Miner and trader Glencore’s credit rating was left hovering above junk grade today, after Standard & Poor’s (S&P) spliced it to the lowest investment grade, citing concern over the impact of China’s slowing economy on commodity prices.
S&P downgraded the Switzerland-based group by one notch to BB- from BBB. It had recently lowered forecasts for some of Glencore’s key commodities - copper, zinc and nickel.
“We believe that commodity prices will remain very unsettled while the impact of China's slowdown plays out. This environment results in reduced visibility of future profits for Glencore and its peers,” S&P said.
“For Glencore, in particular, this also has, and may continue to result in, greater reported earnings volatility than we had previously anticipated, even if we recognise the relative stability over time of trading profits compared with those from mining activities.”
Glencore has argued that its trading division would meet its earnings targets no matter what commodity prices are doing.
It comes in the wake of a similar move by Moody’s last month due to the likely weak mining market conditions over the next two years.
Glencore has stressed its determination to preserve its investment grade rating, and will cut net debt by $10bn (£6.9bn) this year through asset sales, reduced expenditure, the suspension of its dividend payment and raising $2.5bn of new equity capital.
Its investment grade rating is vital to its trading business, which borrows money to take large positions that can generate tight profit margins.
Despite this, Glencore shares were up 14.6 per cent to 98.5p per share, as the mining sector was buoyed by a weak dollar. Nevertheless, they’re still down around 70 per cent since the commodities rout started around eighteen months ago.