(EnergyAsia, August 11 2015, Tuesday) — China’s slowing energy demand is further draining the financial life out of Australia’s thermal coal miners and services companies at a time when they are struggling with low commodity prices, said US ratings agency Moody’s.
China’s thermal coal demand is declining amid the country’s slowing industrial production and push for cleaner energy sources.
“Cost-cutting initiatives across Australia’s mining industry have softened, but not fully offset, the impact of weak commodity prices on margins,” said Shirley Singh, a Moody’s associate analyst.
Miners have frozen their project pipelines and have limited appetite for new coal investments, she and analyst Saranga Ranasinghe jointly wrote in a new report entitled ‘Declining Chinese Coal Demand Exacerbates Pressure on Industry.’
The report identifies BHP Billiton Limited (A1 stable), Rio Tinto Limited (A3 stable) and South32 Limited (Baa1 stable) as being “more resilient in this challenging environment than smaller, coal-focused producers such as Peabody Energy Corporation (B3 negative).
The financial gloom has spread to Australia’s mining-services companies as its miners are renegotiating contracts at lower rates in a bid to preserve margins.
Reflecting this trend, Moody’s said it has taken negative rating actions — multi notch downgrades in some instances — on all five rated Australian mining-services companies over the last 18 months: Ausdrill Limited (B1 negative), Barminco Holdings Pty Limited (B2 negative), Onsite Rental Group Pty Ltd (B2 negative), Emeco Holdings Limited (Caa1 negative) and Bis Industries Group Ltd. (Caa1 negative).
The negative outlooks on the companies reflect Moody’s view that further downside risk remains at an elevated level. Liquidity has become a key differentiating factor in credit quality and ratings, especially for small to midsize Australian miners and services companies.
“To preserve liquidity, companies have slashed their capital expenditure and business investment by deferring growth projects. Most mining-services companies are also selling equipment to generate cash for operations,” said the ratings agency.
While coal remains a main fuel source for electricity production worldwide, the fuel’s main users and importers including the US, China and Japan are making efforts to develop renewable energy sources and natural gas as long-term alternatives.