JOHANNESBURG (miningweekly.com) - Although growth in the global base-metals sector was expected to slow over the next 12 months, ratings agency Fitch Ratings stated that improvement in credit availability and implementation of fiscal stimulus programmes could result in stronger demand in the second half of 2009.
In its newly released base-metals outlook report, Fitch stated that earnings were expected to decline in 2009 from the robust 2008 levels, however, runoff of working capital and active management of capital budgets should partially offset the impact on free cash flow.
Fitch Ratings director Monica Bonar said that demand from China and developing nations had previously driven strong growth in base-metals consumptions, but that growth would slow for at least the next 12 months.
However, the recently announced Chinese stimulus should improve metals demand, as the country accounted for 20% to 35% of the world's consumption of base metals.
The agency noted in particular the $586-billion infrastructure spend announced by the Chinese government in November, aimed particularly at reconstruction in the Sichuan province. The province was rocked by a devastating earthquake measuring 7,9 on the Richter scale, in May.
In South Africa, the spend on public infrastructure, particularly ahead of the 2010 FIFA World Cup, was viewed as a cushion, keeping the economy churning as conditions tightened globally.
Fitch noted that severe demand declines for most metals in the second half of 2008, have resulted in rising stocks and falling prices.
Producers have been taking production off-line and slowing expansion spending, but not enough to increase prices. In some cases, spot prices were lower than the marginal cost of production.
The desire to conserve cash, resulted in a focus on working capital management, and Fitch expected destocking to take some time in this lower demand environment.
“The credit markets have tightened significantly, inducing a consumer recession,” said Bonar.
She noted that metal prices have fallen sharply and that production and capital expenditure cutbacks were being considered or announced.
Capital spending for the base-metals sector might have reached a peak in 2008, and Fitch said it was expecting capital expenditure to fall between 5% and 15% this year, followed by a more severe decline of 35% to 40% in 2010, on the back of weaker earnings and cash flow.
The world’s biggest producer of nickel and palladium, Norilsk Nickel has put mines on care-and-maintenance, while companies such as nickel-miner Albidon, copper producer Anvil and Australian zinc-miner Oz Minerals have all announced measures to strengthen balance sheets in the new environment of lower metal prices.
A significant number of mining project delays, mine shutdowns and cutbacks were evident in the last six months of 2008.
Mining giants such as diversified miner Anglo American halved its 2009 capital expenditure to $4,5-billion, and Rio Tinto reported that it would cut net debt by $10-billion, shed 14 000 jobs, sell additional assets, joint-venture existing projects and take $5-billion off capital expenditure.
On the flip-side, declining energy, fuel and feedstock costs were also expected to result in lower production costs. Unit costs would likely decline as high-cost, marginal production was idled.
The US dollar has strengthened as capital has been repatriated to the US and as US Treasury securities benefited from a flight to quality. An easing in risk avoidance or a heightened perception of future inflation could put pressure on the dollar and result in higher dollar-denominated commodity prices.
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