Moody's downgrades Rio Tinto with 'negative' outlook

In a note to clients, the ratings agency said the action reflected its view that there has been a “fundamental downward shift in the mining sector with the downturn being deeper and prospects for a recovery extended, resulting in increased credit risk and weaker metrics for Rio Tinto as well as the global mining sector.”

As a consequence, Moody’s said Rio Tinto’s ratings needed to be “recalibrated to reflect expected performance over a more protracted challenging operating environment.”

It also said the slowing economic growth rates in China materially impact the demand for base metals while the reducing steel production rates impact demand for iron ore and metallurgical coal - leading to lower prices.

“Supply imbalances, particularly in iron ore, the major earnings and cash flow driver for Rio Tinto, will maintain pressure on prices for several years. While lower oil prices, lower freight costs, and currency depreciation contribute to reduced costs, the drop in prices has and will continue to significantly impact performance,” Moody’s added.

The agency also said a stronger US dollar is a further factor contributing to weakening demand and driving prices lower since most metals are traded in dollars.