Friday, September 18, 2009
Good Golly Miss Moly!
It is 5:31 AM, I've got a fresh pot of Raine's famous TGIF coffee brewing and Little Richard is blasting on the shop PA. That might be a little too old school for many of you but his song "Good Golly Miss Molly" is appropriate if you spell Molly m-o-l-y. You'll notice the Colonel has switched the yellow light to green for "Gold & Moly Prices" on the Eureka Outlook Dashboard to your right. What happened?
For the past week or so I've been worrying about recent declines in molybdenum and nickel prices, both key ingredients to making steel. The drop was curious because General Moly and steelmaker stocks have been on a tear lately. We scratched our heads a bit yesterday in the article Steel, POSCO and Eureka Moly LLC and in the late afternoon I was contacted by General Moly. They offered a thorough analysis of current events which I very much appreciate and will share with you below. As you might expect, the underlying forces that move molybdenum prices are sometimes as difficult to understand as the name of the metal is to pronounce. It is at least a three-legged stool with steel demand being the only leg of yesterday's discussion.
Here is the explanation provided by Seth Foreman, Director for Investor Relations at General Moly:
"We think there are primarily three factors at play here in determining where the price of moly is going. The first, as Colonel Possum indicates, is underlying steel demand. The second is the Chinese building a raw material inventory of so-called “strategic metals” like molybdenum. The third is the rate at which production that had come off line returns to the market.
China has almost always been a sizeable exporter of moly. Last year, the country produced approximately 130M lbs of moly out of a 450M lb global market (~29%). China’s import/export records show that China was a net exporter of approximately 57M lbs of moly in 2008. However, when the price collapsed last year, China became a net importer of moly for the first time. We saw this surface when existing producers like Thompson Creek Metals and Freeport started reporting in their quarterly conference calls that sales had suddenly picked up to Chinese customers. As verification, China’s import/export records show that China has been a net importer of approximately 77M lbs Mo YTD in 2009. A pretty stunning reversal.
So, the question begs, “why did China start buying foreign moly when they produce so much of it themselves?” We think the answer is that a lot (30-40m lbs) of internally produced moly came off-line when the moly price collapsed, presumably because it became uneconomic at lower prices. In fact, we think that so much Chinese moly production came off line, that China couldn’t source all the moly they needed domestically which actually forced them to buy on the global market. This is very contrary to the popular belief pre-2009 that all Chinese moly was cheap to produce.
As Colonel Possum states in his article today, China’s monthly production of crude steel hit an all time peak in August. Thus, we think that China’s need for moly to feed its steel industry has remained relatively flat (or even increased) during this economic recession. Add to that the other emerging economies (Brazil, India) that are much more healthy and the relative health of the Korean and Japanese steel industries (we are told they are both operating at ~90% of capacity), and you’ve got a pretty healthy steel industry ex-US and ex-Europe.
But in addition to China buying moly to feed their mills, we suspect that they have been building a stockpile of these “strategic minerals” both to make sure they don’t get caught short of moly again, but also as part of their high-level diversification away from US dollar denominated assets. This is likely why their imports of moly in 2009 are so much larger than the amount of off-line production (77m lbs versus 30-40m production off-line). Ryan’s Notes (a group that follows the moly space) has reported that China has built a stockpile of about 30M lbs and although nobody can really verify that, it seems about right given the size of the export/import differential I just described.
Lastly, with 30-40m lbs of production off-line in China and more here in the western world, there is going to be a period of time where some of this production comes back online. So long as the new incremental production is matched with incremental moly demand, it shouldn’t have an impact on price. But if too much production comes back too fast, the price will go down, and if too little comes back, the price will go up.
So when we look at the price declining from the mid $17/lb to the mid $15/lb over the past couple weeks, we suspect one or more of the following is at play. First, the Chinese could be done accumulating their stockpile of moly and thus demand has been reduced. Or, second, some incremental production from either China or the western world could be coming back online, increasing relative supply. Or both. (We are just learning that the Ashdown mine has come back online – small Mo producer in the Nevada area).
However, we think that the underlying “fundamental” demand picture looks pretty good. Inventories around the world are de-stocked, emerging economies are on a tear, and things in Europe and the US are starting to look a little better. We don’t see the recovery as either a straight line nor extraordinarily rapid, but we think there are lots of “green shoots” out there, especially ex-USA."
Interestingly, China and the global retreat from the U.S dollar are important pieces to the above explanation. We may be 77 miles from Ely and 125 miles from Elko but the world is on our front porch buckaroos.
Here is our latest graph of molybdenum and nickel prices, it looks like things are stabilizing. Green lights, pardner except for that pesky threat of new mercury emissions regulation. Say, can someone out there put that one to rest?
Turn up Little Richard and let's walk the walk:
4-WD is OFF (the VIX or "fear index" is low, what's this?)
Yellow light is ON for possible adverse regulation/legislation (mercury emissions)
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
Oil is down $0.06 in early trading to $72.53 (October contract); Gold is up $5.2 to $1018.7 (December contract, most active); Silver is down $0.025 to $17.240 (December contract); Copper is down $.0455 to $2.8505 (December contract); Molybdenum holds at $14.75.
The DOW is up 34.46 points to 9818.38; the S&P 500, up 2.86 points to 1068.35. The miners are mixed:
Barrick (ABX) $37.90 down 0.41%
Newmont (NEM) $43.78 up 0.59%
General Moly (Eureka Moly, LLC) (GMO) $3.34 up 1.21%
Freeport McMoran (FCX) $70.18 down 0.64% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are mixed, (a "tell" for General Moly):
Nucor (NUE) $49.70 down 0.28% - domestic steel manufacturing
ArcelorMittal (MT) $41.01 up 0.76% - global steel producer
POSCO (PKX) $106.29 down 0.44% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is up 0.21% to $1,245,139.72(what is this?).
Headline Photograph by Mariana Titus