Has Molybdenum Seen the Bottom?

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Has Molybdenum Seen the Bottom?

By Shelley Goldberg, Commodity Strategist

Molybdenum, often referred to as “molly,” flies under most investors’ radars.

But the fact that this metal shares a name with an ecstasy-inducing party drug isn’t its only interesting trait.

In fact, molly is an incredibly strong silvery metal that can withstand extremely harsh conditions and high temperatures. Appropriately, it is used as an alloy in a multitude of products, like stainless steel, aircraft parts, industrial motors, circuit boards, and electrodes.

However, it’s not impervious to the current economic climate. Molybdenum’s price is down in the dumps along with most of the rest of the commodity sector.

But, the metal’s price may be close to a market bottom. And changes in production and Chinese policy mean that now may be the best time to invest in this little-known commodity.

Riding the Ups and Downs

Today, world production stands at approximately 270,000 metric tons, with China, the United States, and Chile representing the three top producers.

Despite three consecutive years of price declines, last year, the molybdenum market got off to a promising start, with prices reaching 21-month highs in April, fueled by fundamental strength.

But since then, it’s been a slippery downward slope. And now the market may be close to a bottom.

Copper and China Host the Party

Going forward, molybdenum supply growth will continue to hinge on supplies from copper mines that produce molybdenum as a by-product. That market share represents just over 50% of total molly production.

But with copper prices plummeting, there’s less incentive for copper miners to produce. And if they aren’t producing copper, there’s no molly created as a by-product.

Many producers expanded their operations from 2008 to 2012 when fundamentals in both the copper and molybdenum markets were actually good – remember those days? But now, molybdenum output looks set to fall due to the probable drop in copper production.

Furthermore, during the past two years, cost-cutting measures of the larger diversified miners have begun to delay development for many longer-dated copper projects, as well as some pure molybdenum plays.

For example, Thompson Creek Metals Company (TC) announced at the end of 2014 that it’ll suspend operations at its British Columbia-based Endako mine, of which it has a 75% stake.

In the near term, we also have China’s export and resource tax policies to thank for an unsteady price environment.

The government was slated to cancel the export tax on molybdenum, tungsten, and rare earth minerals, on January 1, in reaction to the World Trade Organization’s (WTO) ruling that these trade restrictions breached the organization’s rules and could not be justified on environmental grounds.

But the country has decided to keep its export duties in place for 2015 until further announcement, which will likely be in May. Chinese moly oxide has a 15% export tax and quotas on moly production have been limited to 25,000 metric tons.

Should these duties remain in force beyond the middle of the year, the market will no longer fear the potential for an outflow of Chinese molly stockpiles, which would have the potential to drive prices even lower by creating a supply glut.

China is faced with a structurally elevated cost of production and adverse market conditions. As a result, production from its small- and medium-sized mines has declined over the past few years.

However, China’s growing economy is also a large source of demand for the metal.

Rising With Life in China

The CPM Group estimates that growth in global molybdenum demand was 3.1% in 2014, up from 2.9% in 2013, helped by the ongoing recovery in specialty steel usage.

The group also predicts that rising wealth and living standards in China and improvement in other emerging markets could also drive stainless steel consumption – and thus molybdenum – demand growth.

Long-term infrastructure, energy investments, and transportation are set to benefit the intensity of molybdenum’s use in the emerging markets and could drive stronger growth of molybdenum end use in the steel industry.

Non-metallurgical molybdenum consumption, such as molybdenum use in catalysts, is also projected to record robust growth.

The tech industry is lending support to its growth, too.

Molybdenum disulfide, (or molybdenite), has been garnering a fair amount of interest recently as researchers experiment with it to improve digital cameras and sodium-ion batteries.

Finally, molybdenum’s low price means that there’s little incentive to recycle it. Its recovery and recycling rate is typically no more than 10% to 30%.

So, if China keeps growing and miners keep cutting production, we could be at the cusp of a huge increase in the price of this metal as demand outpaces supply and economic forces take hold.

Pushing Molly

One can trade molybdenum futures on the LME (London Metals Exchange) under the symbol MO, with each contract representing six metric tons.

Futures trade daily out to three months, weekly three to six months, and monthly seven to 15 months, and are quoted in U.S. dollars per metric ton, as well as in yen, pounds, and euros.

On the equity side, valuations and prices are trading at very depressed levels.

Investors should look for companies that have sizable deposits and that are potential low-cost producers. Some of the larger producers include Freeport-McMoRan (FCX), Glencore Plc (GLEN.L), BHP Billiton Limited (BHP), and Nevada Copper Corp. (NCU.TO).

There are a few risks that could cause headwinds to molybdenum prices.

First, as I discussed earlier, uncertainty looms over what the Chinese government will do with the proposed changes in export and resource taxes.

Secondly, a looming surplus over the near- to medium-term horizon could weigh on annual prices through 2016.

Keep your eye on new developments at Chile’s Sierra Gorda, one of the world’s largest copper and molybdenum mines, which is expected to produce 50 million pounds of molybdenum beginning this year.

Good investing,

Shelley Goldberg

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By Shelley Goldberg