Molybdenum oxide price had stabilized in the mid-20s range for most of 2006, and the question is whether this is the new market equilibrium or whether molybdenum prices might slip back to earlier "historical" levels.

Molybdenum is undergoing significant structural change on both the supply and demand sides which makes a return to earlier price structures unlikely.

Now we have been through a period of high copper and molybdenum prices, and yet inventories and molybdenum production from many by-product producers is declining.

In Chile's case, falling head grades at their largest producer – a mine that has been operating since World War I – have resulted in a loss of 10 million pounds of production last year and possibly another 11 million pounds this year.

So while the company continues to maximize copper output, molybdenum output is falling.

This is a radical departure from the earlier reality of the molybdenum industry.

China's molybdenum mine production is falling as well. One estimate has it down by about a quarter between 2002 and 2006. One entire historic mining district appears absent from the news. Production figures out of China are notoriously unreliable, but it appears as though the country wants to retain more of what they produce: China is in the process of adding export tariffs and non-tariff restrictions to molybdenum exports.

A spokesman from the Chinese molybdenum producer JDC was quoted in March as saying that he expected a "…quotas system that would further restrict exports out from the country".

Certainly the stellar gains in stainless and carbon steelmaking in China suggest they'll need every pound of molybdenum they can get: China has become the world's largest stainless steel producer with its output exceeding five millions tons in 2006, up 60 percent from 2005.

Stainless steel capacity there is on track to reach 12 million tonnes by the end of 2007.

China's raw steel production was 418.8 million tonnes in 2006, up 18.5 percent from 2005 and just over one third the world total. In the first two months of this year alone, the output of steel products totaled 79 million tonnes – 25 percent higher year on year.

Canada also has seen significant erosion of its molybdenum production: Several mines have closed. The Highland Valley Copper mine is forecasting an equilibrium level of annual production around 3 million pounds – down from 10.7 million pounds in 2004.

For Canada as a whole, the expected 2007 molybdenum production represents just a
third of what it was in the late 1970s and early 1980s.

While the chronic oversupply and inventory accumulation that characterized the latter part of the last century has been rationalized (through some very hard times for producers and their employees), demand for molybdenum has continued to rise.

Since the mid-1990s, the annual consumption of molybdenum has increased by about 200 million pounds.

These production losses and the demand increase represent the opportunity for new production.

Looking at the demand side, molybdenum has a market niche in stainless steels and in carbon steels. There are other applications – catalysts for example – but steel is the main driver.

Many of these steels were on the drawing boards or in a field-trial stage, but not in substantial use while molybdenum languished at "historical" levels.
Stainless and duplex steels

Stainless steel first; this is roughly a 28 million tonne market.

We are seeing advancement of so-called duplex stainless steels with more molybdenum and less nickel. Right now, the most common duplex stainless grade produced is 2205, nominally containing 40 percent more molybdenum than the corresponding austenitic stainless – grade 316. (The actual compositions vary somewhat with producer.)

Commercial production of these duplex steels is still evolving: Baosteel, for example, China's largest producer, first produced hot rolled 2205 duplex stainless steel strip only this January.

Although the use of higher-molybdenum duplex grades in a given application is not driven solely by the intrinsic value of contained nickel and molybdenum, the recent increases in nickel prices have helped tilt things this way. (Use of the duplex steels involves weight and strength considerations and knowledge of the chemical conditions surrounding the application, etc.)

The potential substitution of a duplex stainless like 2304 (US$2,061/t with nickel at US$20/lb, Mo at US$25/lb) for austenitic stainless 304 (US$4,409/t with nickel at US$20/lb, Mo at US$25/lb) is an interesting one because of the relatively larger market for 304.

Molybdenum bearing stainless steels now represent only 7-10% of the total stainless steel market. Some project examples from Europe follow. The U.S. hasn't yet embraced the substitution to the extent Europe has.
Carbon steels

Carbon steel production in 2006 was over 1.2 billion tonnes.

This is 40 times the size of the stainless market and molybdenum is beginning to establish a foothold in carbon steels through the development of Advanced High Strength Steels (AHSS).

These revolutionary developments in steelmaking are allowing steel to recapture ground lost to aluminium and plastics over decades. Given the size of this segment relative to stainless, the potential for increased molybdenum consumption is truly extraordinary.

In this category, we see an increasing number of applications for molybdenum:

One is pipeline steels containing in the order of 0.25 percent molybdenum.

Engineering studies have shown significant project cost reduction using advanced high strength steels in pipelines, even with the increased unit price of the product.

The reduced wall thickness allowed by these new steels requires less steel overall for the pipeline, reduces transportation costs, and lowers construction costs.

Currently, molybdenum demand in this application is limited by the availability of capacity: The vast majority of the world's pipe mills have yet to upgrade to the newer grades like X100 and X120, which contain higher levels of molybdenum.
Catalysts

There is extraordinary new growth occurring in catalyst demand for the production of
ultra low sulfur diesel (ULSD).

About 95% of refiners use either a nickel-molybdenum catalyst or a cobalt-molybdenum catalyst for sulfur removal in the ULSD application.

ULSD is the single largest environmental mandate since the removal of lead from gasoline 25 years ago, and the full impact on molybdenum demand has yet to be felt.

The overall diesel demand growth rate in the last three years has been about double
that of gasoline: roughly 3.5-4% per year.