MOODY’s has changed its outlook for the global base-metals industry to negative from stable, saying this is driven by global economic weakness and falling copper prices.
Copper is an economic bellwether given its use in power supply, plumbing and communications. The low demand and therefore low price of copper indicates the poor health of the global building and construction sectors.
"Slowing growth in China’s GDP (gross domestic product), continued weakness in Europe and falling copper prices have all contributed to our revised outlook," says Carol Cowan, a Moody’s senior vice-president.
But the international ratings agency says the slowing rate of economic growth in China, especially, does "not bode well" for base metals as China consumes more than 40% of the world’s production. This immediately puts up red flags for SA’s base metals miners, and also for general metals manufacturers in the country. The latter have already endured a long, slow period of decline since 2000.
Broker Imara SP Reid says in its latest report on BHP Billiton that global steel prices are trending downwards. This comes despite the global miner’s guidance for overall mining production growth of 16% over two years to the end of June this year.
BHP Billiton says cost reductions and improved productivity will partially mitigate the effects of lower commodity prices. But interim profits will be "hard hit" by the fall in average prices across four of its major businesses — iron ore, coal, oil and copper — that made up 88% of financial 2014 earnings before interest and tax.
Billiton also says that new low-cost supplies of iron ore entering the Chinese market are "far higher" than the estimated demand increase. This means iron-ore prices will not likely recover soon, although substantial savings on shipping costs will alleviate this to some extent.
International steel maker ArcelorMittal has cut its forecast for world growth to between 2.25% and 2.75% from 3% to 3.5% because of the slowdown in China, Brazil and Russia and its former Soviet satellites.
The Luxembourg-based group is a benchmark for global manufacturing.
Its South African arm, ArcelorMittal SA, is lobbying the government to include steel as a designated sector so that it can benefit from state procurement. But it is unpopular with authorities for ignoring pleas for "developmental" steel pricing.
Moody’s also says that although the US economy is strong and consumption of base metals remains robust there, this will not counter weakening global trends.
To this end, the International Monetary Fund recently lowered its forecast for global growth this year to 3.5% from 3.8% last October, extending the weak forecast into 2016.
In the South African context, consumer price inflation (CPI) figures released by Statistics SA have fallen within the Reserve Bank’s target range of 3% to 6%.
This trend has been largely assisted by the persistent fall in the oil price, says the Steel and Engineering Industries Federation of SA (Seifsa).
It says the associated cuts in petrol prices will most likely mean a further easing of the index.
However, Seifsa economist Tafadzwa Chibanguza warns that while the fall in oil prices is expected to outweigh the inflationary pressure exerted on the weaker rand exchange rate in the headline CPI, the weaker exchange rate will, in time, begin to catch up with the index.
Moody’s outlook for base metals means Standard Bank might have to make further write-downs of about $80m on the value of aluminium stockpiles entangled in a Chinese fraud investigation. It has already written down half the value of the metal, with total exposure of $167m. But the bank says that any recovery in aluminium’s price is "highly uncertain".
Meanwhile, at the World Economic Forum in Davos, Sim Shabalala, the group’s joint CEO, has told Bloomberg that a number of African oil exporters have "huge worries", but that importers will benefit from declines in inflation.
However, he says Africa as a whole has been growing at about 6% for the past 10 years, and the bank thinks it will grow at about 5% over the next decade, notwithstanding the oil slick.