Analysts say there is “little light on the horizon” for the current commodities downturn for several years due to increasing imbalances between physical supply and demand.
Moody’s Investor Service has indicated it is looking at ratings downgrades for 175 mining and energy companies around the world, Mining.com reported.
“We believe that the current severe downturn in the mining industry represents a fundamental shift in the operating environment and that, as a consequence, a wholesale recalibration of ratings is required,” Moody’s said in a recent sector comment.
Moody’s said the current phase of falling prices for iron ore, nickel, copper was “not a normal cyclical downturn, but rather, one we perceive to be unprecedented”.
“Stress on companies in the metals & mining industry could surpass what we saw during the 2008/2009 period.”
The ratings firm said the supply/demand imbalance could be traced back to “overly optimistic” expectations for growth in China which led to “massive investments” in upgrading mines capacity (such as the investments made by Rio Tinto, BHP and Hancock Prospecting in iron ore operational expansion), to the extent that operations would be difficult to scale back in the event of downturn.
With seaborne iron ore and metallurgical coal markets largely driven by Chinese demand, the combination of increased supply with slowing Chinese demand in 2014/15 has resulted in greater price deceleration in 2015.
However, the largest losses in metallurgical coal occurred between 2011 and 2013, when the price fell from around $US330 per tonne to $US150 per tonne.
Moody’s said that while gold was not affected by the same pressures, it declined roughly 8 per cent in 2015, and has been on a steady descent since 2012, however the exposure of some gold producers to copper markets could see them fare worse than others.
In iron ore, the World Bank has predicted the steel-making commodity will be the worst metals performer in 2016, with expectations the average price be about $US42 per tonne this year.
SMH said this would represent a 25 per cent drop on last year’s average of $US55.80 per tonne.
Prices remained close to the $US60 mark for most of the year, but after October prices began a steep descent to a record low of $US38.30 per tonne in December, which has been followed a new year bounce into the low 40s.
The World Bank has dropped 2017 estimates to $US44.10 per tonne, with prices to remain below $US50 until the end of the decade.