2022 so far has been as good as it will ever get for the world’s mining and resource companies but now the outlook is softening by the week and with every central bank rate rise.
That is the view of ratings groups Moody’s and Fitch, which have both downgraded their view for mining and energy sectors over the next year or so.
Moody’s reckons mining company revenue and profits are going to weaken, stretching valuations over the next year if investors continue to believe the current good times will continue rolling on.
The credit rating firm said on Thursday it had changed its outlook for the global metals and mining industry from stable to negative as the global economic slowdown continues to weaken demand.
This downgrade follows one issued two days earlier for the global energy sector to stable from positive, one notch higher than mining (see below).
Moody’s said it revised its global outlook for the mining sector to negative from stable, because of expectations that cash flows and profits will decline for the industry’s largest firms in the year ahead amid weaker demand.
The Moody’s downgrade was also issued by President Putin mobilised 300,000 reservists and other eligible males to try and keep his invasion of Ukraine on track, a move that could further destabilise commodities such as oil, coal and gas, as well as key metals like nickel and copper.
The tightening monetary policy positions and the energy crisis gripping Europe will trigger a recession there in the next six months through the northern winter, while China’s economy will be mired in a property crunch, on top of the continuing damage from President Xi’s hardline zero-Covid policy which has already damaged confidence and demand.
Moody’s said the downturn is affecting prices, which consequently reflects a decreasing profitability for the largest Moody’s-rated companies in the industry during the upcoming 12 months, the firm said late this week.
And, looking at commodities and producers, Moody’s forecast that earnings before interest, taxes, depreciation, and amortisation (EBITDA) will significantly decline for producers of base metals, including copper, nickel, aluminium and zinc.
“[EBITDA and prices] will remain higher than in pre-pandemic years but below the record-high levels seen in early 2022,” Moody’s senior vice president Barbara Mattos said in the statement from the group.
Moody’s expects copper miners to face EBITDA declines due to lower production volumes in certain regions, higher input costs and lower prices.
But that weakness will be lessened by low inventory levels and supply challenges in main copper-producing regions such as Chile and Peru.
Aluminium producers re expected to be the worst hit as prices for the have fallen drastically from recent record highs, while energy and key raw material costs remain high, particularly in Europe. This combination will reduce companies’ margins and earnings, Moody’s says).
While gold is often seen as a hedge against inflation, Moody’s points out that those rate rises from central banks and especially the stronger US dollar, are undermining the attractiveness of both gold and its cheaper ‘mate’, silver.
For precious metals, Moody’s noted that gold and silver prices are both declining “as higher interest rates and a stronger U.S. dollar” have curbed their appeal as safe haven investments.
“Unlike other metals, market sentiment rather than fundamentals such as supply and demand, influences pricing in this industry creating a drop in producers’ revenues,” it said.
Other forecasters say the price of iron ore and coking coal will be driven by Chinese steel prices and demand – at the moment iron ore is around $US100 a tonne and coking coal around $US240 -$US260 a tonne – not sky high, but above their most recent lows.
While steel prices may remain above their historical averages, a recent decline in prices will “significantly reduce” companies’ cash flows, the report noted.
“EBITDA and prices are decreasing as business and macroeconomic conditions weaken. They will remain higher than in pre-pandemic years but below the record-high levels seen in early 2022,” Ms Mattos said in the release.
“In addition, energy and raw materials costs remain high, particularly in Europe, which will also reduce producers’ margins and earnings of producers of base metals.”
Moody’s downgrade came a week after Fitch cut its outlook and price assumptions for the sector.
In its report, Fitch cut its short-term price assumptions for copper, aluminium, nickel, zinc and iron ore, citing the prospect of deteriorating demand as economic growth slows, and the fact that prices have already pulled back.
While the rating agency sees lower prices for many metals, its price assumptions for gold remain unchanged, “reflecting the metal’s ‘safe haven’ investment status amid high geopolitical instability and inflationary pressures.”
In the longer term, Fitch said it expects gold prices to moderate “once geopolitical risks abate and as the interest-rate hiking cycle continues.”
And, like Moody’s, Fitch is more upbeat about the outlook for copper.
Short-term issues aside, the rating agency’s medium- and long-term price assumptions for many of the base metals remain unchanged.
For example, the report said increased demand for electric vehicles over the longer term should support nickel prices.
Similarly, copper’s prospects “remain solid” in the medium term, it said, “due to the energy transition accounting for 50% of growth in global copper demand anticipated over the next five years.”
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Moody’s move to cut its outlook on the global energy sector to stable from positive for 2023 came a day before the Fed’s rate rise (which would have been taken into account in the outlook because it was widely expected to happen).
The ratings agency said energy company earnings will pull back from their record highs this year as the industry faces a slowdown in demand and rising costs.
“With growth in cash flow moderating, oil and gas producers remain unlikely to accelerate growth investment,” it said, adding that the rising cost of capital and higher regulatory costs will likely hamper investment too.
For refining and marketing companies (like Viva and Ampol in Australia), Moody’s said it still sees “robust earnings” in 2023 but a decline from this year’s record levels.
Despite the dimmer outlook for the sector, the report noted that Moody’s expects commodity prices to remain elevated next year.
“Restrained investment and rising uncertainty about the expansion of future supplies, plus a high geopolitical risk premium, will continue to support oil prices at levels exceeding our medium-term oil price range of $50-$70/barrel,” said Elena Nadtotchi, senior vice-president at Moody’s in the release
It also sees North American natural gas prices remaining high due to “significant dislocations” in the global natural gas markets and strong demand for U.S. liquid natural gas exports.
At the same time, Europe’s energy crisis saw Fitch to raise its price expectations for thermal coal, pointing to increased demand in Europe for coal-powered energy, as gas supplies dwindle, and strong demand in China.
In fact thermal coal prices seem to be linked now in the market to LNG and oil prices have detached a bit as the European gas crisis continues.
High thermal coal prices will be with us for a while with the Newcastle ICE thermal coal market showing prices above $US300 a tonne out to the end of 2027. The $US300 a level mark used to be record territory a year ago.
The futures market is showing the price above $US400 a tonne until early next year (covering the northern winter), but prices did fall more than 6% on Thursday after the previous day’s rise in the wake of the Putin mobilisation news.That means the thermal coal companies like Whitehaven, Yancoal, New Hope, BHP, Glencore and others can expect another six months of near record earnings for the December half, and then a year in 2023 of gradually falling prices and profits and increasing costs. That’s if Vlad Putin doesn’t do something stupid again.
