Metals outlook stable on moderating but favorable prices: Moody's

London (Platts)--19Dec2006

The business outlook for the global base metal industry continues to be
favorable for 2007, as base metal prices moderate but remain at favorable
levels, Moody's said in report Tuesday.
Moody's said most producers should continue to generate excess cash flow
in this environment, leading to an outlook on credit ratings that was
predominantly stable. The companies not expected to generate excess cash flow
will be the integrated aluminium producers, given the significant capital
investments they are making in new refineries and smelters.
"The generation of excess cash flow will be particularly important for
those companies that have participated in the consolidation that has
dramatically altered the industry landscape, taking on very large debt
positions that need to be reduced to more manageable levels to continue to
warrant current ratings," says Moody's Vice President and Senior Credit
Officer Terry Marshall, lead author of the annual outlook that covers the
copper, nickel, zinc, and aluminum industries.
Moody's expects pricing will continue to be positive if somewhat lower
for producers as strong demand in China offsets some weakening in US demand.
Supply, in turn, continues to be constrained by a lack of meaningful new
capacity for copper, nickel, and zinc in particular.
"Apart from any significant reduction in Chinese demand, the biggest
threat to price will be from the fund sector, which has supported the growth
in prices over the past few years but which has contributed significantly to
the increasing volatility witnessed this year, particularly in copper," said
Marshall.
Acquisition-driven event risk will continue to be one of the key
challenges to company credit profiles over the next year, said Moody's.
"As the industry consolidates, we expect that there will be only a
handful of significant mining companies left, with a very limited to
non-existent number of second tier companies," Marshall said, adding: "While
Moody's believes that the larger, more diversified companies will be stronger
and better able to withstand downturns in metal prices, the premiums being
paid and debt taken on is a concern, and could impact ratings if acquisition
debt is not reduced in the current strong markets." Moody's also noted that
significant increases in both operating costs and development costs were
additional concerns for ratings.

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