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January 13, 2011 Molybdenum Strategic Investment Program: Discussion Materials Justin J. Honrath Commodity Analyst Society of Mining Engineers, New York.

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Presentation on theme: "January 13, 2011 Molybdenum Strategic Investment Program: Discussion Materials Justin J. Honrath Commodity Analyst Society of Mining Engineers, New York."— Presentation transcript:

1 January 13, 2011 Molybdenum Strategic Investment Program: Discussion Materials Justin J. Honrath Commodity Analyst Society of Mining Engineers, New York Section New York, New York 29 March 2011 Outlook for Molybdenum & Cobalt 30 Broad Street | 37 th Floor New York, NY Justin J. Honrath Commodity Analyst

2 January 13, 2011 Disclosure The views expressed within this presentation are solely those of CPM Group. Such information has not been verified, nor does CPM make any representation as to its accuracy or completeness. Any statements non-factual in nature constitute only current opinions, which are subject to change. While every effort has been made to ensure that the accuracy of the material contained in the presentation is correct, CPM Group cannot be held liable for errors or omissions. CPM Group is not soliciting any action based on it. Information contained here should not be relied on as specific investment or market timing advice. Copyright CPM Group 2011.

3 January 13, 2011 Overview of CPM Group Consulting Investment Banking Asset Management Commodities Management Commodities Research Market Intelligence Analysis Market Intelligence Analysis Market Intelligence Analysis Market Intelligence Analysis Mergers & Acquisitions Debt and equity fund raising services Corporate financial advisory Short to long term advisory services Independent market consulting services Open consulting access to analysts on exchange traded commodities and specialty metals. Managed Accounts Non-Exchange Traded Metals Management Risk management Principal advisor and hedging manager Advisor to help management teams choose or execute their actions A strategic advisor, managing hedging on an ongoing basis Weekly Reports Monthly Advisories Annual Precious Metals Yearbooks Annual Precious Metals Long- Term Studies Base Metals Long-Term Outlook Economic Research Currency Research Country Risk Analysis Special Studies Client Specific Research Producers Consumers Producers Development Stage Companies International Organizations Governments Refiners Institutional Investors Producers Consumers Hedge Funds Refiners Private Clients Hedge Funds Institutional Investors Private Clients Smelters Financial Institutions Institutional Investors

4 January 13, 2011 % of Population Living inUrban Areas Source: CIA World Factbook, IMF Urbanization to Drive Raw Materials Demand  Higher levels of income often translate into a greater percentage of the population living in or near cities, requiring greater quantities of raw materials to support construction efforts.  Of China’s 1.3 billion citizens, roughly 43% of China’s population lived in urban areas in Per Capita GDP (PPP)

5 A Two-Speed Economy Contribution to World GDP Growth Source: The Conference Board, CPM Group

6 Source: CPM Group, Antaike, IMOA, Bloomberg Vehicles per 1,000 People (Vehicle Registration/Population) Source: World Bank, U.S. Department of Transportation, U.S. Census NBS, CPM Group Real Demand From China  In 2009 Chinese Per Capita Vehicle Ownership Per 1000 People was only 10% of that of the United States Per Capita Vehicle Consumption Despite Efforts to Cool Economy

7 Highly concentrated supply chain keeps prices vulnerable to supply shocks. Relatively inelastic demand because molybdenum is typically used in very small quantities in end-uses that require specific properties. Molybdenum is able to withstand highly corrosive environments and extreme temperatures. Demand is correlated to industrial production rather than trends in consumer spending. Molybdenum demand is leveraged to the energy industry. The majority of cobalt is sourced from by- product production, mitigating the correlation between cobalt supply and prices. Releases from U.S. gov’t stockpiles have in the past skewed the relationship between cobalt S&D fundamentals and prices. Demand is reflective of consumer spending Cobalt reserves and production are concentrated in countries with high political risks. Complex and fairly opaque supply chain Molybdenum and Cobalt: A Side-By-Side MolybdenumCobalt

