March 5, 2011 2 Comments
Going forward, the all-important price of mol will depend sensitively on the competition between supply and demand. For a price inelastic commodity like molybdenum, a relatively small demand-supply imbalance can cause huge price swings. Molybdenum is only a small component of overall steel costs, so manufacturers will pay what it takes to get their mol fix. Likewise, nobody’s hoping for a molybdenum engagement ring. If there’s more than enough mol to go around (as was the case in 1980, when steel-rolling improvements caused the usage of molybdenum in pipelines to crater) then the price collapses. I’m trying to build a quantitative model of this phenomenon.
There’s a very useful investor’s presentation on the Thompson Creek Metals website that contains the following .ppt slide:
The slide shows how world mol demand has increased over the past fifty years, and projects demand to 5 years and 10 years forward, assuming the average year-to-year production increase of 4%. The resulting expectation is that there’ll be 600 million pounds of production in 2015, and 740 million pounds in 2021. Given the difficulty in bringing new projects on line, those numbers seem like likely to support a robust mol price. But can we get confidence limits on these predictions?
I sampled the fifty one production numbers from the above graph with a one-sigma measurement accuracy of ~ ±5 million pounds per year, the resulting series, is:
I differenced the above sequence to get set of yearly percentage changes in demand. Assuming that these moves are serially uncorrelated on a year-to-year basis (and remembering, of course, that when you assume, you make an ass out of u and me) one can build foward trajectories for demand over the next ten years. Ten random example trajectories look like this:
After ten thousand ten-year trials, the average 2021 molybdenum production is 683±272 million pounds. The resulting distribution looks quite nicely log-normal. Central limit theorem in action:
So 740 million pounds in 2021 looks a little optimistic, but it’s within 1-sigma of expectations. Seems reasonable that you put your best foot forward if you’re doing an investor presentation…