Increasing rig count bodes well for moly in short term 0...

Increasing rig count bodes well for moly in short term
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By: Liezel Hill
6th July 2009

Updated 1 hour 25 minutes agoTEXT SIZE TORONTO (miningweekly.com) – Recent increases in the number of oil rigs in use around the world should have positive implications for molybdenum demand in the near term, say analysts at New York-based Dahlman Rose & Co.

A significant percentage of molybdenum consumption is used in the production of steel pipes for the oil and gas industry, so that, while overall steel demand is an important indicator for molybdenum, the consumption of steel for these pipelines – known as oil country tubular goods, or OCTGs - is even more significant, analysts Anthony Young and Anthony Rizzuto wrote in a research note on Monday.

A weekly rig count published by Baker Hughes has increased for three consecutive weeks, after declining for 28 of 30 weeks before the recent increases.

“While we believe that there are inventories of OCTG's to be worked through at service centres and in the field, we note that molybdenum prices and the rig count are correlated with a 0,85 correlation coefficient, a strong relationship, in our opinion,” the analysts said.

“Thus the recent increase in rig counts should bode well for molybdenum prices in the near-term”

Molybdenum traded on the spot market above $30/lb during the first half of last year, but fell off sharply in October, bottoming at below $8/lb in April 2009.

It has since recovered to around $10,80/lb, after producers cut production sharply and as demand starts to return to the market.

However, Young and Rizzuto reiterated that significant strengthening of the price will likely prompt Chinese producers, many of which were rendered uneconomic by the fall in prices, to restart shuttered production.

Further, two North American producers – Freeport McMoRan Copper & Gold and Thompson Creek – could also add as much as 16-million pounds to the market relatively quickly.

“This spare capacity effectively caps how high molybdenum prices may trend over the near-term, in our opinion,” the analysts said.