The global outlook for metals and mining

The underlying dynamic of increased demand without increased production remains the primary reason for the recent sharp increase in global metal prices.
The global economy keeps chugging ahead and, with it, so does demand for nickel, copper, iron ore, bauxite, and other metals. Although financial market speculation drives some of the day-to-day volatility in metal prices, the underlying dynamic of increased demand without increased production remains the primary reason for the recent sharp increase in prices. This combination of strong demand and weak supply has strengthened the credit quality of mining and metal companies around the world, and we don't foresee any quick changes in either of these fundamentals.

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.While gold prices continue to shine, industry credit quality is losing its lustre

Like other metals, gold continues to shine. The spot gold price is trading near 12-month highs of US$690 an ounce, and some bullish market watchers are predicting the 1980 record of US$850 an ounce could be under threat over the next few years. We remain positive about gold prices and industry fundamentals
in the medium term. Our credit outlook for gold companies is neutral to negative, however.

High copper prices cast a glow on global producers

Global copper producers are expected to continue to reap the benefits of a positive pricing environment in 2007 and 2008. The ongoing increase in worldwide demand in conjunction with very low inventory levels supports this thesis. Rising operating costs for salaries, steel, and energy, among other things, partly explained by the same economic phenomenon, should only marginally reduce the extraordinary profits and cash flow expected for the sector. However, each issuer's overall business risk profile and financial
policy will ultimately determine the potential for positive rating actions.

Favourable market conditions and consolidation buoy credit quality of European steelmakers

Against a backdrop of supportive steel prices, we expect the credit outlook for Europe-based steelmakers to remain broadly stable. Cash flow is healthy and leverage is generally low. Credit quality is also aided by ongoing sector consolidation, which is helping to ease cyclicality and volatility. Producers are increasingly willing and able to take more rational supply decisions to protect prices, during or even ahead of possible market weakness.

Nevertheless, they continue to face pressures from higher raw material and
energy costs, which partly offset these positive trends.

Regional differences colour the North American coal pricing picture

In recent years, North American coal prices have been volatile, but some regions are better than others in dealing with price swings. Although regional prices vary significantly depending on the characteristics of the coal produced, transportation costs, and contractual arrangements, volatility has cut across the industry. After a meteoric rise in 2005, these spot coal prices fell back to earth with a thud in 2006 and have, for the most part, remained at these lower levels thus far in 2007. Despite current prices, long-term
coal industry fundamentals remain positive.

Latin American steelmakers forge ahead with expansion and acquisition plans

Fueled by firm steel prices and growing demand, Latin American steelmakers are poised to report another year of robust results. Regional consumption increased almost 12% in 2006 and is set to expand at a healthy pace again this year, although probably not as fast as it did last year. More important, these
companies continue to strengthen their commercial relationships with export clients, using cost advantage to reach distant markets. Given the increased capital flowing their way, Latin American steelmakers are forging ahead with growth plans that may have an impact on credit.

Guest opinion: Why Chinese steel exports aren't likely to push down global prices

China became a net exporter of steel only in 2005 with a modest 6 million metric tons, and that number hit approximately 40 million metric tons the next year. This rapid growth has created apprehension about the global industry's future: Could world steel prices tumble if domestic demand in China falls sharply while the country keeps expanding capacity? Rather than leading to a global slump in steel prices, the balance between Chinese demand and supply will improve over the period 2007-2011 and that net exports will decline from estimated 2006 levels to 15 million-20 million metric tons per year.
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