Mining sector defaults likely next year unless radical action taken, ratings agencies warn

There was a moment several months ago when commodities giants including Glencore and Freeport-McMoRan shuttered mines at such a rate that many analysts predicted metal prices were close to bottoming out. Those predictions now look premature.

In a series of hard-hitting reports on the mining sector by ratings agencies Fitch and Moody’s, economists say they expect the outlook to only worsen into 2016, with further price falls for key commodities set to trigger debt defaults among producers and steep cuts in capital expenditure and dividends to shareholders.

Credit quality across the sector will deteriorate as a result, pushing up the cost of borrowing, and straining already depressed balance sheets.

“The commodity downturn is unparalleled in its depth and breadth. Oil, copper, aluminium, and many other basic materials, have fallen in price to severely depressed levels, pressured by the synchronised forces of slowing demand and excess supply,” Moody’s analysts wrote last week.

Between 2010 and October this year, US$1.9 trillion in bonds were issued by related companies, about 18 per cent of global non-financial bond issuance, according to Dealogic; money that was used to finance production facilities that in turn contributed to a global supply glut just as global growth rates headed south. For example, copper is widely forecast to have a physical surplus of around 150,000 tonnes next year, Fitch analysts wrote.

Representing just 14 per cent of Moody’s global non-financing corporate ratings, oil and gas and metals and mining firms already accounted for 36 per cent of 2015 downgrades through October, and 48 per cent of defaults. Moody’s has placed a third of such firms on review for downgrade or assigned them a negative outlook.