Cobalt, molybdenum seen on different paths as LME contracts near

Molybdenum and cobalt will soon emerge as the London Metal Exchange's first minor metal contracts, but that could stand as the only similarity shared by the two materials in upcoming years.

The global molybdenum and cobalt markets will face very different fundamental situations?and therefore, pricing environments?in the mid- to long term, according to analysts of the minor metals.

Molybdenum boasts the most favorable of the two outlooks, according to Catherine Virga, senior base metals analyst at CPM Group in New York.

Although molybdenum has faced its own set of challenges at the hands of the past year's global financial meltdown, specifically the weakening of the steel market, a number of persisting structural trends have helped keep the molybdenum market afloat, she said.

"With the steel market consuming roughly 70 percent of the molybdenum supply, it's really not much of a surprise that the molybdenum market is facing some of the cyclical problems that the steel market has been having in this downturn," Virga said this week at the LME's Minor Metal Breakfast Seminar in London.

Nonetheless, "there have been rather bullish structural trends for the past couple of years (for molybdenum). These structural trends have not been impeded by the recession and they continue to play out," she said pointing to recent and impending infrastructure builds throughout Organization for Economic Cooperation and Development (OECD) nations and the urbanization and industrialization of emerging economies.

"China's seeing a tremendous surge in demand for molybdenum and steel," Virga said, noting that some 120 million tonnes of steel are forecast to be consumed worldwide during the next two years due to the various fiscal stimulus packages.

The supply side of the molybdenum equation is also strong. China, once a net exporter of the minor metal, has become a net importer partially due to a number of "significant" mine closures, she said.

Published by samjiefu@gmail.com

Additionally, many of the new copper deposits slated to come on-stream in the near-future are located in Africa, where cobalt?not molybdenum?is the prime byproduct.

"We're not going to have the same amount of supplies coming from byproduct production," Virga said, noting than some 60 percent of total molybdenum output today comes from copper-molybdenum mineralizations. As a result, the molybdenum market, which could face "a very narrow surplus" this year and in 2010, will move back into deficit by 2011, she added.

With demand on the rise and supply on the decline, the molybdenum market is slated for the upside. According to CPM's estimates, molybdenum will average $11.70 per pound in 2009 and $17.50 in 2010. In today's environment, canned molybdic oxide is in the $13.75- to $14-per-pound range, after having grazed April lows of $8.30 per pound.

While the forecast for molybdenum is sunny, cobalt could still have some stormy days ahead, according to Eric Taarland, senior consultant at CRU International Ltd.

Cobalt, at one time a strong minor metal in terms of price, is facing weakening fundamentals going forward as a growing number of mining operations are brought on-stream throughout Africa, specifically the Democratic Republic of Congo. Freeport-McMoRan Copper & Gold Inc.'s majority-owned Tenke Fungurume project alone, which began production this year, is initially expected to produce some 18 million pounds of cobalt annually.

Published by samjiefu@gmail.com

"As more supply comes on-stream, we expect (pricing) deterioration," Taarland said at the LME breakfast.

Cobalt demand is also on the decline, he said. Although the minor metal, which is primarily used in superalloys and batteries, will see a brief uptick as electric cars evolve, other uses of the minor metal are quickly "maturing," he added.

"We do not expect growth to continue at these same levels as the last decade," Taarland said, noting that CRU estimates a 2009 average price of $20 per pound for low-grade (99.3-percent) cobalt and a long-term price of $10 per pound.

Low-grade cobalt is currently in the $14.5- to $15.6-per-pound range, up from first-quarter lows of $9 but a far cry from the nearly $50-per-pound level seen in March 2008.

Yet despite the expected market divergence between cobalt and molybdenum in future years, the LME expects both contracts to thrive on their new trading platform, Martin Abbott, LME's chief executive officer, said. "These are two markets that have been historically extremely volatile and extremely difficult to price," he said, noting that both are "perfect" for LME contracts.

The exchange's new molybdic oxide and cobalt futures contracts will start trading on Feb. 22.