Industry credit outlook: Metals sector ratings continue to rise, but at a slower rate
As metals prices continue their remarkable run, the credit ratings of metals and mining companies around the world have improved, albeit at a slowing rate. The combination of stronger operating cash flow sector-wide and issuer-specific measures to reduce debt burdens work to the benefit of ratings. Yet, individual companies' business risk profiles, which reflect the highly competitive, volatile markets and other factors, are increasingly constraining ratings.
Will M&A undercut solid credit trends for metals, mining and steel?
Credit ratings on metals, mining, and steel companies worldwide have improved as metal prices climbed during the past several years. This trend is continuing, although the rate is slowing. The combination of stronger operating cash flow across the sector and issuer-specific measures to reduce debt has helped ratings. The key rating factors now will be how companies use cash flow and their robust balance sheets.
Healthy fundamentals should remain in place for at least the next couple of years, and will sustain prices at levels that offset rising costs and maintain credit quality.
A surge in Chinese aluminum production may put high prices in reverse
The price of aluminum touched a high of $1.34 per pound on January 24, 2007, up 30% from its $1.03-per-pound closing on Jan. 2, 2006. It has lingered near this level, closing at $1.27 per pound in recent trading, despite softening demand from some end markets. The price of aluminum will gradually begin to decline, however. The primary reason is the rapid decline in the price of alumina, the raw material for aluminum. Although recent spot alumina prices were at $350 per metric ton, they were as low as $250 earlier this year, from about $650 in 2006.
Nickel producers are winning the game of supply and demand û for now
Overall, nickel miners are racing to accelerate nickel production to take advantage of exceptional pricing and to prevent permanent destruction of demand. Numerous greenfield or brownfield projects are on the drawing board around the world, but a project that isn't under way today is probably five years from any significant output, and the capital and operating cost estimates could face upward revision as the project proceeds. So although the nickel industry is benefiting from extremely high prices, keeping up with demand is proving difficult, and added production could come too late.
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