Q&A: Metals & Mining: Industry Top Trends & Pricing Assumptions Update

In our recent Metals & Mining: Industry Top Trends & Pricing Assumptions Update webinar, a panel of speakers from S&P Global Ratings and S&P Global Market Intelligence discussed the key factors driving the revision of metal prices, industry top trends and outlook for the second half of 2021, ESG factors in credit risk assessment, and more.

Keep reading for answers to the top questions asked during the webinar and responded by our S&P Global Ratings analysts - Diego Ocampo, Senior Director (Corporate Ratings) and Don Marleau, Sector Lead (Metals & Mining).

Q: Do you see a deglobalization trend, and how do you see it affecting the mining and resources industry?
A: Generally, we believe some metals may benefit by the additional demand on Electric Vehicles/Renewables electrification projects, such as copper, cobalt, and lithium, while heavy pollutants, such as coal, are already under pressure with very limited access to capital and heavy regulation.

We see any form of smelting or metal transformation that implies large quantities of power and produces greenhouse gases would need to upgrade its standards regularly to meet stricter regulations, as all major economies are adopting decarbonization goals for 2030.

Q: Given that the current United States (US) Administration will likely promote large construction projects, what metals do you think will benefit from these government projects?
A: Typically, iron ore and steel are associated with infrastructure development, while copper is demanded for electricity infrastructure.

Q: How do you see the Iron Ore price going by the of Q3 2021, given the recovery in Brazil and Australia?
A: We tend to see iron ore demand gradually softening, as stimulus fade-out and economies reach pre-pandemic levels. Notwithstanding that, prices should remain above historic averages at least for the next 24 months.

Q: When will CO2 reduction imperatives start to have a real impact on metal prices and profits?
A: It is already impacting some industries (i.e. coal and steel). China banned almost 30% of steel capacity in the past 3 years causing spreads of high-quality iron ore to soar. As many large economies have very ambitious goals of CO2 reduction by 2030, the trend is likely to speed up within the next few years.

Q: What is the expected trend in mining caped and exploration expenditure over the next four quarters?
A: We are a bit cautious regarding capital allocation as the biggest players may prioritize dividend payments, but what the data of transactions suggests (see the research article from S&P Global Market Intelligence) is that transactions have slightly incremented but with a focus on small tickets.

That suggests that the bigger players with better access to capital are buying smaller players/assets.

Q: Does S&P Global Ratings anticipate more supply to come online, given that the higher pricing will be enticing to projects that were deemed unfeasible in the past?
A: Supply in most of the metals is behaving more cautious, either because Greenfields are more scarce or costlier, or since expansions are riskier either geologically; politically or from a social angle.

Q: How has production reduced of the global metal minerals, like copper, zinc, cobalt, gold, and the like - due to the Coronavirus impact?
A: Demand of most metals receded during 2^nd quarter of 2020, but by 4^th quarter of 2020 incremental volumes were making up for the slower start. So, for the most part, volumes weren’t affected much during 2020.

Q: Where do you expect ratings to trend most and least positively across the sectors?
A: Right now, we are seeing a bit of bifurcation in cash flow and profits depending on if you produce a primary metal or if you are buying it. For downstream, some of the steel manufacturers are going to be dealing with higher costs and will be relying on pricing power to keep margins out. It would also be expected that aerospace is where you’d see the most rating pressure because of decline in demand and higher costs. It’s also probable that the more ESG decisions or policymaking will make companies get a hit in profitability or probability in the portfolio distribution which may cause additional downgrades. We saw that impacting coal, Asian steel markets.

Meanwhile, if you’re upstream and you’re producing your primary metal, prices are so high that you would be making money – doubling and tripling of EBITDA at the front end of the industry. In a few years to come, there may be more capital deployed organically rather than in acquisitions because most of the price hikes have already been flooded in the prices of the assets. Expect some diversification going on in other types of metals, small companies in Peru, and perhaps Chile. Brazilian steelmakers that are integrated and have very good assets, such as iron ore assets, may also benefit a lot, and they were hit hard by Lava Jato, the previous iron ore crisis and credit conditions that were not that good around 2015, 2017, and 2018. There have already been some upgrades there, for instance, companies like Usiminas, CSN.

Q: What are the top considerations when incorporating ESG factors in credit assessments?
Please see S&P Global Ratings - Metals and Mining ESG Evaluation Key Sustainability Factors.

Q: How would ESG factors impact and differ across regional mining sectors?
A: ESG is a very crucial part of our analysis; it impacts industry assessment, profitability, and CapEx. Now, there is a stronger correlation between an ESG profile of a company and the ratings because lenders are far more mindful in assessing companies that don’t run their businesses with a positive impact on the environment. In terms of social, we saw this in the tragedies in Brazil. It underlined something that the industry wasn’t keeping a close eye on, the type of risks this industry is inherently exposed to.

We are going to see capital being far more selective. The big entities, the more diversified, and the ones that communicate better on what they are doing in terms of ESG are going to be more dominant. We expect more reshaping of the steel industry as there may be more impact in the smelting of businesses

Q: How would the U.S. and China trade relations affect the metals and mining sector?
A: The relationship between the U.S. and China is at the core of many exports into China as well as the raw commodities, imports of the finished goods, and the tensions surrounding that. We see this trend leaning towards localizing the supply chain more in North America, partly because of the cost, friction, and the uncertainty associated with trade actions.

If part of the driver is high power costs, potentially then the economics of producing metals in North America is more attractive. To the extent that China is shifting either its fuels for power or making less power available to heavy polluting industries like steel and aluminum, then that offers an opportunity in North America especially if companies are able to do this transition in a way that they have – if they're on a renewable -- upgrade with renewable resources instead of much of the power in China being coal-fired.

So, it wouldn't just be trade factors, but there are policy decisions in China to reduce emissions, shift the economy to more of a consumer orientation from the heavy metals production. That opens an opportunity for probably a lot of old assets in North America and Europe to be rejuvenated, and that's where maybe some marginal CapEx can occur.