TORONTO (miningweekly.com) – Advisory firm Moody’s Investors Service does not expect base metal prices to materially improve over the next 12 to 18 months, saying the basket of metals including copper, zinc and nickel faced downside risks amid an uncertain global economic recovery.

In its latest ‘Outlook Update: Global Base Metals Industry’ report, the firm said average prices, particularly for nickel and copper, had been on a downward trend over the last several years.

Prices for copper, nickel and aluminium in the first quarter of 2015 were down 15%, 9% and 7%, respectively, from the fourth quarter last year averages. Zinc was trending relatively flat.

Moody’s analysts expected that the market would remain volatile and sensitive to changes in, and expectations for, economic and global growth rates. The downward price trajectory reflected the market's response to slowing global economic indicators, particularly in China, which consumed at least 40% of the world’s copper, aluminium, nickel and zinc.

China’s gross domestic product (GDP) growth in the first quarter slowed to 7%, the country's new target figure, and below the 7.4% growth rate in 2014. The country's purchasing managers index (PMI) remained around 50 – readings higher than 50 indicated expansion. The slowing housing and construction markets in China, high inventory levels and concerns over financing availability continued to add to a subdued growth environment, Moody’s noted.

While the US PMI still indicated expansion, it had been slowing since October 2014 and, at 51.5 for April, was flat with March. While Europe had shown signs of expansion with the Eurozone April PMI at 52, this remained modest and offset by persistent concerns over the Russia-Ukraine conflict and Greece’s ability to repay its sovereign debt.

Meanwhile, Brazil's growth was decelerating sharply, with its April HSBC PMI at 46. Given subdued demand levels globally, an expected surplus in copper this year and high aluminium and nickel inventories, the service did not expect prices to break out to the upside.

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The report pointed out that cost benefits from a strong US dollar and low oil prices would mitigate, but not offset, low prices. The stronger dollar would benefit companies that operated in countries with currencies depreciating against the US dollar, such as Australia, Canada and Brazil. Those with operations solely in the US would be less competitive.

Base metals were generally traded in US dollars and the currency's strength could hurt metal demand, resulting in a downward pressure on metal prices that could more than offset cost savings achieved from local currency depreciation.

“Thus, the degree of decline in metal prices will have a greater impact than any cost savings achieved. Lower oil prices will benefit the extractive portion of the industry as energy accounts for around 20% to 25% of operating costs. However, benefits will not be uniform given differences in pit depths, ore grades, and hauling distances,” Moody’s added.

The firm cautioned that companies navigating the challenging environment had to use discipline in capital allocation and strategic investment. Producers had scaled back on capital expenditure, reduced exploration expenses, placed stricter controls on capital allocation and put fewer projects in motion in reaction to lower demand and prices. These actions would help to mitigate the degree of cash burn, but had negative medium- to longer-term implications for production profiles. 


Moody’s pointed out that well-capitalised, diversified producers, with good liquidity and manageable debt maturity profiles had more options and better tolerance for a protracted period of weaker prices. However, they would still feel pressure if the current operating environment continued much beyond 2015. 


Meanwhile, rising political risk in certain countries was expected to drive investment decisions and capital costs. These risks, in both developed and developing countries, included increasing royalties and taxation; higher levels of government ownership or carried interest; increasing environmental pressures from local communities; water scarcity and resource nationalisation.

The agency could change its outlook for the global base metals industry to stable if PMIs in the US, Europe and China tracked above 50 for at least two consecutive months and the International Monetary Fund (IMF) forecast global GDP growth of more than 3%. A positive outlook would require PMIs in the US, Europe and China to exceed 55 for at least three consecutive months and an IMF forecast for at least 4% global growth.

A negative industry outlook indicated the view that fundamental business conditions would worsen, while a positive outlook indicated that fundamental business conditions would improve. A stable industry outlook indicated that conditions were not expected to change significantly.

Moody’s said the iron-ore market had potential for further downside, while aluminium, copper, gold, metallurgical coal and silver were weakly positioned. The zinc and lead markets were considered stable, the commercial construction industry was improving and the automotive sector was putting in a strong performance.

None of the major miners Moody’s tracked were expected to put in a strong performance this year.