Casey Research LLC
March 8, 2005
there had been little to get excited about in molybdenum mining
for nearly a quarter-century. After a price spike in 1979 that
saw "moly" - a soft, gray metal used largely in steel-making
- go as high as $35/lb, the price quickly fell to near $5/lb
and stayed there, for the most part, for the next two decades.
The picture changed dramatically at the beginning of 2004, when
moly began a sudden recovery. The metal jumped to $15/lb by April
and then more than doubled between October and December, to just
below $35/lb by the Christmas holidays - a 1,300% run-up from
the $2/lb price range prevailing in 2002.
Understandably, the rapid rise has the market buzzing and a number
of juniors touting their new mission to find and/or develop moly
deposits. But before putting money into moly ventures, it's important
to ask: will moly's 2004 gains continue, or at least hold, during
To answer this, we need to understand what caused the price spike
of 2004. The standard explanation is that ravenous steel demand
from China created an exceptional need for moly-the logical extension
being that as long as the Chinese economy stays strong, so too
will steel demand and thus the moly price. But a look at the
numbers shows that this explanation is probably an oversimplification.
Contrary to Popular Belief...
did not use exorbitant amounts of moly in 2004, according to
statistics from Adams Metals, presented at the International
Molybdenum Association's general meeting late last year. Moly
demand for stainless steel products did likely grow by a healthy
6 percent on the year, but this is about the same annual demand
growth the industry has seen since 1999. Demand growth for moly
used in making other types of steel, such as low alloy and high-strength
low alloy (HSLA), has flattened over the last 3 years to about
2 percent annually. In fact, even when other uses of moly - such
as for catalysts and lubricants - are considered, demand has
been increasing at a relatively constant rate for the past 20
years, around 4 percent annually.
So, if it wasn't a sudden jump in Chinese steel demand that sent
the moly price soaring, what was it? In fact, the gains probably
can't be attributed to any one major cause. Instead, the run-up
was likely the result of a confluence of smaller factors.
One important development came not from China, but from America.
The U.S. is the world's largest user of moly, but had seen its
demand for the metal peak in 2000 at 81 million lbs and then
decline to 66.1 million lbs by 2002, as the economy sagged. This
demand reduction caused moly to sink to near $2/lb, which in
turn drove global moly producers to mothball a lot of mine capacity.
Consequently, production hit a four-year low in the second quarter
of 2002, with about 43 million pounds of moly available to buyers,
down nearly 25 percent from 2000.
In late 2003, however, the U.S. economy came back to life, and
so did overall western demand for moly, rising to 85 million
lbs in the second quarter of 2004, up nearly 13 percent from
the third quarter of 2003. This in itself, however, doesn't appear
to have been the primary cause of moly prices going through the
roof. That's because producers - mainly the U.S... and Chile
- ramped up production in response to the sudden need. When combined
with exports from China and the CIS, supplies met demand through
the last half of 2003. But then, at the beginning of 2004, something
unexpected happened. China abruptly cut its exports by about
6 million lbs.
The suddenly reduced supply, combined with increasing demand
from the U.S., created a kind of "perfect storm" for
moly, resulting in a 5-million-pound supply deficit in the first
quarter of 2004, at which point prices really began to move.
"Immediate and Rapid Fall in Price"
It thus appears
that the gains moly made in 2004 may have been more of a blip
than a long-term trend in the market. For one thing, the rampant
growth in U.S. moly demand during the first half of 2004 seems
to have been an isolated occurrence. American demand shot up
12.5 percent in the first two quarters of the year as compared
to the same period in 2003, but then leveled off enough that
the overall increase for the year was only 8.5 percent. In other
words, the supply crunch came only because U.S. demand wasn't
evenly distributed throughout the year, but bulged during the
exact period when China cut its exports. After the second quarter
of 2004, western moly demand actually fell slightly, and has
since remained flat.
The export cut from China also appears to have been an anomaly.
