Fitch sees 2010 outlook for base metals as stable

Fitch Ratings expects global metals demand will be more dependent on growth in developed economies in the next phase, according to its global base metals 2010 outlook. The recent recovery in metals prices was primarily driven by domestic consumption and restocking in China amplified by the return of speculative demand. The construction, automotive and capital goods sectors, which are key to consumption of base metals, remain weak in most industrialised regions. While construction should benefit from stimulus spending, automotive and durable goods sectors depend more on consumers, and high unemployment will impede growth. Cost pressures have returned driven by strengthening local currencies, increases in energy prices and wage increases. Metals prices and margins will be influenced in the short term by changes in stocks and exchange rates. 'The recession has lowered the trajectory of supply growth which should benefit producers when demand fully recovers,' said Monica Bonar, Director at Fitch Ratings. 'Our rating outlook on the sector is stable as results for the fourth quarter should show normal seasonal weakness, but we expect results in the first half of 2010 to be more indicative of the strength and sustainability of the recovery.' According to the report, during 2009 metals producers have raised capital and/or sold assets to bolster cash positions or to support necessary spending. For most producers, capital raising and spending decisions were taken when the outlook was most dire, and the rebound in metals prices has surprised significantly to the upside. Fitch expects volatility with the bias toward stable prices and margin expansion over the next 12-18 months in supply constrained or supply disciplined markets. The aluminum market remains a concern given excess capacity, persistent surplus production and high stock levels. The precipitous contraction in demand beginning in the third quarter of 2008 resulted in sharp reductions to spending on exploration and expansion projects. Fitch expects producers to remain disciplined on capital and exploration spending; while expenditures should rebound from trough 2009 levels, Fitch expects spending on average to remain below 2008 peak levels for the next 24 months. Downside risks to Fitch's view include tightening monetary or fiscal policy, a reassertion of financial risk avoidance, or a return to recession. Upsides to our view include supply disruptions or strong recovery in consumer durables. The full report 'Base Metals Outlook Differentiating by Supply' is available on the Fitch Ratings web site 'www.fitchratings.com'. The report provides specific outlooks and analysis for each of the major base metal categories.