re Moly Another point of view. Maybe prices will hold up thru 2005. Wish they would make up their minds. Better yet, I wish gpxm.ob would get their act together and get the mill grinding while moly is in the $20's/lb.range.
Make hay while the sun shines!!!!! Bobwins
RYAN'S NOTES-ALICE AGOOS;
THE ASTONISHING MOLY MARKET,
Presented @ The 2005 Moly Conference.
Many of you may be wondering why Ryan’s Notes is giving
the presentation this morning. I began wondering the same
thing when I started to work on the paper. One obvious reason is
that we didn’t think that anyone (other than Terry Adams) would be
able to prepare a talk on a month and a half’s notice. Another obvious
reason is that the people who had done sufficient research on
the topic were not about to share their hard-won numbers or risk
their reputations by making a forecast in today’s volatile market.
These people were very smart, and I, unfortunately, was very rash.
My first mistake was attempting to write the speech in advance. By
Thursday of last week, I was thinking about revisions and by
Friday I was rewriting my revisions.
Even though I set the moly price twice a week and have
done so for the past 10 years, I am not a masochist by nature. There
are some valid arguments for my giving the paper today. First, I’m
a neutral observer, although several traders have been convinced for
years that I have a garage full of moly. (This may be because of my
empathetic responses to the many no-business reports during those
dreary years when moly oxide was hovering around $3 per lb.) The
second reason is that as a reporter, I can ask questions that many of
you cannot pose to your suppliers or your competitors. I can even
be prompted by mischevious traders to ask questions that will guarantee
years of “no comment” responses from valued sources.
The advantage of being a reporter is that I can gather
information from all industry sectors. The bad part is that because I
don’t buy or sell moly, people can easily tell me to jump in the lake.
Fortunately, not many of you do that—too often. In fact, I had a
good deal of help in writing this paper. I surveyed as many consumers,
producers and traders as I could reach in a limited time and
asked them a few questions. I will summarize the survey responses
in my formal remarks, but first, I would like to thank everyone who
took the time to answer the survey and apologize to anyone I failed
to call, and shame on several of you who never returned my calls.
But seriously, in doing the survey, I discovered that everyone has
put an impressive amount of time into analyzing the market, and
whether or not their forecasts are right, they have made them with a
great deal of care.
With that said, I will proceed with what was promised—a
paper looking back at the last 12 months and forward at the next 12
months. I know now not to write promotional copy for speeches I
have to actually deliver. As an executive with a major producer said
after looking at the brochure for the meeting: “I don’t know the
answer to any of the questions you asked: Where Are We? How
Did We Get Here? What’s Next?” Well, here goes.
(Slide 1)
First, I plan to look briefly at the last 12 months. Then I
will present the survey results. And finally, I will attempt a forecast.
(Slide 2-Price Graph)
The past 12 months have been primarily about price. This
is a graph of the Ryan’s Notes moly oxide mean from January 2004
through the present. (We will examine this more closely in a
moment.)
To get a sense of what happened to price in 2004, I will
just put up the following numbers.
(Slide 3-December Averages)
The monthly average for moly oxide was $7.10 per lb in
December 2003; by December 2004, the monthly average had risen
357% to $32.46. The Western ferromoly price catapulted 385%,
from $17.81 per kg in December 2003 to $86.30 in December
2004. The Chinese FeMo price escalated from $16.29 per kg to
$69, and the US FeMo price rose from $7.80 per lb to $35.14.
(Slide 4)
Moly prices hit record levels at the end of 2004. From the
time prices started to firm in late February 2004, however, everyone
kept waiting for the rally to end, for prices to correct and finally for
prices to collapse. What happened to cause such a sustained runup
in prices?
