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Is It Molybdenum Supply or Demand in the News?

By Jack Lifton

01 Nov 2007 at 01:38 PM GMT-04:00

http://www.resourceinvestor.com/pebble.asp?relid=37367

DETROIT (ResourceInvestor.com) -- There seems to be a definite pattern, among financial analysts who study commodity natural resources, in the way they organize and look at the data; the pattern manifests itself as a tendency to emphasize supply or demand but not both, in the same analysis, as a key driver of price. Molybdenum is rapidly becoming a resource of interest to financial analysts who normally follow and report on only exchange traded metals, but their habit of preferring to concentrate on either supply or demand to the exclusion of the other continues. Excuse the pun but this segregated approach seems to me to be fundamentally flawed.

An easy response to my comment above would be to say that it is trivial; that an analysis of the supply situation of a natural resource must be focused on its prospectors, developers and primary producers (e.g., miners or oil, coal or gas producers) for the purpose of giving advice to those who invest in the shares of companies that do some or all of those things.

The same responder will say that it is only end-users who create and thus care about the cumulative demand for a natural resource, and analysts who follow such end-users rarely make recommendations to buy, hold or sell based on how the end-user manages his interactions with the raw material supply market.

I would say to this responder that he has now completely identified the problem; he knows what analysts do. The problem is that their myopic approach is the problem. They need to look at what determines how demand modifies supply, because it is not a simple inverse relationship.

American B-schools teach that the most important factor affected by inventories at a manufacturing company is return on investment (ROI). Since this ROI is a key figure used by financial analysts in making their recommendations to investors it has become the norm for American heavy manufacturing companies to focus on having no inventory of raw materials, and to shift the burden of doing so to suppliers who are required to deliver their products just-in-time. We are told that our manufacturers learned this behaviour from the Japanese who developed this strategy while rebuilding their industrial base after World War II. It is often overlooked that this strategy was developed in a capital poor, resource poor environment and that from the very beginning the Japanese did not apply this strategy to raw materials.

I have discussed on RI before the idea that end-users would like there to be an exchange traded molybdenum contract so that they could manage the risk of price volatility of molybdenum. Producers say they would also like there to be such a contract but they mean this only for the single purpose of raising capital for development or expansion through predictable pricing, because, in fact, the existence of such a contract (market) would mean that there would need to be warehouse stocks the volumes of which were openly known. This transparency would make it difficult for a producer or a speculator to squeeze the market through a shutdown caused by an ‘accident’ or a strike or by accumulating material secretly and withholding it from the market causing a ‘supply deficit.’ I say difficult, not impossible, but in any case more difficult than such behaviours are today.

The social cultures of resource poor Japan and Korea as well as that of resource, not-so-poor yet not rich, China have it in common that they value planning for the long term and all believe strongly that the government, whatever its social or economic form, has a duty to absorb some of the financial risks involved in operating even a privately owned industrial business venture, because all three nations believe strongly that the maintenance of high employment is more important than allowing the operations of a free market to affect employment adversely.

American politicians who are populists, no matter what their party label, pander to the same instinct in our society, but our economic system is not as receptive to saving and long term planning as those of Asia.

All three Asian economies mentioned have companies which are lionized by the American business press as role models for free market capitalists to emulate, but which in fact have government support and underpinning as well as underwriting for some of their most basic needs such as the maintaining of a stockpile of strategic and critical natural resources so that an accident or a market squeeze, natural or human engineered, cannot shut an industry down.

The one commodity that the Asian economies do not have in abundance is technical innovation in mining, smelting, and refining; they are late to this game in which America is the world leader. The best mining schools in the world are in places with names that include Colorado, Arizona, Montana and Michigan. American companies that try to outsource mining engineering jobs from Asia most often find, to their chagrin, that the applicants have come here first for education and training before returning to Mumbai, Shanghai, Seoul, and Tokyo.

