RBC on MolybdenumExtracts from RBC's Dec 5 report.
Price forecast WAY up:
Old New Increase
2006A $24.38 $24.38 0%
2007E $30.00 $29.50 2%
2008E $35.00 $20.00 75%
2009E $25.00 $15.00 67%
2010E $15.00 $10.00 50%
2011E $12.00 $5.00 140%
Long-term $10.00 $3.50 186%
Molybdenum Market Outlook – First Quarter 2008
Demand
• We forecast global consumption growth of 6.3% in 2007, 6.1% in 2008 and 6.3% in 2009. We maintain trend growth of approximately 5.6% thereafter, in line with average historical growth rates between 1995 and 2006. Demand is currently being driven by strong growth in
various segments that are primary uses for molybdenum such as stainless steels and alloy steels, catalysts and lubricants. Demand is being driven by molybdenum’s unique properties, a lack of suitable substitutes and new emerging applications, which should ensure sustainable growth in demand in the foreseeable future.
Supply
• We expect that molybdenum supply growth will be constrained by a shortage of concentrate. Our analysis indicates that there is no shortage of current roasting capacity and that roaster expansions already announced in the U.S., Chile and South Korea should
provide sufficient capacity to support strong production growth. We forecast productio growth of 5.3% in 2007, 3.7% in 2008 and 6.3% in 2009, followed by 13.3% in 2010 and 5.4% in 2011. In 2011 and beyond, with little or no announced roasting capacity coming on stream, growth will depend on increases in roaster capacity utilization.
Market Balance
• We believe that in 2003 the molybdenum market shifted from a surplus of mine supply to a deficit, causing roasters to operate below capacity. In 2007 through 2009, we expect that supply will struggle to keep up with demand as stainless steel and alloy steel production remains robust. In 2010, we believe that new sources of mine supply and roasting capacity could help supply catch up with demand, pushing the market into surplus.
• Molybdenum inventories are not readily observable. Inventories at major producers are reportedly at minimal frictional levels with material already allocated to customers. We expect this to persist until 2010, when the market could move into a surplus position.
Price Forecasts
• Molybdenum prices have historically hovered near the $3–$4/lb mark, with short periods of high prices in 1979 (second energy crisis) and 1995 (a perceived supply shortage). The primary Climax Mine tended to be the swing producer until its second closure in 1995. We expect prices to remain at historically high levels throughout our forecast period and forecast molybdenum oxide prices of $30/lb in 2007, $35/lb in 2008, $25/lb in 2009, $15/lb in 2010 and $12/lb in 2011. Our long-term price is $10/lb, reflecting the upper percentile of total costs for primary producers in 2011 and beyond.
Risks to Forecast
• Economic Growth – The key risk to our forecast is a decline in economic activity in the developed world and its possible effects on stainless and alloy steels and the development of new energy projects. A 1% reduction in global demand (an average of 5.2 million
pounds per year over our 2007–2011 forecast period) could cut the deficit in 2007 by onehalf and a surplus could emerge in late 2009.
• Supply Growth – An increased focus on financing new molybdenum projects and the relative abundance of molybdenum resources in the Western World could lead to a number of large projects being financed in the next few years. We remain cautious of the longerterm
over-supply situation that could result.
• Chinese Supply – A supply response in China has been muted following a crackdown by the Chinese government on smaller-scale mining operations in the Huludao region in 2005. Quotas have also been imposed to restrict exports, with the likely purpose of increasing
domestic consumption by local steelmakers. A lessening of these constraints could result in
additional supply.