OREANDA-NEWS. The sector outlook for China's metals and mining companies is negative in 2016 because structural overcapacity issues remain unresolved, while the ratings outlook for the sector remains Stable, says Fitch Ratings. The agency, however, expects to see a mild recovery in the growth rate for fixed asset investments (FAI) by 2H16, driven by a pick-up in real-estate construction activities on the back of a low base in 2015. This may result in a slight recovery in demand for steel and aluminium.

Fitch expects net steel and aluminium capacity additions to outpace flat steel consumption, along with slow demand growth for aluminium in 2015-2016. However, we could see steel capacity peaking in 2016 with limited planned capex for steel beyond 2016 and total planned closures in the next five years.

Fitch continues to see steel exports at elevated levels, driven mostly by Chinese steel producers' cost advantage in the short-term. China's One Belt One Road plan in the long term will also create demand for either Chinese steel products or Chinese-made production capacities abroad, which may help to alleviate overcapacity at home.

The ratings outlook for metals and mining companies remain Stable despite the negative sector outlook. That's because we have either factored in weak margin levels or a result of their links with the state which may give them added support in a poor operating environment.