8 Lagging Recovery This Go-Around Indexed Molybdenum, Cobalt, and Base Metals Prices Monthly, through February 2011 Source: Platts, LME, and Metal Bulletin

9 Reactive Molybdenum Prices Monthly, through February 2011 Sharp increase in steel demand & insufficient roasting capacity Mine closures in the Huludao area in China China imposes tighter export quotas & a decline in by-product output A surge in copper mine production Temporary mine closures, increased demand from Chinese steel producers & delay in Chinese exports Forced inventory selling & weak steel production Fiscal stimulus fuels restocking & China becomes a net importer of Mo. Followed by cyclical decreases & increases in demand and steel production.

10 2009 & 2010 Price Performance Stock Builds Weigh on Molybdenum Prices Steel fabricators, outside China, remained hesitant about rebuilding working stockpiles of molybdenum. At the same time, brokers, trading houses, and merchants in the western world continued to draw down their stocks to meet spot market orders. Concerns about stocks builds in China kept price growth subdued. The implied market balance suggests stocks in China rose to over 150 million pounds of molybdenum during the past two years. Based on stockpiling seen in other base metals markets in China, over a quarter of these stocks are estimated to be held as long-term strategic holdings and another third is estimated to held by consumers, whom have replenished depleted working inventories.

11 RoW Short of Mo While China’s Surplus Builds Implied Market Balances Annual, 2000 – 2010e Note: Chinese Market Balance = Domestic Supply – Net Exports – Domestic Fabrication Demand Source: CPM Group, Raw Materials, MEG, WBMS, CNIA, Company Reports, Industry Sources

12 Molybdenum Supply Outlook

13 Supply Growth Delayed by Recession Global Molybdenum Mine Production Annual data, projected through 2012 *Forecasts include supply disruption allowance and a portion of the possible and probable development projects; Source: CPM Group ‘Molybdenum Market Outlook’ 2010e Molybdenum Production, by country

14 Little Committed Supply Over the Next 3 Years Summary of Mo Development Projects Annual data, projected through Endako Expansion - Gibraltar Expansion - Mineral Park Phase II - Zangezur Expansion* - Donggou Expansion* - Los Bronces Expansion - Max Moly Expansion - Toquepala Expansion - Andacollo Expansion* - Climax Restart* - Cananea Expansion - Cuajone Expansion Project Pipeline Note: * - indicates a possible or probable (uncommitted) project. Source: CPM Group

15 Comprehending Longer Term Shifts in Supply Strategic stockpiling by Governments and Other Market Participants with Longer Term Holding Strategies Should Quell Concerns About 2009 & 2010 Stock Builds Reportedly China is studying a plan to build strategic reserves for 10 minor metals. The minor metals that have been included in the study are rare earths, tungsten, antimony, molybdenum, tin, indium, germanium, tantalum and zirconium. Changes in the Molybdenum Mining Quota in China In 2010 the Ministry of Industry and Information Technology issued a mining quota of million lbs, which was allocated at the province level. However, mine production is estimated to have exceeded the quota by over 10 million lbs. In line with the government’s 12 th Five Year Plan, China's Ministry of Land and Resources is planning to classify molybdenum as a national resource. Their new mining quota is expected to be enforced more strictly, constraining growth from historically price sensitive producers. Government imposed rationing acts as a barrier to entry. Chinese companies continue to look abroad for future mineral resources. - i.e. Hanlong investment plans

16 2010 Mining Quota in China Chinese Molybdenum Mine Production Annual, Projected through 2013p 2010 China Molybdenum Mining Quota by Province Million Lbs. (metal content) Source: USGS, RMD, CCS, WBMS, Antaike, CNIA, CPM Group and Company Reports

17 Major Shifts in Chinese Molybdenum Trade Notes: Not adjusted for transport costs. The differential is computed with a VAT adjustment. Chinese Ore & U.S. Mo Prices (Metal Content) Bi-weekly, Through 25 March 2011 Chinese Molybdenum Trade (Metal Content) Chinese trade data through Decemeber 2010, does not account for inventory changes. Source: CPM Group, Customs General, Metal Bulletin

