Moody’s Ratings agency cut its rating on bonds issued by Alcoa from Baa3 to Ba1 today, which qualifies the company’s debt as “junk” in the fixed income world. One of the world’s largest aluminum producers, Alcoa has been plagued by falling aluminum prices and sluggish demand for building materials.
Moody’s thinks the weakness will persist; even though Alcoa has cut costs and production, growth is slowing in China, a primary market for Alcoa’s materials. Also, production cuts aren’t likely to absorb the glut of aluminum or boost prices anytime soon.
The aluminum issues are symptomatic of those plaguing most commodities. Prices of energy, agricultural products, and metals have all fallen in the last few years. It’s what Barry Ritholtz has called a “great rotation” from commodities to bonds and equities.
As Stanley Druckenmiller, former managing director of Soros Fund Management, explains it, the world’s commodities producers were overzealous in 2010, after the worst of the financial crisis had subsided. They ramped up production, but failed to see that China’s GDP growth was moderating, and the rest of the world was far from recovery.
However, the ratings axe may not do much damage to Alcoa’s long-term financial health. Yields on junk bonds are near all-time lows (meaning they’re cheap for companies to issue). Even Moody’s noted Alcoa’s “excellent liquidity and manageable near-term debt maturities.”