Negative investor sentiments coupled with weakening macroeconomic growth indicators globally and uncertainty regarding growth in China will continue to weigh on base metal industry in 2016, Moody's Investor Service said today.
"Slowing growth in China and Brazil, muted conditions in Europe and a weak recovery in the US will continue to pressure global base metal prices," Moody's said in its latest report '2016 Global Base Metals Outlook: Downside Risk Remains on China Concerns, Slowing Global Growth'.
It said the outlook for the global base metals industry remains negative.
According to the report, uncertainty regarding growth in China is one of the primary factors underpinning Moody's negative outlook, with the country accounting for more than 40 per cent of global demand for most key base metals.
Weak global macroeconomic conditions and volatility in base metal prices have also dampened investors sentiment, which could pressure future growth rates, it said.
"We expect base metal prices to continue to trade at lower levels, and expectations for slower growth and reduced demand could result in further downside risk for the sector," said Moody's Senior Vice President Carol Cowan.
Weakening macroeconomic growth indicators and negative investor sentiment will continue to weigh on base-metals industry fundamentals in 2016, Moody's said.
Slowing growth rates in China and Brazil, continued sluggishness in Europe and weak recovery in the US will contribute to a more muted demand picture and, importantly, less optimism about the pace of future growth, it added.
Moody's also noted that steeper price declines will flow through to companies' earnings in 2015, resulting in a material decline in cash flow for many producers.
Companies have reduced controllable costs such as capital expenditure and exploration expenses to boost liquidity, but such actions could pressure their credit profiles over the medium term if producers need to develop projects in a more costly or politically difficult climate, it said.
"Base metal prices won't materially change over the next 12 to 18 months in our view, and could face further downside risk.
"Prices remain on a downward trend in 2015, with a sharp drop in July and August, and continue to trade at lower levels, given expectations for reduced demand and slower growth rates," it added.
Further it added that the cost curves have moved lower, but steeper price decline will hurt earnings performance for the industry. The ability to cut capital expenditures and further reduce controllable costs will mitigate, but not offset, the pain.
"We could change our outlook for the industry to stable if purchasing managers' indexes (PMIs) in Europe, China and the US, the key consuming regions, track between 50 and 55 (above 50 indicates growth) for at least two consecutive months, and if Moody's global macro outlook is for GDP growth of between 3 per cent and 4 per cent," it said.
