Tight credit to put pressure on mining, metals sector

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31 Dec 2008

THE backbone of the Australian economy during the bull run, the metals and mining sector, is expected to struggle for the next year as production is cut back and infrastructure development put on hold. Bankers believe the number of deals in the junior end of the market will be maintained, but the prospective buyers for larger-scale plays will be constrained by tight credit conditions. Major investment banks have marked down forecasts for the sector for the next year, with coal and iron ore production estimated to fall by up to 40 per cent.
A cutback of that size would have ramifications for the federal Government, with lower company tax revenues contributing to erosion of the current budget position.
Deutsche Bank's co-head of natural resources, John MacKinnon, said the sector had not escaped the fallout from tight credit conditions.
"What we are seeing across the globe in terms of the metals and mining is something that has not been seen in our lifetime," Mr MacKinnon said.
"There is no doubt that credit availability has really tightened up since the middle of this year. The banks want to de-risk.
"The banks are going to stay very risk-averse and aware of their investments."
Deutsche has been one of the most bearish forecasters of commodity prices for the coming year, predicting that iron ore and coal will come under intense pressure in the new round of contract negotiations.
However, it has forecast that volumes will slide by 40 per cent before recovering to be down by 10 per cent in the fourth quarter of the 2009 calendar year.
"The contraction in sales volume has been overhanging the market since late October and early November, when global steel makers kicked off a major round of steel production curtailment," the bank's resources analysts said.
"Iron ore producers succumbed first, in mid-November, followed by manganese producers over the past week."
Mr MacKinnon said the deal flow would remain mixed. However, he said there could be strategic deals among iron ore, coking coal and uranium players.
The deal pipeline is expected to be held back, with international and domestic banks hesitant to refinance looming debt deadlines.
It has been estimated that metals companies have borrowed at least $2.4 billion of the syndicated debt that has been raised in Australia over the past two years.
"One of the impacts on the mergers and acquisition is the tightening up of equity and credit availability," Mr MacKinnon said.
"With deals that were on the table but were taken off, there is evidence that they were not able to finance them.
"What has been an interesting dynamic in this cycle is the influence of steel consolidation on the global landscape."
Official data published earlier this month showed that iron ore exports from Australia during October, the most recent numbers available, were down 9 per cent from the previous month.
Deutsche head of oil and gas Alex Cartel said activity in the sector was still strong and would support a robust medium-term oil price.
"The activity has largely continued in that deals that had been started have continued," he said.
"All these deals were done at a significant premium to the market price. A lot of people believe the market prices are undervalued.
"The prices they were done at show that merger and acquisition activity was alive and well."

Source: The Australian