Reduced titanium purchasing in 2008 may just be a bump in the road
Long-term projections still show titanium demand on the rise.
By Tom Stundza -- Purchasing, 8/14/2008 2:00:00 AM
Purchasing of titanium is stagnating this year, even with prices off somewhat from year-ago levels, mostly because of delays in constructing Boeing's next-generation 787 jet and Airbus'A380. However, purchasing of titanium is expected to increase long-term when airlines accelerate the buy of new fuel-efficient jetliners powered by engines from Rolls-Royce, General Electric and Pratt & Whitney.
Longbow Research analyst David MacGregor in Chicago says that titanium producers Allegheny Technologies, Titanium Metals and RTI International Metals have been scrambling to find replacement markets for swelling inventories. There is a lot of titanium metal in the processing and metalworking pipeline because it can take up to 18 months for parts and components to be attached to in-production aircraft.
Buyers surveyed so far this year see no supply problems with titanium. Leadtimes have shrunk to an average 10 weeks this year for titanium mill products from 13 weeks in 2007 while titanium-based superalloys are delivered on average in 13 weeks from 15 week last year. Deliveries may get even quicker next year, suggest the analysts who now expect new-metal sales to be soft through 2009 because of the assembly slowdowns of the two keystone commercial jetliners of the future.
Prices for titanium can be highly variable from sponge to ingot to mill products. Atop that, aerospace-grade sheet and plate sell at high premiums from commercial flat-rolled products. Over the past year, increases in global titanium sponge capacity have increased availability of titanium sponge and scrap to mill product manufacturing plants, which has resulted in declining costs for these raw materials.
This is just one of the reasons for titanium's well-known price volatility. The other factors are the historic cyclicality of demand from aerospace industries, changes in defense spending, supplier competition, the success of new market development, availability and prices of raw materials and long-term supply agreements.
"This recent decline in raw material costs, in turn, has contributed to lower selling prices for our products due in part to raw material indexed pricing adjustments under certain of our long-term agreements, as well as contributing to lower selling prices for our non-contract sales volume," according to a recent quarterly report to the Securities and Exchange Commission (SEC) by Titanium Metals Corp. (Timet) of Denver. And that meshes with monthly buyer surveys which show that the average prices for a market basket of mill product prices at midyear 2008 are 5% below the end-of-2007 level. For the year, Timet and other producers anticipate that titanium prices will remain below 2007 levels.
Titanium is used in the airframes of jetliners and, as a superalloy resistant to heat, a key component in rotors and other aircraft engine parts that allow them to operate at much higher temperatures and, thereby, save jet fuel. However, MacGregor says in a research note that the recent slowdown in aerospace metal offtake this year and next has caused titanium producers to seek sales in such other markets as heat exchangers in oil and gas production facilities, petrochemical equipment, turbine engines for industrial power plants, military aerospace, pollution control equipment, medical equipment and prosthetics, sporting equipment and other consumer products.
Titanium producers will be able to tread water for a time by emphasizing sales to such strong non-aerospace titanium markets as energy, chemical processing and mining, suggests analyst David Lipschitz at Merrill Lynch & Co. in New York. But, he adds that until the new twin-aisle Boeing 787 build out truly commences, buyers in the short term may experience volatility in supply and pricing. "Once the build out occurs, though, we believe supply tightness will return to the titanium market," Lipschitz says, adding that titanium prices will then increase.
"For the titanium companies, there's still no place like aerospace," MacGregor agrees. "The last time there was a rally in titanium was in 1998 and 1999; at that time, we were getting excited about golf club heads and eyeglass frames —you can [imagine] how much titanium that consumed. This time, it's jets. It shows how dependent the industry is right now on the commercial aerospace story."
In its SEC filing, Timet agrees that commercial aerospace applications will remain the leading driver for long-term growth in industry demand despite the revised production schedule for the Boeing 787 Dreamliner adjustments and delays in certain other commercial aircraft build-out schedules, which "are contributing to near-term demand volatility." Part of that long-term optimism is based on the fact that "Boeing and Airbus, the primary manufacturers of commercial aircraft, have reported increased backlogs for their numerous aircraft products thus far in 2008."
Charles Armitage, analyst at Merrill Lynch & Co. in New York, points out that the new Boeing 787 Dreamliner airframe is expected to require approximately 250,000 lbs of titanium alloys mill products per aircraft, a significant increase over the use of the lightweight metal in any previous commercial jetliner airframe.
Boeing also has 78 firm orders from 11 customers for the new 777 Freighter, which starts going to service in the fourth quarter once it earns certification from the U.S. Federal Aviation Administration and Europe's Joint Aviation Authority.
Larry Loftis, vice president of Boeing's 777 programs, says the freighter will be capable of flying 4,885 nautical miles with a full payload, making it the world's longest-range twin-engine freighter. "The airplane's range capability will translate into significant savings for cargo operators with fewer stops and associated landing feeds, less congestion at transfer hubs, lower cargo handling costs and shorter cargo delivery times," Loftis says in a statement.
With that demand coming soon, Timet, RTI and Allegheny Technologies have been moving ahead with plans to boost future capacity for sponge, ingot and mill products.
Timet, for example, started commercial production in the first quarter of this year for a new 8,500 metric ton/year electron beam melt furnace in the U.S. The firm also plans to open new vacuum-arc remelt (VAR) furnaces this year in England and France. Allegheny Technologies, meanwhile, says it is on schedule to complete a new 24 million lb/year titanium sponge facility in the U.S. by the end of this year. Allegheny already has a 22 million lb/year titanium sponge facility.
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