FOCUS - Base metal prices have bottomed but will stay lower for longer - Moody's

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Vivian Teovivian.teo@fastmarkets.comJoint News Editor - Asia

Singapore 23/08/2016 - The price deterioration for major base metals - including copper, aluminium, nickel and zinc - seen in late 2015 and early 2016 has likely bottomed, but material improvement from current price levels over the next 12-18 months is unlikely, Moody’s Investors Service said.

Moody’s has changed its outlook for the global base metals industry to stable from negative effective August 18 but notes that the change "does not imply conditions will improve meaningfully for base metals companies, but that they are unlikely to deteriorate further over the medium term."

The price improvement is not due to better supply/demand fundamentals, but rather sentiment towards Chinese economic  growth and stimulus measures enacted over the first half of the year, the credit rating agency said in a report late last week.

“With the exception of zinc, meaningful recalibration of supply is still not evident,” it said.

All the major base metals, except zinc, will remain oversupplied – with their inventories high - for some time, assuming no supply shocks.

Despite production curtailments by companies like Freeport McMoRan and Glencore, copper continues to be in oversupply due to weak fundamentals amid increased production in Peru and Mexico, it noted.

Nickel has risen about 21 percent between January and July this year but the rise is not sustainable as price movements are driven by commentary from the Philippines while supply/demand factors remain relatively unchanged and LME nickel inventories high, it said.

Average zinc prices, however, have risen around 43 percent between January and June, reflecting an improvement in supply/demand fundamentals with the idling and closure of various zinc mines.

Moody’s expect prices to trade around levels seen in the second quarter but exhibit volatility on economic news, interest rate movements, and currency fluctuations, particularly relative to the US dollar.

Growth expectations for China, a major producer and consumer of base metals, will continue to drive sentiment, with expectations for Chinese GDP growth levels and stimulus actions remaining influential drivers.

“The extent to which price improvement holds, will depend on whether the [Chinese government stimulus] actions thus far were sufficient to stabilise/grow the economy, or if further stimulus measures are necessary to achieve the 6.5-7 percent target GDO growth for 2016,” it said.

Should Chinese GDP expectations and performance deteriorate versus the target range, the industry outlook for the global base metals industry could return to negative, it warned.

Modest improvement in base metal prices and cost benefits from low oil prices and currency depreciation against the US dollar will soften company earnings degradation in 2016, but base metals firms are likely to see earnings fall again year-on-year.

The change to a stable outlook for the industry will not result in rating changes as prices are expected to remain lower for longer, it said.

“Challenging industry conditions should continue at least through 2018 and each company’s ability to improve and right size their balance sheets to a lower-earnings environment will continue to be a key consideration in ratings, as well as liquidity and debt maturity profiles,” it noted.

Rating agencies including Moody’s had downgraded a number of major metals trading and producing firms including Noble Group, Glencore, BHP Billiton, Rio Tinto and Anglo American since late last year till the first half of this year amid the global commodity price slump.

Moody’s base prices for copper, aluminium, nickel and zinc are at $2.15 per pound ($4,740 per tonne), $0.70 per pound, $4.20 per pound and $0.85 per pound for 2016 respectively. Its 2017 base prices are at $2.25, $0.70, $4.75 and $0.85 respectively.

Moody’s uses the base prices to gauge near to mid-term operating performances of companies.

The London Metal Exchange three-month copper price was last at $4,765 on Tuesday, up $16.50 from the previous day's close. 



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