There was some speculation amongst moly bulls that the decrease
might signal that China was planning to use more of its moly
domestically, spelling long-term trouble for global supply. But
this quickly proved not to be the case when, in the very next
quarter, Chinese moly exports shot back up 5 million lbs, close
to levels seen in 2003, and held near that volume for the rest
of the year.
As a result, the supply deficit narrowed to only about 2 million
pounds in the second quarter of 2004. And since then, overall
global moly supply has jumped in response to the price gains,
increasing by an estimated 10 million pounds, or 12.5 percent,
during the last year. In fact, estimates from Adams Metals are
that by the second half of 2004, supply once again exceeded demand,
with the surplus likely now standing at about 5 million pounds-the
biggest excess in 5 years.
This pattern of increasing demand (and prices) quickly bringing
new supplies out of the woodwork is the historical norm for the
moly market. The highest level of output from primary western
moly mines came in 1980, the year after the last great price
spike, with production reaching over 130 million lbs... When
the price crashed soon afterward, production fell to less than
10 million pounds by 1983. A similar situation occurred during
a short-lived price run-up in the early nineties. In 1993, with
the price languishing near $3/lb, primary production had dropped
to the lowest level in the last 20 years, at about 40 million
lbs. But when the price moved up through 1994, reaching $16.50/lb
by January 1995, primary production immediately doubled to 80
million pounds, causing the price to subside once again.
This suggests that today's high prices will soon entice significant
supply into the market and drive the price of moly down sharply.
In fact, Phelps Dodge, owners of Colorado's Climax mine, perhaps
the world's largest primary moly deposit (which currently sits
idle), said of the market in a recent report, "There is
a cautious approach in this sector of the industry as historical
moves to suddenly increase production by primary miners have
often led to an immediate and rapid fall in price to levels below
economic operating requirements." True to this prophecy,
the moly price has already fallen in 2005, so far shedding nearly
$10, or 29 percent, to around $25/lb.
And today there
is an additional factor that makes it risky to invest in primary
moly producers. Namely, secondary production. Moly is commonly
associated with copper porphyry deposits, especially in the U.S.,
Chile, and Peru, and copper miners often produce moly as a byproduct.
Because moly and copper are both processed by flotation, it's
easy for copper miners to turn the moly taps on or off. Thus,
such operations generally fare better throughout the ups and
downs of the moly market.
In fact, unlike the cyclical production numbers seen from primary
mines, moly production from secondary mines has increased more
or less steadily throughout the last 25 years, from about 100
million pounds in 1980 to a forecasted record of 195 million
pounds in 2004. This means that there's a lot more secondary
moly out there today - a supply that requires relatively little
capital cost to bring to production - competing with supplies
from primary mines that either have to be developed from scratch
or restarted after months or years on standby. Last year brought
numerous announcements from secondary producers of plans for
new copper-moly mines or expansions of existing operations. Chilean
national miner Codelco upped its moly production 59 percent in
the first 9 months of 2004.
Of course, this makes it all the more attractive to invest in
a copper-moly producer (if anyone needed another reason to do
so, given the recent strength of the copper market). To that
end, in the January International Speculator, we reminded
you about Amerigo Resources' plan to add a moly extraction plant
at their Colihues copper tailings project at Codelco's El Teniente
mine in Chile. The plant, which is expected to be commissioned
this month, will produce 500,000 pounds of moly in 2005, ramping
up to 800,000 or 1 million pounds in 2006. The cost for production
will be about $2/lb., which will add significantly to Amerigo's
bottom line even if the moly price goes to half, or even a quarter,
of its current value.
(Ed. Note: for more on a 30 day no-cost trial to Doug Casey's
International Speculator to learn the latest on Amerigo and all
Doug's favorite stocks, click
The bottom line: 'buyer beware' when investing in a primary moly
producer who will live and die by the historically volatile moly
price. Perfect storms, such as the one we saw last year, don't
happen that often.
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of Casey Research, LLC, and is used here with permission. Casey
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