We live in a massive ecosystem built out of steel. And all that steel requires a silvery metal few people are familiar with: molybdenum.
Molybdenum. It’s one of my favorite words to say.
For investors, it just might soon turn into one of your favorite words, as well, here’s why…
Molybdenum prices find footing and pick up speed
Like a lot of the metals I talk about here on Investment U, molybdenum got creamed by the recession. Actually, “creamed” isn’t even the right word… “obliterated” is more apt. Moly prices fell from $34 per pound to $8.75 – a loss of 74 percent.
Molybdenum miners were hammered as well:
- Freeport-McMoRan Copper & Gold (NYSE: FCX), the world’s largest moly producer, collapsed from $103 per share at open on January 2, 2008 to $21.57 by December 26.
- General Moly (AMEX: GMO) tumbled from $12.35 per share to a mere 76 cents.
- Thompson Creek Metals (NYSE: TC) shares lost 78 percent of their value during the same stretch.
- And China Molybdenum Co. (OTO: CMCLF) imploded from $14.28 to start 2008 to a low of $1.45 by October.
It was brutal. But that was 2008. As the global economy has rebounded – albeit slowly for the developed world – molybdenum prices have found footing… I wouldn’t say they’ve stabilized completely, but they’re at least heading (mostly) in the right direction.
But we could see the moly market pick up some speed.
China’s metals grab
As molybdenum demand tanked in 2008, moly producers gutted output and China went on a buying spree.
Moly is primarily used to make stainless steel and lower steel alloys. In fact, stainless and engineering steel production represents 60 percent of all moly consumption. So wherever steel goes, molybdenum follows.
The United States and Chile are two of the top three moly producers in the world. But just like with everything else, China is the king of the hill. China’s also the world’s largest consumer of molybdenum… and it remained a net importer in 2010.
It costs Chinese moly miners $13-plus per pound to produce, compared to just $8 to $10 per pound for the Western World. So, it shuttered mines during the low-price environment in 2008 and 2009.
This is also why China’s started investing heavily overseas. China’s Sichuan Hanlong Group bought a 25 percent stake in U.S.-based General Moly and secured a $665-million loan for the company to cover the costs of its Mt. Hope mining project. Mt. Hope is the largest moly project out there, boasting reserves of 1.3 billion pounds and will produce 40 million pounds per year during the first five years of operation.
(For comparison, Freeport-McMoRan will produce 73 million pounds of moly in 2011, and expects to sell 62 million pounds.)
In total, China’s Export-Import Bank agreed to provide Hanlong with $1.5 billion to invest in foreign mining projects. And it’s poured hundreds of millions of dollars into moly and copper projects in Australia and the United States.
We saw that China cut exports of rare earths because of its ever-increasing domestic demand. And it won’t grant any new licenses for prospecting or mining of these until June 30, 2012. The same holds true for molybdenum. China’s moly demand is expected to grow at a rate of six percent per year – three times that of the annual growth rate of other major consumers like Europe and the United States.
But here’s why China keeps winning in the metals markets…
In 2010, China’s stockpiles of the metal amounted to around 30 percent of total global inventory. For instance, in 2009, almost half of Chile’s molybdenum exports were shipped to China. And the reason is quite clear: China is the world’s largest steel producer.
They were brilliant, aggressive market strategists, stockpiling the metal while it was dirt cheap… cheaper than China could produce it.
Global molybdenum production and future demand
In 2007, China set export and production quotas on moly. These were just recently raised for 2011. But this doesn’t have the same impact that led to the blow-up we saw in the rare earths sector.
You see, the United States and Chile combined account for more than half of worldwide moly production. China is the single-largest producer, but it’s not a completely lop-sided market.
On the horizon, we have the urbanization of China, the Middle East and India. Because of this, molybdenum demand for construction, transportation and power generation (wind turbines, coal power plants, nuclear plants, etc.) is projected to grow six percent per year over the next decade.
If China doesn’t completely curb its nuclear agenda, it’ll need an average of 400,000 pounds of moly for each reactor. With a 100-reactor target set, that’s 40 million pounds just for China’s nuclear industry.
And let’s not forget oil pipelines. Every mile of oil pipeline requires 3,200 pounds of molybdenum. Just think of all the shale drilling projects going on around the world. They all need pipeline expansions to get this production to market.
So, if you invest now in molybdenum, expect the near term to be soft. But things will heat up and we could see supply and demand tighten as steel use gains momentum and the oil and gas industry expands.
Disclosure: The author does not hold positions in any of the stocks mentioned