BALTIMORE, MD -- China is still hungry. Go figure. After all, this is the same nation that continues to build the city equivalent of a Philadelphia...every single month!
It seems like no matter how much the world markets put on its plate, it is never enough. This fact is never more apparent than in the steel market where the dragon seems to be completely unquenchable.
Recently released Chinese GDP figures only underscore this fact.
On Tuesday the National Bureau of Statistics released a figure that even took some China watchers by surprise. Amazingly, China's second quarter growth had surged at the fastest rate of any quarter in a decade despite official efforts to slow the pace of growth by curbing investment.
On an annualized basis, this equated to a stunning annualized growth rate of 11.3%.
Naturally, this type of growth requires enormous amounts of commodities. And none of these is more important than steel.
Simply put, China needs steel in the same way that its babies need rice. Without it they would simply wither away. I know this because I recently talked to my publisher Brian Hicks, whose wife is Chinese.
He said his 3-year old daughter can eat 3-times the amount of rice than he can.
And to feed Chinese economy it takes lots and lots of steel. All types of steel that you can imagine. Its massive trade surplus couldn't be built or maintained without it. Without steel China would wither.
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Because of this it is no secret that China has entered into tens of billions of dollars worth of iron ore contracts to maintain their mills.
This is where Molybdenum comes in. In fact "moly" and steel are joined at the hip.
This is because without Moly the production of certain grades of steel becomes impossible. Used as an alloy in the steel making process it lends both strength and corrosion resistance to the finished product. As such over 2/3 of all moly is used in the production of these steel alloys.
Needless to say these are important qualities. In fact, these types of steel are crucial to water distribution systems, chemical processing systems, automotive parts, construction equipment, gas and oil pipelines and off shore rigs.
In fact without these moly-laden steels offshore drilling would be exceedingly difficult. Not only is high molybdenum steel used as a hardener in drill stems, but an incredible 27% of all off shore rigs are built with stainless steel containing moly.
And in today's world one thing is for sure- we can't get enough of these rigs.
These and other factors have combined to propel moly to new heights. The chart below illustrates this fact as moly prices have soared beginning in Sept 02. Since then, moly increased an incredible 800% in late 05 and has since pulled back to a $26.25/lb for an overall gain of over 500%.
These price levels naturally are the result of supply and demand imbalance in the market.
These imbalances will certain continue well into the future as China continues to gobble up more and more moly.
In fact, recently released figures have projected that China's domestic consumption of molybdenum is set to increase 20% this year as strong demand from steel plants is continuing amid tight domestic moly supplies.
These tight supplies have been further deepened by increased stainless steel production in Japan. Japanese stainless production is up 7.75% year over year. As a result, Japan imported 214mt of roasted molybdenum concentrates and ores from China in May 2006, an increase of 29% year over year.
This is creating tighter and tighter markets. And tight market mean one thing-big profits.
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Playing this trend in moly, however, is not easy. It does not trade on future markets and its price not exactly transparent because it usually changes hands via direct sales from miners to producers.
It can, however be played indirectly by buy shares in the companies that mine moly producing ores.
Rio Tinto is one such miner. In fact the company recently announced that it was going to actually give up some of its copper production to maximize its production of moly as it moved to take advantage of its soaring prices.
Anglo American PLC is another. But regardless of how you choose to play this trend in moly an investment in this resource is a wise one.
After all, as Confucius once famously remarked......"China's gotta eat"
When it does molybdenum is sure to be on table.
- Steve Christ
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