Molybdenum: "Complicated times are coming between 2015 and 2017"

In May, Chilean state copper commission Cochilco said that it expects molybdenum to see a slight surplus this year, followed by a 1,200t deficit in 2014 and a return to an oversupplied market from there.

Prices, according to Cochilco, will fluctuate between US$10 and US$13/lb in 2013 and US$11-$14/lb next year.

In the first of this two-part interview with BNamericas, Pablo Bascur, founder and CEO of Chilean molybdenum consulting company MolyExp, discusses his projections for 2013 and 2014, as well as the supply-side factors that will contribute to a paramount change in the market beyond then.

BNamericas: Earlier this year, Cochilco put out a report estimating that this year would see a slight molybdenum surplus to be followed by a deficit for the metal in 2014. In your opinion, how is the market balance shaping up for this year and next?

Bascur: With molybdenum, it's normal [to have] some adjustments from a portion of the production because there are two types of producers – those who obtain molybdenum as a copper byproduct and those who get it as a primary product from mining, which we call primary producers. These primary producers have higher costs and therefore are generally structured to make adjustments in the production so as to not pressure the market.

There's something else that happens with molybdenum that is different from copper, for example. With copper, in general, producers don't make this small adjustment in their production each year because you can always sell copper production. If you don't have an end consumer, you hand it over to the London Metal Exchange. You can always sell the copper once you produce it. In the case of molybdenum, it's not like that. You have to have a consumer that needs molybdenum; there isn't the option to deliver significant volumes to the LME.

This, then, forces those producers with higher costs to seek a level of production that they believe they can sell, within certain limits.

So, for this year and the next, I believe the market will be within those levels, within the easy adjustment range. We'll probably see a small surplus… but it isn't significant. What is very significant is that complicated times are coming between 2015 and 2017.

BNamericas: Before delving into that last comment, how will prices behave in the meantime?

Bascur: Prices should not vary substantially from what we have today, how they have moved between this year and last.

BNamericas: Now, why will things get complicated around 2015?

Bascur: I see a paramount change in the market in the next three or four years.

[One thing I didn't explain is that] in this segment where molybdenum is a byproduct, in general the production decisions are not related to the market situation…. They recover it because it's a byproduct, but in relation to the value of copper, it's very small. What does this mean? [It means] that in project decisions, also, the price or [market balance] of molybdenum aren't very important either.

[In the West there are a lot of projects with molybdenum as a byproduct of copper and] the majority of the projects are under construction, so we aren't talking about something in the [distant] future.

This goes in parallel with something else, which is that the Chinese are in the midst of an intelligent process – for 30 years they have been growing at rates of 10%/y – and where they are developing their mineral resources, thus generating the virtuous circle of creating jobs, jobs-consumption, consumption-investment, and that's how the economy grows. The mining sector is where they suffer for certain things they don't have, such as copper, for example, and iron ore … in the case of molybdenum, they have it. They have large reserves, the largest reserves in the world…. Strategically, as well, the Chinese don't want to depend [on others], if possible.

What we have seen from China in its participation in the molybdenum market, in the last 20 years they have strongly developed their resources based on, in general, let's say about half of the production, mines that are very small and very rudimentary [but] medium and larger projects are also emerging and there are three large companies that are also growing.

BNamericas: What does this development in China mean for the overall market?

Bascur: Until 2009, the Chinese exported a significant part of their production, as domestic consumption was very low. Within the last five years, Chinese consumption has skyrocketed and today they are major consumers, they are now the world's largest consumers, while the rest of the world will go from a deficit to major surpluses in the coming years.

It's a radical change to go from being a net exporter at high prices to a low-price situation where you need [molybdenum] for domestic consumption. The bulk of the production in China is primary, so they should make an adjustment, but will they make an adjustment? Or will they protect their economy?

In the West, there is going to be significant extra volume and the question is – will the Chinese import at the cost of halting their expansions and stopping their primary mines, or not?

For more on molybdenum demand and what the changing market will mean for prices beyond 2014, look for the second part of the interview with Pablo Bascur in next Friday's Metals Perspectives.