18 Molybdenum Demand Outlook

19 A Staged Recovery in Molybdenum Demand Emerging Markets Remain A Large Driver of Mo Demand in 2011 After Robust Rebound in Developed Economies in 2009/10 Mo Demand Correlated With Industrial Development Recovery in Steel Production Slows in U.S., Europe, and Japan in 2011 Western world steel producers may continue to buy molybdenum on the spot market, calibrating supplies to market conditions and demand fundamentals. China and Other Emerging Economies Continue to Provide Underlying Support to Mo Demand

20 Molybdenum: An Industrial Metal Source: CPM Group, AMM, Platts, CPB Netherlands World Industrial Production and Mo Demand Annual, through 2010e World Industrial Production & Mo Prices Monthly, through January 2011

21 Mo Demand Leveraged to Steel Markets Molybdenum End-Uses, 2010e Molybdenum Demand by Region, 2010e Source: CPM Group, IMOA,

22 Global Steel Output Near All Time Highs Source: World Steel World Steel Production Monthly, Jan – Jan. 2011

23 Molybdenum Price Outlook

24 A Bullish Outlook Emerges Mo Prices are Set to Rise as Market Conditions Expected near-term development projects delayed by global credit crisis and lower molybdenum and copper prices Changes in Chinese Mining Policies Need to be Put in Context Stocks built in China over the past two years may become increasingly sticky China continues to look abroad for future mineral resources Mo Demand Growth is Projected to Slow, But Remain at Historical High Levels The bifurcation in global economic growth will keep molybdenum demand dependent on emerging markets in Further recovery in the steel markets of developed economies is supportive of elevated Mo demand growth rates over the next two years. Unlike other LME-traded metals, investment demand is not a key driver of molybdenum prices. The newly launched LME contract remains thinly traded.

25 CPM Base Case Scenario: Source: CPM Group ‘Molybdenum Market Outlook Tighter Market Conditions Approach Projected supply includes the release of metal from strategic stockpiles. Estimated Inventories Running Market Balance

26 Still at a Nascent Stage Sources: CPM Group, LME Mo Official LME 3-Month Prices & Open Interest Daily, through 25 March 2011 Mo LME Cash Prices & LME Inventories Daily, through 25 March 2011

27 Cobalt Outlook

28 Event-Driven Cobalt Prices Monthly, through February 2011 African output recovers, Russian exports and US stockpile sales increase Asian Financial Crisis New sources of supply come online, weakening economic conditions Lower Co supplies from DR Congo & Canada Rebound in Co supplies Global Financial Crisis Ban on cobalt ore & concentrates exports from the DR Congo, Increased battery demand, market deficit Improved demand, LME contract launched, DRC-First Quantum feud Producer Price changed to Reference Price, commercial Co battery use begins

29 Cobalt Supplies by Source & Demand Annual, projected through 2012p Chinese refined production excludes output from Umicore. Probable supply is not adjusted for disruption allowances. Stockpile release do not show builds in stocks. Sources: CPM Group World Cobalt Mine Production, 2009 World Cobalt Refined Production, 2009 Cobalt Supply Hinges on DRC

30 But Massive By-Product Additions to Keep Market In Surplus Summary of Co Development Projects Cobalt capacity, projected through Ramu -Ravensthorpe -Ambatovy -Idaho Cobalt* -Cameroon East* -Nico -Las Camariocas -Yerilla -Mt. Gunson -Muliashi North -Weda Bay -Boleo *Primary Project Project Pipeline Source: Metals Economics Group; Excludes 19,000 mt SOCOMIN project Mt

