From Moodys:
Iron ore, Australia’s largest export commodity by value, has been experiencing sharp price declines since the start of 2014 due to large increases in supply and lower growth rates for steel production in China. Overcapacity has grown on the Chinese Mainland as GDP growth slows. The current price of around USD84 per metric tonne (mt) for 62% Fe iron ore CFR is down over 35% from the beginning of 2014.
» This trend will exert a direct negative impact on Moody’s rated Australian producers over the next 6-12 months. Atlas Iron Limited’s (B2 stable) credit profile will be the most affected, reflecting its position as a single-commodity producer with moderate cash costs. Atlas will be further impacted by widening price discounts for its iron ore, which is generally of lower quality than that from the major producers.
» Of the major iron ore miners, Fortescue Metals Group (Ba1 stable) will be the most affected, as unlike its peers, it is a single-commodity producer. By contrast, the earnings and credit metrics for BHP Billiton (A1 stable) and Rio Tinto (A3 stable), while also experiencing pressure, are better positioned, given their lower cost profiles, improvements in debt levels, and benefits from product diversity.
» To preserve margins, we expect the miners to reduce their scope of work and renegotiate contracts with the providers of mining services, which will in turn further reduce earnings and cash flows at the latter. Mining services companies affected are Ausdrill (Ba3 stable) Barminco (B2 negative) and Emeco (B1 negative).
» Moreover, as part of initiatives to counter the weak price environment, the majors have been reducing their labor forces, meaning reductions in fly-in fly-out passengers. This trend will negatively impact airlines and airports, such as Qantas Airways (Ba1 negative) and Perth Airport (Baa2 stable).
» A potential further reduction in capital expenditures for development will negatively impact the construction and engineering sectors, as their companies, such as Leighton Holdings (Baa3 stable), face reduced project work.
