On December 14, global credit ratings agency Fitch Ratings announced that metal and mining companies are expected to improve earnings and remain disciplined in capital spending and working capital management in 2011. Fitch also said that its 2011 outlook for the US metals and mining sector is stable.
According to the company's report, most metals producers right-sized their capital structures and bolstered liquidity in 2009 to support expectations for an anemic recovery, while strong cash generation in 2010 and higher expectations going forward have resulted in larger capital budgets and, in some cases, higher dividends. Fitch expects the recovery for metals and steel raw materials to stretch into 2012.
Fitch said that demand from China continues to dominate global metals demand. Although demand from developed nations has improved, it is expected to remain below peak levels through 2012, the ratings company pointed out, adding that the construction, automotive, and capital goods sectors - key to consumption of base metals and steel - remain weak in most industrialized regions.
Fitch expects volatility, with the bias toward improving prices from current levels, and modest margin expansion over the next 12-18 months in supply-constrained or supply-disciplined markets such as copper, hard coking coal, and iron ore. The cut in capital spending and exploration beginning in the fourth quarter of 2008 lowered the trajectory of supply growth, which should benefit producers when demand recovers fully. While budgets have rebounded strongly, Fitch expects producers to maintain return on investment expectations and risk preferences.