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Even in an environment of declining metal prices, the sudden and violent drop in molybdenum prices has left investors in shock.
Molybdenum, or "moly" as it is called, looked like the one bright spot in the commodity world through September and most of October. Prices were holding around US$32 or US$33 a pound, which is where they had been for more than a year.
Then in late October, there was a sudden hiccup in the market and prices fell to US$26. That turned out to be a mere prelude to the last week, in which they plummeted to around US$12 or lower.
"Looking at market reports, we're hearing of trades in single digits. It's an amazing decline," said George Topping, an analyst at Blackmont Capital.
Industry insiders cite a couple of reasons for the sudden fall from grace of moly, a silvery-white metal that is used in high-quality steel alloys.
Part of the problem stems from chaos in London, where traders who borrowed money to hold moly inventories are having their lines of credit pulled and are forced to liquidate their holdings at virtually any price.
A bigger concern is on the demand side. With the global growth picture weakening due to the credit crisis, a number of steelmakers have announced plans to cut production and have stopped buying new material (it doesn't help that they typically draw down their inventories late in the year and are rarely aggressive buyers of moly at this time).
Some analysts have suggested that the steel production cuts indicate that moly prices could fall even further. Yesterday, Fraser Phillips of RBC Capital Markets wrote that the top of the cash cost curve for moly is somewhere around US$7 to US$8 a pound, a level that could provide support for prices.
Other experts argue that the sell-off is way overdone already. That is because that vast majority of the production cuts in the steel industry are for general steel. Moly goes into specialized steels that are mainly used in the energy industry, and there are indications that demand for those steels is holding up better than others
"If you read 99.9% of the reports, they paint moly with the general stainless [steel] brush," said one industry insider, who asked not to be named. "So that perception becomes reality, and it has just crashed the moly price."
He added that moly-bearing stainless steels are not used in the housing or auto industries, which are the weakest sectors right now (though there is moly in the sheet steel used in the auto sector).
On the positive side, analysts believe the moly market could turn around quite quickly as production is curtailed and new mines are delayed. A key announcement in that regard came yesterday, as Freeport- McMoran Copper & Gold Inc. (FCX/NYSE) said it is cutting production and suspending construction of the Climax mine, which was expected to be one of the biggest sources of new moly production.
That followed last Friday's announcement from Thompson Creek Metals Company Inc. (TCM/TSX) that it is delaying its Davidson moly project in light of weaker prices.
Most of the current molybdenum output around the world is produced as a by-product in copper mines. So with moly prices plummeting, companies are expected to redeploy their equipment to the copper-rich parts of the mine and produce less of the moly, experts said. – Financial Post