By Michael J. DesLauriers –
TORONTO (ResourceInvestor.com) — In recent months Molybdenum has been all the rage amongst leveraged share speculators, as prices have risen nearly 20-fold off an all-time low of $2.36/lb in 2001 to nearly $40 last month. Prices are now about $36/lb. The last major spike in “moly” was to just over $30/lb in the late 1970’s.
The International Molybdenum Association states that, “Although steels and cast iron comprise the single biggest market segment, molybdenum’s diversity has also proven invaluable in superalloys, nickel base alloys, lubricants, chemicals, electronics and many other applications.”
The Association’s website lists the primary consumption sectors of the metal by end use in percentage terms as: Stainless Steels & Super Alloys 30%, Low Alloy Steels 30%, Chemicals & Mo Metal 20%, Tool & High Speed Steels 10% and Foundry 10%.
Huge Profits For Miners
At the recent Canaccord Minor Metals Luncheon in Toronto, Michael Schwartz of Teck Cominco [TSX:TEK] provided some factual enlightenment on the metal that has captured the imagination (and pocket book) of many investors. Schwartz has good reason to be informed. In 2004, Moly contributed 23% to Teck Cominco’s $1 billion operating profit, while just two years earlier the word Molybdenum didn’t even appear in the company’s annual report.
The Moly Market
Schwartz’s first order of business was to dispel the notion that bona fide facts were the rule rather than the exception.
According to Schwartz, “The minor metal markets are for the most part opaque, when compared to their base metal counterparts. Very little information on their production or consumption is published in the markets, and what does appear in the press is often misleading or misquoted.”
He also noted that access to precise information is all the more difficult to obtain where the Chinese, a redoubtable force in the moly market, are concerned. About 40% of the world’s moly is derived from primary moly mines. The majority of these, accounting for around three quarters of that percentage are located in China. Only about 10% of total moly production comes from primary moly mines in the West, all of which is controlled by integrated producers (producers who mine and roast the moly concentrates). A roaster is akin to a smelter.
More importantly, as Schwartz pointed out, the majority of world moly production comes as a byproduct from copper mines. Indeed, “the largest producers of moly are copper miners who are insensitive to the moly price, so if moly went back to $2/lb tomorrow, most of these miners would continue to produce it anyway.”
2004 world mine production of moly was estimated at 385 million pounds with demand believed to be about 375 million pounds.
The Roasting Bottleneck
Schwartz told the audience that the problem lies in “the moly roasting capacity where the really gray area starts to come in.”
“There are only a handful of roasting companies remaining in the West and their roasting capacity is a closely guarded secret. Those that have it, don’t publish it.”
“In the past it hasn’t been a problem because supply was always sufficient to meet demand, the miners produced enough moly to get roasted, the roasters had enough roasting capacity to roast it…and there was enough supply to meet demand.” Moly demand is now outstripping roasting capacity and as moly prices rose roasting charges have moved ahead of the moly price.
“Today we are faced with an increasing demand for raw materials in an environment of rising oil and gas prices, coming on the heels of years of underinvestment in mining, oil production and most importantly, moly roasting capacity.”
The problem is that while companies are looking to bring additional moly onstream due to higher prices, additional roasting capacity in the West (Chile) will not come online until late 2006 or early 2007.
Schwartz says that, “this is where the roaster bottleneck has occurred and now as a result of this roaster bottleneck were seeing prices rise as demand is not being able to be filled from the increased mine production, it’s being held up at the roasting capacity level.”
Teck Cominco believes that the roasting capacity in the West is already at its limits although enough capacity exists on a global level. The problem is that all of the extra capacity is in China. Chinese demand has apparently experienced a 276% year-to-date increase in moly concentrate imports to feed Chinese excess capacity.
There is an awful lot of Molybdenum in the world. According to the IMOA, world reserves are 12 million tonnes. The USGS attributes substantially more to China, and puts the number at some 19 million tonnes. Either way, there is probably more than one hundred years of current demand already identified.
While roasting capacity will be the buzzword for the next few years and prices may well remain lofty, moly is simply too easy for producers to bring on stream, and plans are already in hand for additional roasting capacity to be put in place. Within the next few years, prices for the metal are likely to fall even in the face of apparent insatiable Chinese demand.
Source: Resource Investor