31 Higher Copper, Nickel, and Platinum Prices are Increasing Supplies of By- product Cobalt Production The U.S. Defense Logistical Agency is winding down its 20-year program to sell off nearly 100 million lbs of cobalt. Uncertainty Overhangs Cobalt’s Forward Supply Curve The majority of new supplies forecast to come online are sourced from the politically unstable Democratic Republic of Congo, which ranked in the lowest quartile in the most recent survey of mining “friendly” policies published by the Fraser Institute. Technical difficulties recovering nickel from low-grade laterite deposits and cost overruns may to delay or curtail recoveries of cobalt as a Ni by-product. Supply-side Drivers for Cobalt Prices

32 Elevated Growth Rates Persist Total Cobalt Demand by End-Use Annual, p p

33 Greatest Gains Projected in Top End-Uses Dyes/Paints BatteriesSuperalloys Superchargers, aircraft turbine engines, gas turbines, chemical and petroleum plants Hydroprocessing & hydrodesulfurization of crude oil, gasoline, jet fuel, low-sulfur diesel, plastic resin Automotive and electric sensors, ignition systems, meters, medical and geophysical imaging applications Manufacturing of tools and the cutting or shaping parts of power machinery Tire adhesives, soaps, driers, feedstuffs, anodizing, recording media, electrolysis Carbides Magnets Catalysts Other chemicals HS Steels Hybrid electric vehicles, power tools and consumer electronics such as personal computers and cell phones Cutting tools, gear hobs, mills, taps, drill reamers, broaches Artistic colors, fabrics, plastics, glass, enamels, ceramics Growth of Cobalt Demand By-End Use (ranked by 2009 volume) Annual, p Sources: CPM Group

34 Cyclical Demand Resumes After Recession-Led Slump Recovery in lagging consumers spending trends affecting the aerospace sector, power generation, automobile production, personal electronic equipment, etc. Cobalt Chemicals Exposed to Growing Global Market Share for Rechargeable Batteries for Automotive Applications (Hybrid Electric Vehicles, Electric Vehicles, and Plug-in Hybrid Electric Vehicles) Uncertainty Overhangs Cobalt’s Forward Supply Curve Traditional LiCoO2 cathode material continues to face substitution to mixed metal oxide materials, that may contain less or no cobalt. The LME Cobalt Contract As a market of last resort, the industry can use the LME’s delivery option to sell excess stocks in times of oversupply or to source material during supply shortages. The cobalt market will become more exposed to investment demand. Demand-side Drivers for Cobalt Prices

35 Refined Supply Japanese fabrication demand appears to be unaffected by the 11 March earthquake Sumitomo’s Niihama nickel-cobalt refining complex located on Shikoku island in the south is largely away from the damage that occurred in the Northeast. Magnitude of the Earthquake’s Effects on End-Use Consumption Less Clear Current estimates suggest lost automotive production over 300,000 units since 11 March This is negative for personal expenditures as well, but the effects will be largely unknown until the timeline for reconstruction is more clear. Some estimates peg losses in global auto production as high as five million units due to losses in auto components production Cobalt prices may decline in the second quarter as ample supplies and marginally lower demand for lithium-ion batteries from electronics manufacturers due to the negative impacts of the earthquake on personal expenditure Questions Remain Over the Japanese Market

36 Cobalt Contract Gets off to a Running Start Co Official LME 3-Month Prices & Open Interest Daily, through 25 March 2011 Cobalt LME Cash Prices & LME Inventories Daily, through 25 March 2011 Sources: CPM Group, LME

37 Estimated Inventories Running Market Balance Source: CPM Group Glutted Market Conditions Persist …But the Majority of Growth Projected in the Politically Unstable DRC CPM Base Case Scenario:

38 A NNUAL Y EARBOOKS S PECIAL S TUDIES L ONG T ERM O UTLOOKS M ONTHLY A DVISORIES W EEKLY R EPORT CPM Group – Commodity Research

39 January 13, 2011 Thank You! Questions? 30 Broad Street | 37 th Floor New York, NY Justin J. Honrath Commodity Analyst Justin J. Honrath Commodity Analyst Society of Mining Engineers, New York Section New York, New York 29 March 2011


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