AsiaPac Metal and Mining Industry face tougher conditions

Outlook for the metal sector remains negative in 2012 due to lower cash flows.

In a report from Standard and Poor's "Most Asia-Pacific Metal And Mining Companies Face Compressing Cash Flows In 2012, commodity prices have declined from stratospheric levels in 2011, though prices of certain minerals such as iron ore and copper have possibly bottomed out in the first quarter of 2012. Nevertheless, a negative outlook for the steel and aluminum sectors in 2012 prevails due to lower cash flows.

Here's from Standard and Poor's:

The steady credit quality of the Asia-Pacific mining sector will likely remain over the next 12 months, despite the fall in mineral prices from high 2011 levels. "Miners in the region are still enjoying fairly decent margins compared with historical levels," said Ms. Suzanne Smith, the Head of Commodity Ratings for Asia Pacific at Standard & Poor's. "Furthermore, supply-side constraints and a still-growing absolute demand will likely sustain prices close to those realized over the first quarter of 2012 for the rest of the year," Ms. Smith added. Still, rising production cost from elevated fuel prices and higher labor and mining contractor costs is the key risk to credit quality for the mining sector.

The outlook for the metal sector in the region remains negative because of a combination of overcapacity and sluggish demand growth. "We believe the profitability of steel and aluminum producers in the region will continue to weaken over the next quarter at least, even in a soft landing scenario for China," Ms. Smith said. Steel and aluminum end-markets that are sensitive to fixed asset investments, including construction and infrastructure, are most at risk from a slowdown. Despite tough conditions, sustained capital investment in the metal sector will likely persist in 2012. "Interestingly, we believe capital spending by metal companies will remain high in 2012, especially in the aluminum sector in China", Ms. Smith said. "This is in sharp contrast to the experience in the U.S. and Europe, where capacity is being reduced".