First, demand growth was unusually high. Nearly every
demand sector was operating on, not eight, but nine cylinders from
stainless steel to chemicals to catalysts to even superalloys late in
the year. Phelps Dodge estimates that global moly demand rose
10%. Sellers and consumers alike were caught off-guard by levels
of demand in the US, South America and Europe—not to mention
China, which we all know took a phenomenal leap upward in terms
of stainless steel production and demand.
Demand was certainly pushed upward by China’s economic
growth, but possibly more important to the market was the
distinct shift in the way Chinese moly producers sold their product.
Prior to 2004, Chinese moly prices generally lagged the market
when spot prices started to rise and led the market down when
prices softened. Throughout most of last year, Chinese suppliers
were either slightly ahead of or on a par with price rallies. At the
same time, Chinese suppliers were slow to lower their prices when
the market softened. In the past, Chinese sellers were accused of
setting off price collapses by flooding the market with low-priced
metal at the first signs of price weakness. The absence of cheap
material ensured that price declines were moderate and brief as you
can see from the price graph.
(Slide 2-Price Graph again)
Taking a closer look at prices last year, you can see that
the line looks a bit like a jagged staircase. We had this price pattern
because both buyers and sellers were suffering from something that
I have called “Market Paralysis,” and this paralysis became more
acute as the year progressed and prices rose. At the start of 2004,
prices were stable to slightly declining. Consumers and traders
assumed that prices would fall further. Consumers decided to wait
to purchase; some traders went short.
In March, prices started to rise, but still, we reported in
Ryan’s Notes on Mar. 22, “No one is confident of a sustained rally.”
Buyers could wait no longer. They came into the market and found
little spot material. The few traders who had gone short vowed,
“never again” and that was it for the year. Prices rose rapidly in
March/April and then started to taper off.
The paralysis took hold once again but this time affecting
Alice Agoos
Ryan’s Notes
The Astonishing Moly Market
Presented at the Ryan’s Notes 2005 Moly Meeting
buyers and sellers. Buyers waited for prices to weaken, and traders
were unwilling to take positions for fear that prices could drop. Add
to this, the fact that Chinese suppliers were not offering any bargains
for traders. The risk for traders grew larger. From late May to
mid-June, there was a mini-price spike as buyers had to come into
the market to buy and traders scrambled to find material to sell.
The next falloff in prices was shorter and more moderate
from mid-June to mid-July. Paralysis again and prices began to
climb in August, September, October, stabilizing a bit in November
and then taking off again in December. From August until yearend,
prices rarely retreated. Buyers stopped anticipating lower prices, but
prices had become so elevated that they felt they could only buy
minimal quantities, and they were unwilling to take the risk of buying
forward in case prices did drop. Traders, meanwhile, became
equally nervous and risk adverse. Most confined themselves to
back-to-back sales. Few, if any could afford to take a position.
Until December, the mantra of traders was “the price can
fall quicker than it rose.” By December, however, sellers started to
analyze supply and demand numbers more carefully. They realized
that the major slug of additional production already had been
absorbed and that a surge in output was unlikely in the coming
year. At the same time, the outlook for demand in 2005 was positive.
Now, sellers started envisioning a gradual decline in prices
because concentrates that were produced in 2004 would be
processed in 2005 and only incremental production increases would
take place. But by December, moly oxide prices were $35, a price
that discouraged anything other than conservative behavior on the
part of traders.
As you can see, moly oxide prices have been declining
since the start of 2005. The behavior pattern has not really changed,
however. Consumers are holding back from buying. Chinese suppliers
are being slow to lower their prices. Traders expect prices to
weaken further but they are not anticipating a collapse. Acollapse
would occur if there were several desperate sellers or one large desperate
seller. It is hard to determine how much unsold spot material
is being held by traders, but it does not seem to be a considerable
amount. Also, consumers are not holding large inventories. As a
result, spot buying will continue to soak up material in trader hands
in contrast to past price spikes when so many consumers bought
forward that spot buying virtually dried up for two months.
