for commodities such as iron ore and copper, albeit at a slower pace of 2%-4% annually, considering the current temp of investment in infrastructure and construction,” S&P forecast.
Meanwhile, S&P’s price expectation for 2013 “points to a continued price drop” for the major metals mined in Latin America: copper and iron ore. “In the case of iron ore, we expect additional capacity form Australia in the second semester of 2013, which could lower prices,” Vitoria and Ocampo suggested.
“For copper producers, we are also concerned about product cost increases as result of ore grade reduction, and rising energy and labor costs in the region,” they said. “Nevertheless, the stable outlook reflects our view that most rated companies still enjoy relatively strong operating efficiency.”
“Latin American mining companies will continue to make use of their financial flexibility and we expect a tighter control on capital expenditures (capex) as well as some reduction in dividend payments to offset lower profits, resulting in stable credit metrics,” S&P observed. “For some larger mining companies such as Vale S.A, (Vale; A-Stable/) and Corporacion Nacional del Cobre de Chila (Codelco; A-Stable/) we also expect cost cutting measures in order to improve profitability amid lower prices.”
S&P expects price volatility to continue with the main concerns of global economic deceleration and a prolonged recession in the euro zone.
“A deeper slowdown in China would weigh heavily on commodity prices,” the analysts advised. “We believe there are more risks for new projects, particularly from smaller mining companies and we are less concerned with new excess capacity in the short term given so many delays.” S&P also suggested cost inflation remain an issue, “given the still significant investment programs in the region and challenging access to additional energy and labor.”
“If prices decline further than our expectation following weaker demand, the outlook on our rated companies may turn negative,” S&P noted. “Iron ore prices consistently below $100 per ton and copper prices below $2.75 per pound would lead to a weaker-than-expected scenario.”
Nevertheless, S&P expects most rated mining companies to maintain their current credit quality, “even though our projections incorporate lower commodity prices. We expect companies (to) address this by reducing capex and dividends, and implementing cost-cutting measures, resulting in stable debt ratios.”