Citigroup forecasts strong moly prices until 2010 (April 23, 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 molybdenum to trade above US$30 per lb until 2009. Moving into 2010, the market likely will move into surplus and Citi forecasts the price will drop to about $25 per lb. So far this year, average prices for the metal have climbed 26% in Europe and 8% in China.

And with U.S. crude oil prices recently 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. “This equals to an inflation-adjusted price of over $61 per lb today, using a 2.5% per annum inflation rate. The current metal price is still far from its historical high.”

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 supply from by-product producers and declining Chinese exports will continue to buoy prices.

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

Government officials are implementing export quotas as well as closing small mines and roasters, tightening approvals, and hiking export tariff and resource taxes.

Global demand for molybdenum has been growing at about 6% a year during the last five yearshigher 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 ten molybdenum miners are primary producers, Citi notes. But more than 50% of all new supply is expected to come from primary miners rather than by-product producers.

Freeport-McMoRan in the U.S. and Codelco in Chile, two of the 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 McMoRan’s Climax Mine (30 million lbs per year), General Moly‘s Mount Hope project (38.3 million lbs per year), and Moly Mines’s 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.