(Slide 4 again)
Finally, I want to touch on two other reasons for the sustained
price increase in 2004. Excess stocks (over in-process inventory
of three months) were probably lower than most people realized
at the start of 2004. Byproduct moly production was low in
2003 because of the depressed copper market. The fact that Western
mine output rose by nearly 50-million lb in 2004 and prices nearly
quadrupled the same year indicates just how low inventories were
and also how strong demand was. Inventories continue to be
extremely low.
The other reason for the sustained price increase in 2004
was that mine production outstripped available roasting capacity so
there was a bottleneck. We will examine the roasting situation more
thoroughly later, but I will just say that on paper in 2004, there
appears to have been a supply surplus of 20-million lb. Because not
all of that 20-million lb was roasted, the actual surplus was probably
less than half that amount.
(Slide 5)
Now that we have looked at what happened last year, we
have to ask why history didn’t repeat and the market didn’t crater.
The last time that moly prices rose as high as they did in
2004 was in 1979. Again the price rally was precipitated by strong
demand and tight supply. But in 1979 and also in 1994/95, producers
rushed in to solve the supply crunch by either developing new
mines or restarting shuttered mines and re-activating moly circuits.
That didn’t happen this time. No one announced a new mine. In
1980, Mt. Tolman, Mt. Emmons, and Kitsault were just a few of
the new projects announced. In 1995, Cyprus Amax reopened the
Climax mine; Asarco restarted a moly circuit and Molycorp
reopened its Questa mine.
This year was different from other years in that demand
did not fade; it actually grew stronger as prices started to climb.
This year was also different in that Chinese moly was needed by
the market. Chinese exports, which were only about one-million lb
greater than in 2003, did not alleviate the market tightness or lead
to a price collapse. Finally, in 1979, there was a producer price, and
the majority of business was done on the producer price.
(Slide 6)
Since history has not repeated, are there new lessons we
can learn from 2004? The most obvious lesson is that we need to
do a better job of assessing demand, not just in China where it is
difficult to get a handle on numbers, but also in our own back
yards. Market intelligence was poor. On the supply side, we have
all learned that concentrate production does not tell the whole story.
Roasting capacity (and also conversion capacity) are key to determining
supply dyanamics. We need to recognize that high prices
affect buying and selling behavior and can lead to the lengthy cycle
of paralysis described earlier. And, probably the most important lesson
is that statistics do not always help predict market fluctuations.
What we are seeing currently is that a very small amount of surplus
material can convince sellers and buyers that prices must weaken.
Similarly, a single consumer being no-quoted by several sellers on a
routine spot inquiry can cause prices to spike.
Before gazing into my crystal ball, I would like to present
the results of the survey I conducted. The first question asked was
whether business practices had changed in the last 12 months
because of escalating moly prices.
(Slide 7)
Nearly everyone (even producers and traders) said that
their inventories were whittled down to the bare bone because of
prices. One consumer said, “We used to manage our own inventories.
Now our suppliers control our surplus.” Another noted, “We
have not been allowed to be aggressive in acquiring material at
these prices.”
Consumers said that they were spending more time shopping
for moly and expanding their supplier list. Some US buyers,
who had used only domestic suppliers, were looking at off-shore
procurement.
Most consumers said they had been able to pass on the
higher moly costs “to a degree.” Some steel mills were looking at
switching from applying surcharges to increasing base product
prices so that if moly prices do fall, “we will be ahead of the
game”.
Many consumers said they had increased their use of
scrap.
(Slide 8)
The first response of sellers to the question about changed
business practices was to talk about credit and insurance. They said
they were putting much more effort into scrutinizing the credit-worthiness
of customers and trading partners, chasing down payments,
making sure that no invoices were outstanding and in some cases
limiting sales to customers.
Producers and traders said that they were working to
lengthen the pipeline in order to guarantee on-time delivery because
so many customers were working off of depleted inventories.
Traders said that they were checking their inventory much more
frequently than in the past to make sure it was properly insured.
