Commodities | Mar 08 2007
By Chris Shaw
Molybdenum, which is used as an anti-corrosive and as a strengthening agent in steel, attracts little attention in global commodity markets in part because the metal is primarily a by-product of other mining operations. As a result the price of the metal is volatile, as evidenced by its 2005 spike to a record US$40/lb and subsequent pullback to an average price of US$25/lb last year.
Despite this volatility the outlook for the metal appears good, as GSJB Were notes output growth is likely to be subdued in coming years. Industry insiders agree with this view as Mark Wilson, vice president of Canadian Producer Thompson Creek Metals, pointed out at a recent investment conference in the US.
Wilson’s view is the supply-demand dynamics of the industry are favourable for higher prices, as on his firm’s estimates the world will need a further 100 million pounds of molybdenum over the next four years to meet global demand, which is forecast to grow at a compound rate of 4% annually during this period from current levels of 410 million pounds.
Demand is being driven not only by the construction sector but also via industries such as shipping, where new legislation requires large cargo ships to have double hulls by 2010, and the increased focus on exploration in the oil and gas sector given the metal’s use in pipes and drills.
The problem in Wilson’s view is it is not clear where the extra supply will come from, as there are few new mines scheduled to come on stream. The only one of note in the short-term is a mine in Peru, forecast to produce six million pounds this year and nine million pounds annually from 2008.
At the same time ore grades are declining at most operations around the world, so growth from existing primary mines and by-product operations is expected to be limited. While existing producers such as Phelps Dodge are looking to ramp up production, Wilson points out this won’t impact on output until around 2009.
The positive supply outlook is matched by increasing demand, as molybdenum is used in around 10% of all stainless steel and has little in the way of substitutes. As Smith Barney Citigroup notes, the solid steel market outlook this year implies similarly solid demand for molybdenum, particularly as the Chinese are expected to introduce export quotas at levels of 50-70% of last year’s levels.
China is the big swing factor in the market as it appears the only producing nation likely to be able to lift output in the short-term, though Wilson suggests this may not translate into higher exports as the increased output may well be used domestically.
GSJB Were also expects demand for the metal in China to increase this year given an expected increase in steel demand, the broker estimating a 12% lift this year after a 17% increase in 2008.
The result is a positive outlook for prices, the broker suggesting molybdenum prices this year should average US$22 per pound. While this is down from last year’s US$25 per pound average it remains well above long-term average prices. Citigroup is forecasting an average price of US$20 per pound this year and US$10 per pound in 2008, though it notes risk remains to the upside from these numbers.
Rio Tinto (RIO) offers the only real exposure to molybdenum on the Australian market, though it is not a major contributor to group earnings.