If you just look at the most current U.S. Geological Survey (USGS) monthly report on molybdenum you will find some very interesting numbers. The U.S. produced 60,000 tonnes of molybdenum from domestic mining operations in 2006. Seventy five percent of the molybdenum used in this country in 2006 went into the production of specialty steels. The U.S. produced 80 million tonnes of steel in 2006. China in 2006 produced 40,000 tonnes of molybdenum from domestic mines, and it produced more than 400 million tonnes of steel.

Therefore, America used more molybdenum to produce specialty steels than China produced molybdenum in total in 2006. Its good to know that the country in which ‘stainless’ steel and high strength steels were invented, stainless steel as recently as 1919, is still leading the world in the production and the utilization for innovative purposes of the most technologically advanced steels. A great number of those innovations, moreover, are based on properties developed through the study molybdenum alloying chemistry and metallurgy.

For example, America domestically is building more pipelines for the transmission of oil and gas than any other single country on earth. True some of these pipelines originate in Canada, or Mexico, or even farther out, but I am counting them as American if they terminate in the U.S. and are financed by American companies. These pipelines are dependent for meeting their technical specifications for transporting, at a wide range of temperatures, more and more corrosive grades of oil and gas on the properties of molybdenum as an alloying element in steel, specialty welding alloys, and on molybdenum compounds used as corrosion and heat resistant lubricants.

Molybdenum alloy steels have been developed and are now also being used to retrofit America’s electric power plants which use steam or gas driven turbines, particularly nuclear plants, to resist corrosion and ‘creep,’ the permanent deformation of metal components under long term high temperature operations, as well as to resist corrosion and cracking in cooling systems which must be treated to resist microbial growth or salt water. Significantly advances in molybdenum alloying of steel have also improved, and in some cases even made possible, the use of exotic, much more efficient, coolants such as molten lead or molten salts for the design of future power plants running at efficiency-producing higher temperatures.

Flying under almost all analysts’ radars is the fact that the design of the storage vessels for nuclear waste which will be needed ultimately for presently existing waste to be placed in the national repository at Yucca Flats, Nevada, which is now scheduled to be opened, in 2017, calls for around 17,000 tonnes of molybdenum.

Now, multiply the above mostly future demand for molybdenum, for pipelines around the world; for retrofitting power plants around the world; and for storing nuclear waste from nuclear plants around the world by a factor of as much as five, because, just as an example, the new 20,000 miles of pipeline construction in the U.S., using at least one ton of molybdenum per mile, is only 20% of the world’s currently planned pipeline construction and you get what could be literally and insatiable demand for molybdenum for the foreseeable future.

Did I mention that the rapidly increasing focus on deep sea drilling for oil requires molybdenum alloy steel for the pipes, the pumps, the drill bits, and the construction of both the drilling and the permanent deep sea platform?

I got the above information about molybdenum demand drivers and much more from a comprehensive study called “Expanded Uses of Molybdenum in the Energy Industry,” which is posted on and downloadable from the website of the Thompson Creek Mining Company. This is the single best narrowly focused yet detailed study of a metal’s demand that I have ever read. The author, Mr. Denis Battrum, was a purchasing manager for a very large privately owned commodity company and then for a large privately owned steel specialty producer before he became a market research provider. I don’t know Mr. Battrum, but I can tell you that he knows more about molybdenum’s end uses in the energy sector of the global economy than any person with a purchasing background in heavy industry who I have ever met, with one exception.

This brings me now to another recent molybdenum report by financial analysts. This one, which bills itself as a molybdenum market study, is entitled “The Sustainablilty of Recent Molybdenum Prices.” I was only able to obtain a four page “Molybdenum Report Summary” from its issuing entity, CPM Group which, its letterhead describes as a “Commodities Research, Consulting, Asset Management & Investment Banking” concern. I was not able to obtain a copy of the full report, because that is for purchase only, and is $35,000.00 a copy, which, to be fair, is not a great deal as reports by financial analysts based in New York City go.

