From Standard and Poors:
Several Iron Ore Producers Placed On CreditWatch Negative After S&P Revises Downward Its Price Assumptions
OVERVIEW
• In our view, the severe supply and demand imbalance in the iron ore market could continue for the next two years.
• We have lowered our price assumptions for iron ore for 2015, 2016, and 2017 (to US$45/te, US$50/te, and US$55/te).
• As a result, we are placing our ratings on eight iron ore producers on CreditWatch negative.
• We expect to resolve the CreditWatch placements in the coming two to three weeks after reviewing the effect on each issuer’s financial and business risk profiles.MELBOURNE (Standard & Poor’s) April 14, 2015-–Standard & Poor’s Ratings Services said that it has placed the ratings on the following iron ore producers on CreditWatch with negative implications:
• Anglo American PLC
• BHP Billiton Ltd.
• CAP S.A.
• Eurasian Resources Group (ERG) S.a.r.l.
• Exxaro Resources Ltd.
• Fortescue Metals Group Ltd.
• Rio Tinto PLC
• Vale S.A.The CreditWatch placements follow our decision to lower our price assumptions for iron ore to US$45 per ton (US$/te) for the rest of 2015, and to US$50/te for 2016 and US$55/te for 2017, on April 13, 2015 (see “Standard & Poor’s Makes Significant Downward Revisions To Its 2015-2017 Iron Ore Price Assumptions,” April 13, 2015). This compares unfavorably with our previous price assumptions of US$65/te in 2015, US$65/te in 2016, and US$70/te in 2017).
The revision of our price assumptions and the sharp fall of iron ore spot prices reflect the severe supply and demand imbalance in the market, which we believe could persist for the next two years due to the following factors:
• The continued and sizable expansion of seaborne iron ore supply by major players;
• The slower pace than expected of displacement of high-cost producers; and
• Softer demand growth from China. In addition, the severity of the price decline has been sharpened by:
• Falling production costs because of declining prices of energy inputs, such as diesel; and
• Weaker currencies in major iron-ore producing countries, such as Australia (down by over 20% over the past 12 months versus the U.S. dollar), Brazil (down by about 35%), and Russia (down by more than 40%).At the same time, the combination of lower energy costs and weaker currencies is sustaining marginal producers, thus prolonging the supply glut and weakness in iron ore prices.
In our view, lower iron ore prices may not only weaken producers’ operating cash flows and financial leverage, but may also affect the long-term resilience of some companies’ business risk profiles, given the higher-than-anticipated earnings volatility due to iron-ore-price swings.
CREDITWATCH
The CreditWatch placements signal the likelihood of a number of negative rating actions after we complete our sector review. We expect downside typically of up to one notch, but we don’t exclude the possibility of rating affirmations or, exceptionally, a two-notch downgrade.The rating actions will depend on company-specific factors, including each issuer’s cost position, exposure to iron ore, and its ability to take counteractive measures in terms of reducing capital spending, generating positive free cash flow and preserving liquidity in the current prolonged downturn.
We expect to resolve the CreditWatch placements within the next two to three weeks. During that period, we will assess in more detail the companies’ plans to address the adverse impact on cash flows from falling iron ore prices.
