VANCOUVER (miningweekly.com) – The 2017 outlooks for the global base metals, US steel and US coal industries remain stable for the next 12 to 18 months, according to Moody's Investors Service.
In a report released Tuesday, the ratings agency said that weak macroeconomic indicators would limit upside movement in the base metals sector, particularly Chinese purchasing managers’ indexes (PMIs), which pointed to anaemic growth and Brazil's retracting economy, while European indicators have demonstrated better momentum.
"Recent price improvements in base metals were driven by Chinese stimulus – including easing of credit, reserve-requirement cuts, increased infrastructure spending – as opposed to fundamentals. Moreover, supply-demand fundamentals will be materially unchanged in 2017,” Moody's senior VP Carol Cowan stated.
STABLE OUTLOOK
Moody’s stated that supply-demand fundamentals were expected to remain materially unchanged for 2017.
It noted the copper supply-side response remains muted, despite higher-than-expected Chinese demand on stimulus spending, production disruptions and low costs for non-US producers having kept surpluses lower.
Moody’s said that, with new mine production coming on line, a surplus is anticipated for 2017 and 2018.
According to the market analyst, aluminium continues to face capacity overhang, with the significant increase in Chinese smelter output outpacing reductions in the rest of the world. However, stricter environmental requirements in China could change this dynamic.
Nickel remains in surplus and inventory levels high, despite increased steel and stainless steel output in China, which has boosted prices.
Moody’s noted that zinc had officially entered deficit territory early this year following closure in 2015 of MMG’s Century zinc mine, in Australia, among other curtailments.
However, the supply gap could moderate in 2017 on potential mine restarts and increased output from the Antamina mine, one of the largest copper/zinc mines in the world.
Meanwhile, lower energy prices, depreciated currencies in natural-resource-rich countries such as Brazil, Australia, Canada and Russia, have moved the cost curve down and provided a floor to companies’ earnings contraction.
Moody’s said currency fluctuations relative to the US dollar would affect costs, but movement in the cost curve would have some reflection in the movement in prices, as would the restarting of idled capacity.
Further, the outlook for the US steel sector reflected improving fundamentals on the back of price recovery, fewer imports owing to positive trade case outcomes, and strengthening capacity utilisation.
"Broader-based, robust industrial growth, improved capacity utilisation, a stable price environment and improvement in markets, such as commercial-construction and oil country tubular goods – tubes that are used in oil and gas production, remain critical for a meaningful recovery in the US steel industry," notes Cowan.
COAL CORRECTION
In the US coal industry, thermal coal prices have experienced some recovery after prices bottomed and as natural gas prices rise. However, the average realisation and earnings before interest, taxes, depreciation and amortisation of thermal coal producers will decline modestly since they generally sell coal under long-term contracts.
Metallurgical coal prices have fallen in the past four years from more than $325/t in 2011, to about $80/t early this year. However, the sharp 150% rally since then to more than $200/t is expected to be short-lived and unsustainable, owing to it correlating with temporary supply disruptions and operating days restrictions at mines in China, weather events in Australia, and a stimulus-driven increase in demand from the Chinese steel sector.
While a price rally provides long-awaited relief for met coal producers, Moody’s believes the market will normalise in the first half of 2017. Analysts expect a decline in imports into China in 2017 as infrastructure issues resolve and local mines ramp up output.
"Over the next eighteen months, we expect benchmark settlements to come down to a range of $90/t to $120/t," added Moody's VP and senior analyst Anna Zubets-Anderson.
Australia’s met coal exports are also expected to remain relatively flat, with no growth expected over the next 12 months.
Moody’s also noted a significant drop in total industry debt to pre-2010 levels, mainly owing to several US majors, including Alpha Natural Resources, Arch Coal, Patriot, Walter Energy and Peabody Energy, having gone through restructuring processes.