An obscure metal used to make steel has become this year's worst-performing commodity, after China's stumbling economy and a collapse in the energy industry drove outsized losses.
Molybdenum -- that's mo-lyb-de-num for the uninitiated -- is used in many steel building materials and to help harden the drills used to extract oil and natural gas from deep underground. Prices plunged 49 per cent, the most among 79 raw materials tracked by Bloomberg, as the white metal was undermined by the flagging demand and oversupply that plagued global commodity markets throughout 2015.
Use of the metal tumbled 5.1 per cent this year, the biggest contraction since 2009, driven by a slowdown in China, the world's biggest metals and energy consumer, according to Macquarie Group. Prices have dropped for eight straight months, the longest slump since 2011, weighing on returns for mining companies including Freeport-McMoRan Inc., the world's top producer.
"It's like a poster child for the commodity bear market," said Paul Christopher, a St. Louis-based head global market strategist for Wells Fargo Investment Institute, which oversees $1.7 trillion.
We don't have a positive outlook on metals, including molybdenum, because they've been overproduced. They will continue to do the worst, not just because China's demand is slipping still, but also because there's not been enough supply adjustment.
Prices for molybdenum oxide tumbled to a 12-year low of $4.616 a pound in November, according to monthly data from Metal Bulletin. The drop exceeded the 34 per cent decline for crude oil and the 26 per cent slide in the Bloomberg Commodity Index, a gauge of returns from 22 items that is headed for its biggest annual decline since the recession in 2008. Molybdenum for immediate delivery traded on the London Metal Exchange slumped 43 per cent this year to $11,628 a metric ton ($5.27 a pound).
About half of molybdenum is produced as a byproduct of extracting other metals, mainly copper. Because it makes up a small portion of revenue for mining companies, suppliers are slower to respond with output cuts when prices tumble, said Mu Li, an analyst at commodity researcher CPM Group in New York.
Production topped demand by 40.9 million pounds in 2015, the biggest surplus since at least 2002, according to Bank of America Corp. The market will remain oversupplied through 2020, the bank estimates.
The most common use of the metal is to make steel harder, stronger and more heat-resistant, which is appealing for energy producers for components including oil rigs. The collapse in crude prices to a six-year low has cut demand for equipment as companies including Chevron Corp. reduce spending. Some estimates show that pipes and tubes used by the energy industry account for almost 20 per cent of global molybdenum consumption, said Barbara Buck, the vice president of marketing and sales at Climax Molybdenum Co., a unit of Freeport.
It's oversupply from copper that creates such an imbalance. So many copper producers can produce molybdenum at very low cost by virtue of byproduct production. And the steel industry only needs so much of it.
"The primary reason for the decline in molybdenum prices has been a slowdown in demand," Buck said in an emailed response to questions from Bloomberg. "This has been attributable, in part, to a decline in demand related to the fall in the oil and gas prices, and the resulting reduction in the number of active oil rigs."
Production cuts can help to trim the molybdenum surplus. Phoenix-based Freeport is lowering output by about 34 million pounds a year, including at its Climax-operated Henderson mine in Colorado, Buck said. At the site, molybdenum is a primary extract from ore, rather than a byproduct. Globally, the industry has announced reductions equal to about 11 per cent of world demand, she said. The glut will narrow next year to 40.6 million tons and shrink to 18.6 million in 2017, Bank of America analysts including Oscar Cabrera said in a November report.
Still, the announced cutbacks are being "almost completely canceled out" because of increasing output through byproduct extraction at copper mines in South America, said Edward Spencer, a senior consultant at London-based researcher CRU. This will keep stockpiles high and could lead to a "sustained" period of low prices, he said in an email.
"It's oversupply from copper that creates such an imbalance," said John Meyer, an analyst at SP Angel in London. "So many copper producers can produce molybdenum at very low cost by virtue of byproduct production. And the steel industry only needs so much of it."