Rio Tinto expects molybdenum price to remain high
Source: Hoovers
Rio Tinto Ltd. (RTP) expects molybdenum prices to remain high and will continue taking advantage of this by sacrificing some copper production at its U.S. operations.
The company has told analysts on a visit to its Kennecott copper mine in Utah it expects a strong market for molybdenum over the next 12 months, with prices around US$20 a pound.
The miner has boosted production of Molybdenum, used largely in metal alloys, at Kennecott to take advantage of the prices.
It has told analysts molybdenum production is set to fall 11% to 34 million pounds in 2006 due to lower grades but could stay at about 80% of current levels until 2015.
Mine managers expect copper production to be steady at 275,000 short tons a year through to 2008.
Soaring copper and molybdenum prices have made Kennecott a key performer for Rio Tinto, contributing 26% of earnings in the first half.
Goldman Sachs JBWere analyst Neil Goodwill said the company\\'s guidance for molybdenum production to fall around 11% was better than expected and could boost earnings forecasts.
"This would be 11 million pounds higher than our current estimate and at spot prices would add about US$300 million to revenue or about US$200 million to net profit," he said in a client note. "We will review our earnings at the end of the trip."
Analysts have also been told that the commercial and residential development of some of the 93,000 acres of land the miner owns around Kennecott is well underway.
The land is near the fast growing region of Salt Lake City basin and analysts have been told its development could add between US$30 million and US$40 million a year to Rio Tinto\\'s net profit.
Input costs have risen at Kennecott and ABN AMRO said the most serious problem was with tire wear at the 103-year-old Bingham mine.
"The biggest challenge is the shortage of tires with the steep grades, hard rock and long haul distances making it difficult to get the same tire life extension as other mines," ABN AMRO said in a client note.
However, Merrill Lynch analyst Vicky Binns said costs looked to be under control and should be flat in 2006 with the ready availability of labor from Salt Lake City helping keep labor costs down.
"Bingham has seen cost increases from higher diesel and steel prices and some higher power charges but generally no big increases as far as labor for their own workforce or for the contracting workforce is concerned," she said.
The mine\\'s life has been extended to 2019 and a dedicated team has been set up to look at extending this further, either through open pit extensions or moving to underground mining.
http://metalsplace.com/metalsnews/?a=7011
Molybdenum Myopia, Part 2
By Jack Lifton
14 Aug 2006 at 12:05 PM EDT
DETROIT (ResourceInvestor.com) -- Irish Public Broadcasting (RTE in Gaelic) reported today that ?Replacing Alaska pipeline may cost BP $100 million.?
A BP [NYSE:BP; LSE:BP] source says the oil firm expects the replacement of corroded pipelines at the Prudhoe Bay oil field in Alaska to cost around $100 million, but the total cost to BP will likely be several times this figure.
The expected cost includes around $20-$30 million for the steel pipeline, well above the $15 million that steel analysts have predicted.
The BP source said the higher than predicted cost was because the company was "a distressed buyer"?.
Think of the feeling in the pit of your stomach as you look at the pavement where you last parked your car and see a patch of oil that must have leaked from its engine somewhere. God, you cry to yourself, it?s going to cost a fortune to fix the thing, and I don?t have the money, or I had planned to use the money for something else. But unless you are a reader of Resource Investor, you are not in the least concerned about your dealer or your repair shop being able to get the (expensive) parts they will need to fix whatever is wrong.
Unfortunately this is where the analogy breaks down for the oil producing industry. So, there is an opportunity for the little guy to make some money.
First of all what?s the problem in Prudhoe Bay, Alaska, and what?s it got to do with molybdenum anyway?
I personally think that British Petroleum?s local, Alaska, budget manager needed to skimp on something, and I?ll bet that whomever it was noticed that the molybdenum sulfide anticorrosion grease used to protect internal joins and welds on the carbon steel pipe used to transport crude from the oil field collection centers to the main pipelines had gone up in price dramatically in a short time. This graduate of a key business school then asked ?what is this stuff?? and was told that it was for protecting joins and welds from corrosion. I?ll bet that he told his cowering staff that we?ve got to cut back on this anticorrosion stuff to where it will just do the job, or I?ll get a poor review for performance to budget. The suits then told the collection and transfer station managers to cut back on the expensive anticorrosion stuff, and they told their parka-over-blue jeans types who actually do the work to cut back on the anticorrosion stuff. This is just what happens when children at a round table are told to whisper to the person next to them something they have heard from the person next to them. The words that the children and (in this case, accountants and others whose bonus is dependent on performance to budget) don?t understand, just disappear. And I\\'m alone in this theory.
Something like this set off a chain of events.
First, less very expensive anti-corrosion chemical additives were added to the oil flow than were necessary to limit the well known wearing out of the pipe to a manageable level, even though this was critical so that leakage and downtime could be avoided by maintaining the already worked out maintenance schedule for inspection and replacement;
Second, less very expensive molybdenum sulfide grease was used on the joins and welds, and;
Third, expensive maintenance schedules were not increased to take into account the lesser protection from corrosion.
The final result was less usage of expensive anti-corrosion additives in the oil flow, less usage of very expensive molybdenum sulfide grease on the joints and welds, and most importantly, fewer inventory turns of expensive and very expensive chemicals as well as a smaller inventory of very expensive oil field grade steel pipe and valves. Oh, and I almost forgot, less man hours of very expensive skilled labour for maintenance.