Many traders had to reduce their positions as prices rose.
Traders dealing with Chinese suppliers said they stopped purchasing
material for shipment because of fears about delivery. Instead,
they paid a premium to buy only material already on the water.
Sellers said there was less haggling over price than in the
past.
Finally, producers and traders said that they were experiencing
much greater supervision from senior management than in
the past. “Now that moly is in the spotlight,” said one seller, “my
boss expects weekly reports on sales whereas in the past I’m not
sure if he looked at sales on more than a quarterly basis.” Asalesman
for a producer said that mine crews had actually been told to
make adjustments in order to maximize byproduct output.
(Slide 9)
This slide tackles the issue of substitution. I interviewed a
small sampling of users, but my overall sense was that little substitution
took place in 2004 and little is planned for 2005. Many people
are looking for ways to cut moly use, and half-hearted efforts at
exploring substitution will become more serious if moly prices do
not retreat. By retreat, however, I’m not talking about a return to $3
moly. I think consumers are prepared for moly oxide to be at least
$10. It’s clear that in certain “high-end” applications such as superalloys
and catalysts little substitution can take place in the nearterm
because it takes years to get a new product certified. An easier type
of change would be for a stainless steel customer to switch from
316 stainless with a high moly content to 304 stainless (which he
would have to replace more often because its corrosion resistance is
not as good as 316 stainless). Some steel producers say that they
have switched to lower moly-bearing grades and also opted to put
in the least amount of moly possible within the range specified for a
product. Even after taking measures to reduce moly use by 5-7%,
one specialty steel maker predicted that the quantity of moly he
purchases will remain unchanged this year because his production
volumes have increased by a similar amount.
In 1979, high-strength, low-alloy steels, which accounted
for roughly 20% of moly demand, cut moly use by half, and moly
consumption in HSLA steels did not return to 1979 levels until
2001. There has not been massive substitution for moly in HSLA
steels this time round partly because the mills have been able to
pass on the higher raw material costs and also because the substitute
elements for moly have not provided much of a cost savings.
Certainly, some small applications of moly in smoke suppressants
and as a tracer elements in power station towers have disappeared
with the high prices and are unlikely to return now that
alternatives have been found, but these specialty applications do not
add up to much in terms of total pounds of moly consumption.
Some consumers surveyed said they were not looking at
substituting for moly because of the time needed to develop and get
approval for a substitute. One consumer said that moly was used in
so many of his company’s products that substitution would require
“a massive” change in our business.
Some consumers said they had technical people investigating
alternatives but the earliest change would be three-to-four
years in the future.
(Slide 10)
Users were asked about their moly needs in 2005 compared
to those of 2004. The majority of consumers plan to use the
same or more moly in 2005. Some said they might try to use more
in the form of scrap, however. Consumers planning to use significantly
more moly admitted they were starting from a small base.
Some consumers said that if they were not constrained by existing
production facilities, they probably would use more moly in ’05;
instead they will be using the same as in 2004. The only consumers
who indicated that they probably would use less moly in ’05 were
consumers that made products for the auto sector.
(Slide 11)
As for the business outlook for ’05, consumers from the
stainless steel sector were positive. Consumers involved with superalloys,
catalysts and chemicals were extremely positive. Sellers saw
another good year in terms of volume, but many feel that because
steel goes through natural cycles, we might start entering a down
cycle in the second half of the year. As mentioned before, the least
promising sector is expected to be automotive. Consumers also said
that they were less worried about passing through higher raw material
costs to their customers.
(Slide 12)
The price prediction charts are self-explanatory and you
can go over them at your leisure. I would just point out that moly
buyers are generally expecting slightly higher prices than sellers.
This might not be surprising as both groups probably are trying to
err on the side of caution. Also, there seems to be quite a bit of uniformity
in guesses on the part of sellers. This might signal that they
are all wrong.