The summary I received contains some ambiguous statements where certainty, which is available easily, would have made the conclusions much stronger. It says, for example, that “the majority, historically, roughly 60%, of the world’s molybdenum supplies come from copper deposits…where molybdenum is produced as a copper byproduct.” It at least does not add that Chinese deposits are almost all contained in primary molybdenum mines or that remaining global reserves of molybdenum are nearly 75% contained in primary copper deposits.

The report also contains some (mining engineering wise) statements, such as “This type of specialty mining, exploiting higher grades and higher prices, is not sustainable throughout the life of a mine.” It seems to me that outside of New York City, it is well known that high-grading is not sustainable, and there is in fact a, yet to be seen, serious discussion of high-grading to be had when discussing molybdenum recovery as a byproduct of copper mining as opposed to discussing the issue with regard to primary molybdenum mining.

The summary of the CPM Group report has a demand outlook section that begins one paragraph with the sentence “Steel is a malleable alloy of iron and carbon.” Really? I was sure until I read that sentence that malleability was not a property of steel at ordinary temperatures. I’m still sure that I’m right, and as in giving credence to testimony in a court of law it is the credibility of the summary that has been put into question for me by ambiguous and just plain wrong statements. I can’t resist one more example. The CPM Report summary starts a paragraph in the “Other Molybdenum Applications” section with a sentence, the first clause of which is, “A superalloy is an alloy that has high temperature qualities....” The writer should be saying that, “A superalloy is an alloy that has high temperature strength.”

I do agree with the conclusion of CPM group as stated in the summary that the price of molybdenum “[will] remain strong over the next ten years, above previous historical averages.” But I sure hope that the ‘facts’ and conclusions cited in the summary are not the only basis upon which CPM Group reached that conclusion.

I’ve reached my own conclusions from everything that I have learned through my education, work experience and ongoing study of metals and their markets during my business life over the last 45 years. I must say that this includes many articles I have read on Resource Investor and many presentations I have heard such as the one by Mr. Ivan Herring at the last IIC Hard Assets Conference in Las Vegas.

American technological innovation is our single most valuable metallurgical resource. We know more about mining, smelting, refining and fabricating metals than any other industrial society on earth.

Some of our narrowly focused financially inept businessmen and politicians value our innovation at zero and try to give it away to buy a short time cycle competitive advantage in low labour costs from a a technology starved, yet, apparently unknown to these same ‘businessmen,’ very hungry country such as China, which will agree to any terms at first just to get the technology, which is their totalitarian government’s primary interest in allowing their ‘businessmen’ to do ‘business’ with us.

So far, interestingly enough for molybdenum mavens, China has been unsuccessful in gaining, for example, America’s best-in-class deep sea oil drilling and oil recovery technology. CNOOC, the state owned Chinese national oil company, tried to buy Occidental Petroleum last year mainly to get its deep-sea drilling technology, but also to get Molycorp’s primary molybdenum mining properties in the American southwest. The Chinese knew what American financial analysts do not that molybdenum is essential to the future of deep sea drilling, which is the last great frontier for as yet undiscovered reserves of petroleum.

If just some of the uses detailed in the demand report cited above come into being and supply grows even by all of the projections , which I have seen and which total about 65,000 mt of new and additional molybdenum production by 2012 then the price of molybdenum could go through the roof in the next decade to the point where ores and processes that are marginal today could come into production even with current technology, notwithstanding the hope that innovations may occur that will make even lower grade ores, than are considered today ,become economical.

We are entering into a great era for North American molybdenum mining if only we can overcome mindless environmental activism, and we can convince the U.S. government, private industry and Wall Street that a strategic reserve of molybdenum needs to be created and underwritten by Federal guarantees but managed by private industry because its turnover will need to be ready at a moment’s notice to dampen adverse market conditions, and speed is not a property of democratic institutions. There is no other way to stop jobs and technology from being sold out to countries that have hard currencies based on productive natural resources such as the U.S. dollar was and could be again.