Citigroup forecasts strong moly prices until 2010 (May 05, 2008)

Molybdenum supply won’t catch up with demand until 2010 and rising oil prices will only heighten the metal’s value, according to a new report from Citi Investment Research, a division of Citigroup Global Markets.

Citi expects the metal to trade above US$30 per lb. until 2009. Into 2010, the market likely will move into surplus and Citi forecasts the price will drop to about US$25 per lb. So far this year, average prices for molybdenum have climbed 26% in Europe and 8% in China.

And with U. S. crude oil prices surging to a record above US$119 a barrel, the outlook for what Citi calls the “energy metal” will remain strong for some time to come. The report points to a 90% correlation between oil and molybdenum prices.

“The molybdenum price reached over US$30 per lb. in 1979 due to a surge in oil demand,” the bank notes in its April 18 research report.

In inflation-adjusted terms, that equals more than US$61 per lb. moly today, using a 2.5% annual inflation rate.

“The current metal price is still far from its historical high,” the report continues.

Apart from its use in the steel industry, the metal is commonly used in the oil industry as a chemical catalyst as well as in the building of oil and gas pipelines.

Declining byproduct supply and Chinese exports coupled with robust demand growth from China will continue to buoy prices for the metal.

China is expected to dominate growth in demand. Citi forecasts China to contribute to 60-80% demand growth in the next few years at the same time as its government has tightened its grip on the resources it lets out of the country.

Government officials have been closing small mines and roasters, tightening approvals, hiking export tariff and resource taxes and implementing export quotas.

Overall, global demand for molybdenum has been growing at about 6% a year during the last five years — higher than the world’s industrial production growth of 3-4%. Citi forecasts annual growth of 5% in 2008-2010.

During 2007, the world balance of molybdenum was in deficit. Citi predicts demand will grow by about 20 million lbs. this year with supply only rising 7 million lbs.

Currently only three of the top 10 molybdenum miners are primary producers, the bank notes. But more than 50% of all new supply is expected to come from primary miners rather than byproduct producers.

Freeport-McMoRan Copper & Gold in the U. S. and Codelco in Chile, the two largest copper producers in the world, are also the two largest molybdenum producers.

The majority of the new supply is expected to come from primary molybdenum mines including Freeport’s Climax mine (30 million lbs. per year), General Moly’s Mount Hope project (38.3 million lbs. per year), and Moly Mines’ Spinifex Ridge project (24 million lbs. per year).

Citi estimates average cash costs will reach US$8 per lb. by 2015 and yield a 50% long-term cash margin, which is consistent with the average for the 2000-2005 mining cycle.

According to 2006 data from the U. S. Geological Survey, the world’s total reserve of molybdenum comes in at about 8.6 million tonnes, or about 19 billion lbs. Based on the scale of current mining, Citi says, that means the metal can be excavated for another 44 years.

The U. S., China and Chile currently are the three largest molybdenum-producing countries in the world, together accounting for roughly 78% of global production and about 83% of global reserves.