(Slide 13)
There was general agreement on the part of buyers and
sellers that moly prices will not drop back to $3-4 per lb. For prices
to decline to those levels, people agree that supply would have to
increase dramatically or demand would have to collapse, and no
one foresees either of those events taking place. Many mentioned
that the critical influence of China in terms of both supply and
demand. If China’s exports decline precipitously, if it decides to
withold material from the market to keep prices high, if its demand
either rises or dips more than expected, China will impact the market.
Finally, there was agreement that inventory replenishment will
lead to more stable pricing. One consumer estimated that six weeks
of finished product were necessary to have price stability. Aproducer
said he felt inventories today are close to six weeks worth.
Others peg inventories at only about 1- to 2 weeks currently.
Most people surveyed said they were not at all confident
in their predictions. One person said, “I can say with authority that
the high prices will last at least until the moly meeting on Feb. 15.
We’ll have a nice luncheon rather than a Valentine’s Day massacre.”
Another person said, “I am now prepared to change my
mind three times a day. To be dogmatic only costs me money.”
With that in mind, we will proceed to my forecast.
(Slide 14)
Looking at this slide, you can see that existing producers
will add about 27-million lb of production in 2005 compared to
2004. And as I said before, this increase comes after an increase of
nearly 50-million lb in 2004 over 2003. We expect China’s production
to be unchanged at 100-million lb or slightly lower.
(Slide 15)
Moving on to new producers. Few of the new projects
that have been announced will be adding to supply this year. The
ones that will be in production are rather small. In 2006, Collahuasi
is expected to produce 8.8-million lb and its production will continue
to increase to as high as 26-million ppy in subsequent years.
(Slide 16)
My estimates of supply and demand for 2003, 2004 and
2005 are shown in this slide. The 2005 forecast assumes 30-million
lb of increased production and a decrease in Chinese net exports of
about 13-million lb. I expect demand to increase at least 6%, which
is higher than the historical norm of about 4% per year. As you can
see, the surplus in terms of weeks of demand still is small. In my
opinion, this small surplus will ensure that prices stay elevated
compared to their historical levels. Oxide prices could be below
$10 by the end of the year, but a price of $8 still yields an excellent
profit for exisitng primary and byproduct producers.
(Slide 17)
I said I would return to the topic of roasting capacity. I
tried to put together numbers for actual operating roasing capacity
in 2004 and expected roasting capacity in 2005. Roasting capacity
will increase about 4% this year, but the bulk of the increase will
not come onstream until the second half, when the Alto Norte roasters
(with a combined capacity of 20-million ppy) come onstream.
Production, as we have seen, rose dramatically in 2004,
but the roasters were not able to keep up with the increased output.
From the third quarter on, roasting was running about 5-million lb
per quarter behind production. That backlog presumably will continue
to build through the first half of this year, and could take the
entire year to eliminate. This also will prevent prices from plunging
because finished product will not be overly abundant in 2005.
One other point. Operating roasting capacity is under 400-
million ppy, but total available world capacity exceeds 460-million
ppy. Much of the non-operating capacity, however, is in Russia and
China and is not considered viable because of logistics and processing
losses. Looking further into the future, there is more roasting
capacity that could be easily activated, if needed. In North America,
alone, there probably is 40-million ppy not being used. In addition,
Molymet has said it will add 40-million ppy of roasting capacity in
2007 in order to handle increased production from Collahuasi in
Chile and Antamina in Peru.
In conclusion, I just want to warn all of you that I have a
lousy track record in predictions. Last May I predicted that moly
oxide prices would end the year 2004 at about the same level they
started the year, i.e. $7-8 per lb. The oxide price at the end of the
year was $35. The only thing that makes me feel slightly less foolish
is that no one called this right. With that in mind, I would advise
taking my remarks with a grain of salt. I’m hoping that our panel
discussion will provide you with a more complete picture of the
market.
Thank you.
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