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Tightening supplies of the metal and continuing demand from China are just some of the reasons behind the strong outlook for the metal

Interviewer: Geoff Candy
Posted:  Tuesday , 19 Oct 2010

 

GEOFF CANDY:  Welcome to this edition of Mineweb.com's Metals Weekly podcast and joining me on the line is Catherine Virga, director of research at the CPM Group.  Given the multi-year highs being hit by both gold and silver, as well as the political intrigue abounding in the rare earths space, it's pretty easy to lose sight of some of the other minor metals in what's going on in those markets.  Catherine it was LME week last week in London and you were quoted as saying some interesting things about both molybdenum and the cobalt markets.  If we look at molybdenum in particular, you're pretty positive on that market.  What's driving it at the moment?

CATHERINE VIRGA:  The molybdenum market is one of the markets that we do see a more positive outlook for - that is there are tightening supply demands on the metals that are quite positive for the market, but one thing about the molybdenum market - it's quite different than the other LME traded base metals even though it just was launched on the LME in February this year.  Molybdenum is a fundamental store or the main driver of prices and we're not seeing investors have such a large influence on prices as they are for some of the other base metals.  With those markets investors have been factoring in expectations of both supply and demand going forward, whereas for molybdenum is still based on current supply and demand fundamentals and less so on future supply.  I would say some of the biggest drivers on the market are the fact that both the supply and demand side are quite concentrated.  So it's these concentrated fundamentals that have led to rather short price moves in the molybdenum market over the past decade.  In fact the molybdenum market has had some of the more reactive prices to changes in the supply and demand fundamentals.  On the supply side, China is the largest producer, producing roughly 36% of supplies in 2009 and there actually have been notable changes in China. With the regulatory policies in China, they have been really targeting the illegal projects as well as those that have violated some of the environmental regulations in the area.  Then they did impose a mining quota for 2010 and we do expect a new mining quota to be released very shortly for 2011 and this is something that could potentially have an impact on prices as far as some of these smaller scale operations continue to have tighter regulations imposed on them.

GEOFF CANDY:  Coming to the demand side of things clearly it's an important art of the fundamental balance.  If we look macro-economically where are we placed in terms of demand for the metal, and indeed particularly from China?

CATHERINE VIRGA:  That's a very good question because the demand side is a key driver for the molybdenum market, in particular the steel market - that's because roughly 70% of molybdenum is consumed in this market - and the steel market has a fair amount of cyclicality to it so that is really going to have a significant influence on the molybdenum prices - and we do see some potential restocking with an uptick in production of molybdenum in the fourth quarter and then potentially some more strength arising in the first quarter and leading up to particularly the area with the greatest internal strength would be in the second quarter of 2011.  For China, we have had a build up in inventories in China during 2009 and that has created a buffer or cushion between supply and prices or demand and prices.  So I do think that Chinese demand isn't going to be a major pull for molybdenum prices in the medium term.  They still need to work down some of their existing stocks, but as we move into 2011 and some more of those stocks get drawn down, we could have more of a positive influence on prices arising from China.  China has historically been a net exporter of molybdenum and they did shift over to being an importer in 2009.  This year we're looking for the market to be pretty much in balance, but that does lead to the fact that they're not continuously building up massive stocks at this level, which is positive for prices going forward.

GEOFF CANDY:  How cyclical is the stockpiling process?

CATHERINE VIRGA:  The economic environment that supported stockpiling in 2009 is not likely going to be repeated.  This is the time period where we had a surge in availability of credit to Chinese fabricators, consumers and even to some extent maybe speculators.  This is something that has been a major focus on the Chinese government, to reign in some of this excess credit, and I do think that the stockpiling right now - there's going to be those natural shifts in preparing for the cyclicality of the steel market and less so of the stockpiling for longer term investments.

GEOFF CANDY:  Just to close off with, you mentioned earlier that the molybdenum market isn't really that influenced by the kind of speculation side of things.  Is that likely to change over time, do you think?

CATHERINE VIRGA:  The molybdenum market was launched on the LME in February 2010 and they did a hard launch in May so that has opened it up - exposes it to a level of investment demand.  However, the contract is still gaining traction and at this point of very low levels of liquidity I do think we'll have investors still be a bit stand offish from the LME contract in the near term.  Over time the molybdenum contract is one that could potentially be more liquid than the tin market and opening it up to much greater levels of investment demand.  I'm basing that on the physical flows of molybdenum in terms of supply as well as ... the market in terms of the prices over the past five years.

GEOFF CANDY:  Where does molybdenum place in the CPM Group's view of the metals complex?

CATHERINE VIRGA:  We're definitely more optimistic on the molybdenum market than some of the other metals.  We do think expectations from investors have tacked on a significant premium onto prices already.  We have prices rising to an annual average of about $21.75 in 2011 and that compares to a price of $15.25 in the market currently.