By Adam Currie – Exclusive to Moly Investing News
The molybdenum market of 2011 was the very definition of tumultuous, with prices slowly increasing in the first quarter of 2011 but decreasing for the remainder of the year; with the average price slightly higher than that of 2010. Used primarily as an alloy in steel manufacturing, molybdenum pricing largely tracked the same price trend as that of the iron sector during 2011.
The metal experienced a notable price drop during the second half of 2011, displaying signs of a market that had fallen victim to oversupply. This dip surprised analysts with global demand for the commodity having increased by 16 percent in 2010.
Despite this dip, the US Geological Survey (USGS) stated that 2011 US mine output of molybdenum in concentrate increased by 8 percent in comparison to 2010.
The USGS also added that both byproduct and primary molybdenum production levels in the US remained strong in 2011 in comparison to the relatively low levels seen in 2009.
Analysts suggested that the main causes of oversupply in the market stem from production increases in western-based mines, as well as the sharp dip in import numbers recorded by China.
Market difficult to forecast
According to figures compiled in January, a Steelguru survey showed that nine western molybdenum mining companies produced 26 million pounds (14.2 percent) more product in the first nine months of 2011 than it did in the corresponding period in 2010. At the same time, it suggested that China’s import of the metal during the period decreased by 10.5 million pounds (42.4 percent).
Canadian-based RBC Capital Markets has forecast molybdenum growth rates at 8.4 percent in 2012 and 8.8 percent in 2013, before settling back to trend growth of a little over 5 percent in 2014 and 2015. It commented that China had been the main driver of growth in molybdenum demand over the past five years and that it expects this to continue throughout its forecast period.
“We estimate demand grew by 6.2 percent in 2011, and we forecast growth of 8.4 percent in 2012 and 8.8 percent in 2013, before settling back to trend growth of a little over 5.0 percent in 2014 and 2015, “ it said in a recent market commentary.
It added that it forecasts a “dramatic acceleration” in mine production growth throughout the period, as new projects, both primary and secondary, come on stream.
Meanwhile, investment banker Dahlman Rose has revised its 2012 molybdenum estimates as analysts anticipate that commodity prices will continue to exhibit volatility in 2012.
The company suggested that declining ore grades, project cost increases and delays, as well as political and labour unrest are expected to continue to restrain supply growth and that it believes that the global supply response to improving economic conditions will be slower than many anticipate.
Labor unrest has already affected Canadian copper and molybdenum producer Amerigo Resources Ltd (TSX:ARG), which was hit by a strike at its El Teniente mine in Chile. While the company has recently stated that it plans to meet or exceed its production targets for 2012, it produced 785,068 pounds of moly in 2011 – well below initial expectations.
Amerigo’s President and CEO, Klaus Zeitler did comment that although the company had experienced lower output due to last year’s labor strike, that 2011 did represent a new annual molybdenum record production for the company.
The company’s production from its only operational project, Minera Valle Central in Chile, should meet or exceed its target of close to one million pounds of molybdenum in 2012, it said in a company statement.
Oversupply a concern
“Further, we anticipate that General Moly’s (NYSE:GMO) Mt.Hope asset will commence production in mid- to late-2014, delivering an additional 38 million pounds of incremental production,” said Dahlman analysts.
This influx of additional material into the marketplace, coupled with the introduction of QuadraFNX’s (TSX:QUX) Sierra Gorda mine, expected to commence production in late 2014 to early 2015, has seen analysts forecasting that moly prices will likely remain range bound between $14-$16 per pound over the medium term.
While some analyst groups are forecasting a surplus of supply, Canadian junior exploration-stage company BCM Resources (TSXV:B) recently sent out a note to investment subscribers stating that the USGS estimates the current global moly reserve base to be approximately 9.9 million tonnes, or equivalent to more than 40 years consumption at current consumption rates.
However, the letter also went on to add that, according to USGS estimates, if current growth levels being seen in China persist, that this reserve base could be halved to 20 years by 2014.
Based on current market speculation, a significant decrease in Chinese import numbers as well as the significant increase in moly production forecast for the near-term, it does seem likely that the oversupply scenario of 2011 will continue into at least the first half of 2012.
Securities Disclosure: I, Adam Currie, hold no positions in any of the companies mentioned in this article.