The business outlook for the global base metal industry continues to be favorable for 2007, as base metal prices moderate but remain at favourable levels, according to a new report from Moody’s Investors Service.

Moody’s predicts that most producers should continue to generate excess cash flow in this environment, leading to an outlook on credit ratings that is predominantly stable. The companies not expected to generate excess cash flow will be the integrated aluminum producers, given the significant capital investments they are making in new refineries and smelters.

“The generation of excess cash flow will be particularly important for those companies that have participated in the consolidation that has dramatically altered the industry landscape, taking on very large debt positions that need to be reduced to more manageable levels to continue
to warrant current ratings,” says Moody’s vice president/senior credit officer Terry Marshall, lead author of the annual outlook that covers the copper, nickel, zinc, and aluminum industries.

Moody’s expects pricing will continue to be positive if somewhat lower for producers as strong demand in China offsets some weakening in US demand. Supply, in turn, continues to be constrained by a lack of meaningful new capacity for copper, nickel, and zinc in particular.

“Apart from any significant reduction in Chinese demand, the biggest threat to price will be from the fund sector, which has supported the growth in prices over the past few years but which has contributed significantly to the increasing volatility witnessed this year, particularly in copper,” says Marshall.

Acquisition-driven event risk will continue to be one of the key challenges to company credit profiles over the next year, says Moody’s. “As the industry consolidates, we expect that there will be only a handful of significant mining companies left, with a very limited to non-existent number of second tier companies,” says Marshall. “While Moody’s believes that the larger, more diversified companies will be stronger and better able to withstand downturns in metal prices, the premiums being paid and debt taken on is a concern, and could impact ratings if acquisition debt is not reduced in the current strong markets.”

Moody’s also says that significant increases in both operating costs and development costs are additional concerns for ratings.