Stress Tests for Miners Show BHP, Rio Can Endure China Shock

LAGOS (Capital Markets in Africa) – It’s the question commodity investors dread: what happens if China slows and prices crash? S&P Global Ratings crunched the numbers for just that scenario and found the world’s five top miners including Glencore Plcand BHP Billiton Ltd. would be able to get by without a ratings cut.

As prices will “run out of steam” sooner or later, S&P modelled a one-year collapse caused by a sudden shock to Chinese demand “as that’s one of the most likely causes of a downturn,” the agency said in a note. The test, which also covered Rio Tinto Group, Anglo American Plc and Vale SA, found that “it will take more than a price shock to shake the balance sheets of the big five.”

The world’s largest miners were severely tested by the last major slump in materials prices that culminated in the final quarter of 2015 as investors fretted about the impact from a slowdown in China and, in the case of iron ore, ever-rising supply. Producers responded by cutting costs, rationalizing portfolios and bringing down debt burdens. S&P said its hypothetical market crash was modeled using prices 10 percent below those hit in that quarter.

“The major miners are well-positioned to absorb a potential external shock after completing their debt-reduction plans, supported by a currently low commitment to growth capital expenditure,” S&P said. Deleveraging and “flexible financial policies should make them resilient not only through normal industry cyclicality but also under more severe stresses.”

The agency added twin cautions about its findings. First, the results of the stress tests could not be applied to smaller producers. And second, that the study wasn’t based on an attempt to model a full-blown worldwide trade waror the paths that could lead that kind of confrontation.

If a China crisis won’t be enough to force downgrades, what could? “The short answer is a deviation from their current financial policies, especially in tandem with a material drop in prices,” it said, listing risks including opportunistic acquisitions. “We do not currently anticipate the miners taking such actions, however, given the lessons learnt in the last downturn.”

In the final quarter of 2015, raw material prices came under extreme pressure on concern about a slowdown in China, the largest user of metals and the top importer of iron ore. The raw material used to make steel — which now trades at $63.25 a ton — tumbled below $40 in that three-month period.

Source: Bloomberg Business News