Metals and mining credit quality stable according to S&P

Standard and Poor’s (S&P) has issued a report by two of its Primary Credit Analysts which described metals and mining credit quality as stable and while the credit ratings agency expects higher metals prices to continue, it also has concerns over several factors that present risks.

The analysts are forecasting that base metals prices will remain above historical levels for the next several quarters “as worldwide demand continues to be strong and supplies continue to be constrained.”

They also note that while metal credit ratings have been improving this year, the strength of the metal cycle has provided metal producers with a level of liquidity that has prompted mergers and acquisition, some of which have been achieved through “relatively high debt.”

The report refers to a number of factors that could limit higher credit ratings and therefore present near- to medium-term risks.

These include: any unexpected drop in Chinese industrial production; continued cost pressures from higher energy, materials and labor costs; significant capital spending to replace reserve, improve operations, expand overseas, and lower corporate cost profiles; increasing use of leverage to fund acquisition activity; weakness in the US economy.

With regard to the US economy, a stronger dollar could also present a risk, in that it could encourage imports and adversely affect domestic companies.

Turning to metals prices, the analysts point out that: “further positive rating actions for companies producing base metals will be tempered by higher spending aimed at replenishing reserves, increasing production, enhancing efficiency, and rewarding shareholders.”