Fitch sees negative mining outlook in 2016

Fitch Ratings' outlook for the global mining sector in 2016 is firmly negative, reflecting its view that Chinese demand will continue to weaken in the coming year and that commodities will remain deeply unpopular with investors.

The slowdown in Chinese demand had already created substantial oversupply in some commodities, including iron-ore and aluminium.

“We expect this trend to continue in 2016 as the Chinese economy undergoes a gradual deleveraging and transition from investment to consumer-led growth.

“Average prices for these two commodities are, therefore, likely to be lower in 2016, as are prices for copper and zinc. Nickel could prove an exception to the trend, due to mine closures and falling Chinese nickel pig iron production, but this is far from certain,” the ratings agency said in a statement on Thursday.

Most mining companies now had weak credit profiles for their current rating, reflected in the fact that most large international mining companies were on negative outlook or rating watch negative.

“We expect companies to continue to focus on cost control and short-term liquidity management in 2016. But they will find it harder to use cost cuts to aid debt reduction because the falling diesel prices and beneficial exchange rate moves that helped them in 2015 are unlikely to be repeated,” Fitch noted.

Further, it pointed out that reductions in capital expenditure budgets were similarly largely complete, which meant that more mining companies were likely to come under increasing pressure to cut their dividends to boost free cash flow in 2016, following relatively modest reductions in shareholder returns so far.