A lot of workmen noticed the degraded maintenance, because they saw leaks and patch jobs (temporary repairs) start increasing as long ago as 2004. The newspapers are trumpeting the story of how the workers complained to their ombudsman in Alaska about the dangers to themselves and to their jobs. Congress, of course, and the Alaskan politicians will either hold hearings or sue as in this story.
British petroleum planners and budget managers were well aware that strategic products for the maintenance of their operation such as special oil pipe (tubular products as they are called in the oil industry) were getting hard to find off-the-shelf, because of incredible world demand. Since demand was exceeding supply no one whose bonus depended on performance to budget wanted to order or suggest ordering extra inventory.
Anticorrosion chemicals and molybdenum disulfide grease were also getting much more expensive due to vastly increased demand for petrochemicals and for molybdenum.
The result was that the BP management was shocked, shocked I say, that suddenly a 16 mile section of their operation had to be shut down due to leakage and then it was suddenly discovered that all 16 miles of pipe, valves and pumps had to be replaced. If BP restates bonuses paid for performance to budget to take into account the losses from this ?unforeseeable accident,? I?m afraid that a lot of its managers and executives will need to put off buying Dom Perignon for their barbeques.
One solution to BP?s problem would be to replace all of its transfer pipe with stainless steel, but this would cost, just for the pipe, if they could find it at current market prices, three times as much as carbon steel pipe, and welding and joining stainless steel is much more expensive than doing the same with ordinary steel and takes a lot more time!
The China Post had an article on August 10, 2006, about this problem of BP?s entitled ?BP search for pipeline steel no easy task.? Of interest to investors are the following excerpts from the article:
?BP PLC plans to replace about 16 miles (25 kilometers) of pipeline at its Prudhoe Bay, Alaska, oil field. That\\'s a small run in pipeline terms, but a big leap when it comes to getting the steel necessary to make the repairs.
?Companies are having to go farther a field to service the world\\'s growing demand for energy, which has driven demand for large-diameter, tubular steel used to build the pipelines that bring oil and gas back to civilization.
?In the past, though, the business proved too cyclical for many steelmakers, leaving only a few major North American suppliers - Ipsco Inc. [NYSE:IPS; TSX:IPS]; Oregon Steel Mills Inc. [NYSES]; and Berg Steel Pipe Corp. of Florida, which is partly owned by Salzgitter AG [OTCPK:SZGPF].
?It\\'s been difficult for those remaining companies to keep up with recent demand. Ipsco\\'s tubular steel business is sold out through the third quarter of 2007 ?.
??This is the hottest stuff out there,? independent steel analyst Michelle Applebaum said.?
BP found severe corrosion and a leak in a 30-inch (76-centimeter) diameter, low-pressure feeder pipe that runs between two of its pumping stations at Prudhoe Bay, according to government officials.
Replacement pipe of the quality necessary to transport oil across Alaska\\'s tundra will likely cost about $100 a foot (30 centimetres), and the publicity surrounding BP\\'s immediate need for the product could further boost prices, according to steel-industry sources. There will also be substantial costs for removing the old pipe and transporting and installing the new steel on Alaska\\'s tundra? the approximately US$8 million to US$10 million cost for new pipe isn\\'t likely an issue for BP. Getting the steel certainly could be (emphasis added).
??Oregon\\'s tubular division head estimated pipe availability would be difficult from any of the world\\'s top tier producers,? UBS analyst Timna Tanners said. ?If a production schedule could be interrupted, minimum delivery could be two months from a domestic mill and four months from overseas.? ?.?
I would certainly recommend looking at the stock of all of the tubular steel product producers named above. They are all survivors of the last shakeout, and, like the lady on a troop train, they don?t need to solicit attention. BP?s problem of finding supplies will reoccur each time an unforeseeable accident of this type happens anywhere in the oil producing world to anyone.
Now as for molybdenum. I wrote about its supply, demand, and domestic sourcing situation earlier this year. I called my article Molybdenum Myopia. I urge you to revisit that article and another article entitled Strategic Metals-Molybdenum. You will then be prepared to understand much more than some of BP?s Alaskan operations managers about the price, the supply and the demand for molybdenum, ferromolybdenum and molybdenum chemicals as they critically affect the oilfield operations segment of the global petroleum industry.
Keep in mid that as of now China, for all intents and purposes, controls the supply of molybdenum and ferromolybdenum in the U.S. Chinese demand is also the engine of molybdenum and ferromolybdenum supply in the world. Molybdenum is primarily a secondary product of copper and gold mining. Read all such prospectuses carefully to see if the mining company has recognized the existence and the value of the molybdenum. If not, ignore the prospectus.
So, even when BP finds the pipe it needs, and the specialized workers, it will surely have to take molybdenum sulphide grease from another of its locations to meet the large demand it will suddenly have for this product also. It will surely be competing for molybdenum products with an increased global demand fuelled by BP?s own problem as every oil producer on earth does an emergency inspection of every running foot of pipe and re-greases every tubular oil product join and weld on earth.
Perhaps the Phelps Dodge [NYSED] molybdenum mine reopening at Climax, Colorado is reason enough to take a look at Phelps Dodge. The price of stainless steel will go up if molybdenum and ferromolybdenum go short due to this unexpected demand.
http://www.resourceinvestor.com/pebble.asp?relid=22727
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