Molybdenum has gone from the darling of the minor metals market to a basket case in months. Back in 2007 Moly was trading at $40/lb and investors thought it could go even higher. The ETF Sprott Molybdenum, set up by Eric Sprott, was launched attracting $189m at its IPO. They had some justification, a couple of years earlier the metal had been trading at over $85/lb. Since then, the molybdenum price has drifted lower before finally crashing along with the rest of the commodities sector. Today it is trading below $9/lb and Sprott’s ETF is being liquidated. Sprott is not the only casualty. Adanac Moly has filed for creditor protection under CCAA in the state of BC to give it a temporary stay of execution, while it desperately tries to re-arrange its affairs. But its situation looks desperate. Even BHP has delayed plans to build a $120mn processing plant at its Escondida mine in Chile.
Molybdenum has the unfortunate characteristic of tending to appear in very low concentrations and often in deposits with copper. So when copper is strong, Moly is mined as a by product leading to over supply, but then the price falls. As prices rose in the early to middle part of the decade, even pure Moly mines came on stream in Chile and the USA. Such has been the position over the last few years. Supply has grown dramatically but demand has been slow to catch up. Indeed as over 70% of Moly is used in stainless steels and other super alloys, demand for which has been declining for the last year or more, the Sprott ETF looks like a leap of faith in hindsight.
Should we care? Aren’t low metal prices good for consumers? Yes they are, yet we should still care. When the price drops from $85 to $10/lb the economics of the industry become messy. Miners and their financiers are going to be highly reluctant to invest in new facilities. Sooner or later demand will come back. At the moment, the oil and gas industry is shelving exploration and new refining capacity but as hydrocarbon prices stabilize and demand picks up in a year or two so will demand for stainless. As aero engine and tool steel markets gradually come back, demand will return, not with a bang but they will come back. What will the supply market look like at that time? Sadly depleted is the answer and the ground will have been cleared for yet another rollercoaster ride of prices.