Cape Town - There is little light on the horizon in the mining sector and it is unlikely to return to normality for years to come, said rating agency Moody's Investors Service.
"We believe that the current severe downturn in the mining industry represents a fundamental shift in the operating environment and that, as a consequence, a wholesale recalibration of ratings is required," Moody's said on Tuesday.
The slump is unprecented and no mere normal cyclical downturn, said Moody's, adding that stress on companies in the metals and mining industry could surpass that seen during the 2008/2009 financial crisis.
"Prices peaked in 2012 for most base metals, with a subsequent gradual price decline in 2013 and 2014 that allowed companies to adjust mining plans and exploration expenses. However, price declines accelerated sharply in mid- and late-2015 and that has continued in the first few weeks of 2016," said Moody's.
The agency pointed out that the prices of metals prices are continuing on a downward spiral, hit by slowing economic growth in China and weakening global demand. Purchasing managers' index figures below the breakeven 50 mark are a sign of ongoing contraction and this is hardly likely to show any significant easing as China moves toward a service economy, said Moody's.
It paints a gloomy picture of future prospects in the mining sector: "There is little light on the horizon and we expect the physical supply/demand imbalance to widen further, leaving industry conditions extremely weak and making a return to normality unlikely for several years."
Moody's expects the US dollar to keep firming as interest rates rise, keeping up the pressure on base metal prices. "While some miners benefit from lower costs on weaker local currencies and oil prices, this is only delaying the supply adjustments needed to bring the industry back into balance.
"This imbalance can trace its roots to the overly optimistic expectations for growth in China, which consumes some 40% to 50% of the key metals like aluminum, copper and nickel, coupled with a favourable financing that led to massive investments by miners in building capacity - particularly in high tech 'super mines' that are difficult to scale back," said Moody's.
On top of that, steel production in China, the catalyst for the seaborne iron ore and met coal markets, slowed in 2014 and 2015.
Turning to gold, Moody's said the metal is driven by different dynamics, and that its safe-haven status and store value as a reserve currency made it more resilient to price compression than the base metals. "Nonetheless, gold declined roughly 8% in 2015 and hit monthly averages below $1 100 per ounce in both November and December.
"Overall, gold prices have been declining since 2012 and are expected to remain responsive to economic and sovereign concerns as well as the strength of the USD, oil price and equity price movements," said Moody's.
It pointed out that mining firms in countries with weaker currencies, such as the rand, could feel the benefit of a drop in costs.
The agency, which has already placed 55 companies in the base metal, precious metal, iron ore and coal industries under review for downgrade, said all miners are impacted to various degress and "many companies could be downgraded, some multiple notches".
"Our broad review, which will be largely completed during the first quarter, will consider each mining company's asset base, cost structure, likely cash burn and liquidity, as well as strategies for coping with a prolonged downturn," said Moody's.