Did you read about the Moody’s downgrade of Fortescue Metal Group’s credit rating in this morning’s papers? Hard to spot, seeing as Fortescue informed the market of the downgrade at 7.29pm Monday, well after the finance and business pages of many papers had gone to bed for the night. Though it was on some websites this morning as the early staff caught up with what was missed overnight.

The downgrade was notable for two things: 1) Moody’s cut Fortescue’s rating to Ba2, two notches below investment grade; and 2) it left the outlook negative.

However, the ratings statement was more notable for what it didn’t mention: the recent rebound in iron ore prices (down another 2.7% overnight Monday, to US$55.55 a tonne, or 11% under the US$63 a tonne of a week ago). Probably because there’s no guarantee that rebound will last even six months, let alone two years.

And Moody’s reasons for the negative outlook (meaning another ratings cut could occur in the next 18 months) were based on realistic assessments of the problems facing the whole industry, not just Fortescue.

Moody’s said:

“[its] expectation for lower iron ore prices going forward reflect the agency’s view that steel production in China, the principal destination of Fortescue’s iron ore shipments, will decline and that ongoing iron ore supply additions will continue to pressure fundamentals. As a single commodity producer, lower average iron ore prices will lead to Fortescue’s revenue and earnings dropping over the period despite its stable production profile and reducing its operating and capital costs.”

And continued:

“… the ratings are not expected to be upgraded in the near term given current operating conditions and iron ore prices, however, the ratings could be stabilised if Fortescue demonstrates a track record of operating with lower costs of production and an ability to further reduce debt levels in the now lower pricing environment.”

And what about the mooted deal with Vale, announced a week ago today, just after that surprising 24% surge in the Fortescue share price? At this stage, Moody’s doesn’t believe it is worth incorporating into the rating because it remains uncertain, needing approval from a clutch of regulators around the world, with China the most important. But you can bet that if Vale were buying a 15% stake in Fortescue via a placement, which pumped actual cash into Fortescue’s balance sheet, instead of an on-market buying splurge (which will operate like a share buyback by Fortescue, without it using its precious cash), then Moody’s would have looked at the deal in a different light. Up to the close on Monday, Fortescue shares had lost 16% in value from the $3.08 peak hit on Monday of last week — an accurate indication of the change in sentiment about the Vale deal.