Until 2004, there had been little to get excited about in molybdenum mining for nearly a quarter-century. After a price spike in 1979 that saw “moly”-a soft, gray metal used largely in steel-making-go as high as $35/lb, the price quickly fell to near $5/lb and stayed there, for the most part, for the next two decades.

The picture changed dramatically at the beginning of 2004, when moly began a sudden recovery. The metal jumped to $15/lb by April and then more than doubled between October and December, to just below $35/lb by the Christmas holidays-a 1,300% run-up from the $2/lb price range prevailing in 2002.

Understandably, the rapid rise has the market buzzing and a number of juniors touting their new mission to find and/or develop moly deposits. But before putting money into moly ventures, it’s important to ask: will moly’s 2004 gains continue, or at least hold, during 2005?

To answer this, we need to understand what caused the price spike of 2004. The standard explanation is that ravenous steel demand from China created an exceptional need for moly-the logical extension being that as long as the Chinese economy stays strong, so too will steel demand and thus the moly price. But a look at the numbers shows that this explanation is probably an oversimplification.

Contrary to Popular Belief…

Steel-makers did not use exorbitant amounts of moly in 2004, according to statistics from Adams Metals, presented at the International Molybdenum Association’s general meeting late last year. Moly demand for stainless steel products did likely grow by a healthy 6 percent on the year, but this is about the same annual demand growth the industry has seen since 1999. Demand growth for moly used in making other types of steel, such as low alloy and high-strength low alloy (HSLA), has flattened over the last 3 years to about 2 percent annually. In fact, even when other uses of moly-such as for catalysts and lubricants-are considered, demand has been increasing at a relatively constant rate for the past 20 years, around 4 percent annually.

So, if it wasn’t a sudden jump in Chinese steel demand that sent the moly price soaring, what was it? In fact, the gains probably can’t be attributed to any one major cause. Instead, the run-up was likely the result of a confluence of smaller factors.

One important development came not from China, but from America. The U.S. is the world’s largest user of moly, but had seen its demand for the metal peak in 2000 at 81 million lbs and then decline to 66.1 million lbs by 2002, as the economy sagged. This demand reduction caused moly to sink to near $2/lb, which in turn drove global moly producers to mothball a lot of mine capacity. Consequently, production hit a four-year low in the second quarter of 2002, with about 43 million pounds of moly available to buyers, down nearly 25 percent from 2000.

In late 2003, however, the U.S. economy came back to life, and so did overall western demand for moly, rising to 85 million lbs in the second quarter of 2004, up nearly 13 percent from the third quarter of 2003. This in itself, however, doesn’t appear to have been the primary cause of moly prices going through the roof. That’s because producers-mainly the U.S. and Chile-ramped up production in response to the sudden need. When combined with exports from China and the CIS, supplies met demand through the last half of 2003. But then, at the beginning of 2004, something unexpected happened. China abruptly cut its exports by about 6 million lbs.

The suddenly reduced supply, combined with increasing demand from the U.S., created a kind of “perfect storm” for moly, resulting in a 5-million-pound supply deficit in the first quarter of 2004, at which point prices really began to move.

“Immediate and Rapid Fall in Price”

It thus appears that the gains moly made in 2004 may have been more of a blip than a long-term trend in the market. For one thing, the rampant growth in U.S. moly demand during the first half of 2004 seems to have been an isolated occurrence. American demand shot up 12.5 percent in the first two quarters of the year as compared to the same period in 2003, but then leveled off enough that the overall increase for the year was only 8.5 percent. In other words, the supply crunch came only because U.S. demand wasn’t evenly distributed throughout the year, but bulged during the exact period when China cut its exports. After the second quarter of 2004, western moly demand actually fell slightly, and has since remained flat.

The export cut from China also appears to have been an anomaly. There was some speculation amongst moly bulls that the decrease might signal that China was planning to use more of its moly domestically, spelling long-term trouble for global supply. But this quickly proved not to be the case when, in the very next quarter, Chinese moly exports shot back up 5 million lbs, close to levels seen in 2003, and held near that volume for the rest of the year.

As a result, the supply deficit narrowed to only about 2 million pounds in the second quarter of 2004. And since then, overall global moly supply has jumped in response to the price gains, increasing by an estimated 10 million pounds, or 12.5 percent, during the last year. In fact, estimates from Adams Metals are that by the second half of 2004, supply once again exceeded demand, with the surplus likely now standing at about 5 million pounds-the biggest excess in 5 years.

This pattern of increasing demand (and prices) quickly bringing new supplies out of the woodwork is the historical norm for the moly market. The highest level of output from primary western moly mines came in 1980, the year after the last great price spike, with production reaching over 130 million lbs. When the price crashed soon afterward, production fell to less than 10 million pounds by 1983. A similar situation occurred during a short-lived price run-up in the early nineties. In 1993, with the price languishing near $3/lb, primary production had dropped to the lowest level in the last 20 years, at about 40 million lbs. But when the price moved up through 1994, reaching $16.50/lb by January 1995, primary production immediately doubled to 80 million pounds, causing the price to subside once again.

This suggests that today’s high prices will soon entice significant supply into the market and drive the price of moly down sharply. In fact, Phelps Dodge, owners of Colorado’s Climax mine, perhaps the world’s largest primary moly deposit (which currently sits idle), said of the market in a recent report, “There is a cautious approach in this sector of the industry as historical moves to suddenly increase production by primary miners have often led to an immediate and rapid fall in price to levels below economic operating requirements.” True to this prophecy, the moly price has already fallen in 2005, so far shedding nearly $10, or 29 percent, to around $25/lb.

More Risk

And today there is an additional factor that makes it risky to invest in primary moly producers. Namely, secondary production. Moly is commonly associated with copper porphyry deposits, especially in the U.S., Chile, and Peru, and copper miners often produce moly as a byproduct. Because moly and copper are both processed by flotation, it’s easy for copper miners to turn the moly taps on or off. Thus, such operations generally fare better throughout the ups and downs of the moly market.

In fact, unlike the cyclical production numbers seen from primary mines, moly production from secondary mines has increased more or less steadily throughout the last 25 years, from about 100 million pounds in 1980 to a forecasted record of 195 million pounds in 2004. This means that there’s a lot more secondary moly out there today-a supply that requires relatively little capital cost to bring to production-competing with supplies from primary mines that either have to be developed from scratch or restarted after months or years on standby. Last year brought numerous announcements from secondary producers of plans for new copper-moly mines or expansions of existing operations. Chilean national miner Codelco upped its moly production 59 percent in the first 9 months of 2004.

Of course, this makes it all the more attractive to invest in a copper-moly producer (if anyone needed another reason to do so, given the recent strength of the copper market). However, as regards investing in a primary moly producer who will live and die by the historically volatile moly price, it’s a case of ‘buyer beware’. Perfect storms, such as the one we saw last year, don’t happen that often.