Bangkok--10 Jun--Moody
Moody's Investors Service has a negative outlook for the base-metals, mining, and steel industries in Asia Pacific over the next 12-18 months. The negative view matches Moody's outlook for the sector elsewhere in the world.
The agency's lead regional analyst for metals and mining, Terry Fanous, a senior vice president, says, "China's strategic stockpiling and replacement of lower-quality domestic production with higher-quality imports have supported the recent rally in prices for many base metals, but we will not see a sustainable turnaround in demand until the major economies of the U.S., Europe, and Japan recover."
Fanous does not expect such a recovery before 2010 and says it is likely to be gradual and sluggish, adding, "We therefore expect the financial profile of the sector to be weak in 2009 and well into 2010, particularly because there have not been major improvements on the cost side to neutralize the pressures on output pricing and production."
Fanous notes, "In the current environment of a weak global economy and uncertain capital markets, companies more likely to maintain their ratings include those that enjoy product diversity, conservative financial leverage, limited refinancing risk through 2010, and manageable programs of capital expenditure over the next 2-3 years." He says that such companies include BHP Billiton, which Moody's rates A1 with stable outlook, and which had maintained a superior financial profile going into the current downturn. "As such, last week's announced JV with Rio Tinto (rated Baa1/stable), and which entails a payment of up to US$5.8 billion over the next 12 months, is manageable within BHP Billiton's ratings.
Chris Park, a Moody's vice president in Hong Kong, says "Ratings within the steel sector have become more vulnerable in the global recession because much lower sales volumes and prices - due to weak demand and overcapacity - have put margins under pressure." According to Park, these challenges have contributed to the change in outlook of POSCO and the downgrade of Tata Steel's ratings in recent months.
With regard to China, Park says, "The ongoing slump in China's property and export sectors, which are key users of global bulk commodities such as steel, may ultimately benefit from the stimulus packages in China and abroad, but the full effects of these stimulus policies remain to be seen."
Laura Acres, a Moody's vice president, says, "In contrast to other regional issuers, rated Indonesia producers of thermal coal enjoy stable outlooks as they have locked in favorable long-term contract prices and enjoy strong demand for their output from domestic and North Asian utilities."
Fanous also adds that , "Liquidity profiles vary within the sector. Investment-grade issuers have manageable positions supported by appropriate levels of balance-sheet and alternate liquidity and manageable levels of capital expenditure, despite their weakened operating cash flows."
"However," he adds, "pressure on cash flows and the absence of any meaningful bank credit have strained the liquidity of some high-yield issuers." He noted that risk aversion in credit markets is another factor behind the weakened liquidity profile of such issuers, which include Bemax (rated Caa1) Griffin Coal (rated B3), and G Steel (rated Ca, with a negative outlook).
For further details on the sectors' issuers in the region, please refer to Moody's previous regional outlook, published at www.moodys.com in May 2008 and entitled "Industry Outlook -- Snapshot: Asia-Pacific Base Metals, Mining, and Steel: Stable Outlook Amid Margin Pressure". For a global perspective, readers can access a report from April 2009, entitled "Global Base Metals Industry Outlook -- Six-Month Update" and a special comment from January 2009: "Leveraged Finance Industry Updates: Mining, Steel, and Coal Industries".
In Asia Pacific, since last May's outlook, Moody's has downgraded Asia Aluminum four times, Bemax, Griffin Coal and G Steel (each on three occasions), Tata Steel (twice), and Vedanta, while revising BHP Billiton's outlook to stable from negative after it withdrew its takeover bid for Rio.
In determining corporate ratings, Moody's uses its rating methodologies on the global mining industry, published in May 2009, and on the global steel industry, from January 2009.
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Sydney
Terry Fanous
Senior Vice President
Corporate Finance Group
Moody's Investors Service Pty Ltd
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Sydney
Brian Cahill
Managing Director
Corporate Finance Group
Moody's Investors Service Pty Ltd
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