While the world's mining sector faces tough times ahead, the absolute decline will not be as severe as it was during the global financial crisis, S&P forecasts.
In what likely will be a period of ups and downs, mining companies around the world share significant hurdles: slowing growth in the Chinese economy as well as economic uncertainty in Europe and the United States.
"Slowing growth in the Chinese economy will, in our view, almost certainly have an outsized effect on metals and mining companies around the world," Standard & Poor's warned in a recent report.
"And slowing economic growth in other markets will likely affect metals and mining companies too. It may be only a matter of the degree to which they suffer," S&P Primary Credit Analysts Michael Scerbo and Suzanne G. Smith advised.
The good news is Standard & Poor's Ratings Services only see a 10% chance that the Chinese economy could suffer a hard landing with growth slowing from the annual average of more than 9% in the past few years to 5%. However, even if the Chinese economic expansion slowed to only 8%--and because growth could even be slower in China's construction sectors, "the world's world steel producers could suffer most."
In North America, much of the current risk for mining stems from domestic conditions, says S&P. Construction steel markets are still weak, although industrial demand has picked up a bit, thanks to auto production and equipment manufacturing. "But even with demand slowly improving, the risk of oversupply and pricing volatility remains," the analysts advised.
Meanwhile, U.S. coal producers have already felt the impacts of an unusually warm winter and the fact power generators have been switching from coal to natural gas because of lower gas prices, S&P noted. The bad market for steam coal, which power plants use to generate electricity, has caused prices to plummet.
At the same time, global prices for met coal, which producers used to make steel, have declined and earnings from met coal will not offset the significant decline in steam coal demand and pricing,
Nonetheless, S&P forecasts not all steel-related industries will suffer at the same rate.
Brazil will benefit because it hosts some of the world's most prolific reserves and quality iron ore. Although China has tried to exploit its own iron ore reserves, domestic production meets just 30% of its needs.
Even with Chinese steel production at record highs, large Chinese steel companies are losing money for the first time in 10 years "and overcapacity and slowing demand may continue to weigh on steel prices, perhaps pushing them further down," the analysts observed.
"Standard & Poor's believes that while a sharp slowdown in Chinese economic growth could reverberate through the iron ore market, we don't expect prices to weaken significantly. Even if Chinese steel production grew at a much slower pace, iron ore producers would have to increase capacity significantly to meet demand."
However, in the Asia-Pacific region, S&P says the slowdown in China and weakening commodities prices could hurt metals and mining companies, which face rising costs, softening prices, and oversupply problems.
"Times could be very tough, in our view, for producers of commodities such as zinc and nickel, which are used in heavy industry," according to Scerbo and Smith. "We think prices on these could suffer the most in a medium- or hard-landing scenario in China.
"And we have a negative outlook on the metals sector, reflecting our view that steel and aluminum producers will continue to struggle with softening demand growth and abundant supply. Aluminum prices, in particular, show no immediate signs of having reached bottom-or doing so any time soon."
"Still , while we are forecasting a deceleration in demand in the Asia-Pacific metals and mining sectors due primarily to the slowdown in property development and infrastructure investment in China, we believe the absolute decline may not be as severe as it was during the global financial crisis," the analysts advised.