Demand has collapsed and no rally is expected now until 2005
Tom Stundza, Executive Editor -- Purchasing, 10/9/2003 2:00:00 AM
Purchasing of superalloys has fallen dramatically since 2001, and probably won't really improve until quite some time in the future when manufacturing by the aerospace and power generation industries recovers. Producers, distributors and analysts agree the end-use markets for high-performance special alloys are hugely depressed. Their take: Commercial airframe build rates do not look to turn up until 2006, which means aerospace orders will not begin to improve until mid-2005 at the earliest. Nonaerospace market segments won't begin to improve until sometime in late 2004.
Various market studies in 2000 and 2001 had suggested growth for superalloys in a broad range of components used in the automotive, aerospace, electronics/thermal management, sporting goods, nuclear and electrical power generation industries. Instead, the unexpected downturn in superalloys demand after Sept. 11, 2001 has continued unabated and has led to production cutbacks, poor fiscal performance and bankruptcies among suppliers. Superalloys consumption is being projected at less than 110 million lb this year, the lowest end-use level since 108 million lb in 1995.
Although producers such as Specialty Metals, Allegheny Technologies, and Carpenter Technology thought last year was the bottom of the demand decline, analysts generally disagreed—and have been right. Further demand declines have continued this year and only marginal growth recovery is being forecast for 2004. Special Metals continues to pursue a plan of Chapter 11 bankruptcy reorganization while Carpenter and Allegheny Technologies are dealing with the softness by shifting their marketing focus to industrial, medical applications and energy industries.
"The near-term outlook for aircraft manufacturers is not favorable, as struggling carriers continue to defer purchases of new planes," says analyst Rebecca Eby at Global Insight in Eddystone, Pa. "The slump in civilian aerospace is expected to last through at least 2005." She suggests that production levels "look pretty dismal" for the next several years. Defense spending on aircraft, engines, missiles, and parts has helped large aerospace conglomerates weather the downturn in commercial aviation, she adds, "but the growing federal deficit could mean less money in the future for such big-ticket items as the Joint Strike Fighter."
Meanwhile, "the power-generation market has gone from boom to bust," adds economist Kenneth Kremar at Global Insight offices in New York City. "Production of engines, turbines, and power-transmission equipment increased steadily from 1996 through 2000, says Kremar. The next two years were rough, with production dropping 8% in 2001, 9% in 2002 and another 7% this year. "The recovery in power generation machinery and equipment will be fragile in its early stages," he forecasts, "with production of engines, turbines, and power-transmission equipment slated to advance by just 3% in 2004 and 7% in 2005."
Buyers aren't complaining
With the two key markets in disarray, supply hasn't been an issue for buyers. Leadtimes for delivery of superalloys have dropped from more than 10 weeks at the start of 2000 to about 7 1/2 weeks this summer. Prices for superalloys have slipped 2-5% in the past eight-plus months and are down 15-17% over the past year. That's why suppliers have been struggling. Special Metals of Huntington, W. Va., the world's largest superalloys producer, has been trying to reorganize out of bankruptcy for almost a year, but it hasn't been easy.
"Like most manufacturing businesses, we became adversely affected by the events of Sept. 11, 2001, and then the general downturn in the manufacturing economy," says Dennis L. Wanlass, chief operating officer. "There has been significant reduction in demand for nickel-based superalloy and other special alloy products from the land-based power generation and thermal processing end-markets as well."
Wanlass adds: "And there's been a further deterioration of business conditions in the commercial aerospace sector this year," since the space shuttle Columbia disaster. Streaking through the atmosphere at 18 times the speed of sound, Columbia disintegrated over Texas on the morning of Feb. 1, about 15 minutes before its scheduled landing at the Kennedy Space Center in Florida.
Superalloys distribution executives agree the market is mired in one of its deepest slumps ever. "The market is down to an extreme degree because business just isn't there," adds H. Wayne Ferguson, president of Ferguson Metals Inc. in Hamilton, Ohio. Compounding the problem of the superalloys producers has been the dramatic decline in demand from the gas turbine market.
"Land-based gas turbines were supposed to be the savior for superalloys suppliers, but it hasn't worked out that way," Ferguson says. At a metals market conference two years ago, Luigi La Braca, technical director of nickel-based alloy manufacturer Ross & Catherall of Sheffield, England, made a highly publicized projection of 250% growth in superalloys demand this decade, particularly in industrial gas turbine power generation.
However, "the natural gas supply crisis has turned the market against gas-fired turbines, which were all the rage just a short time ago," says Kremar at Global Insight. Demand growth over the near term is not expected to be robust; therefore, supply is not expected to be a problem—even with the turbine-manufacturing sector operating at less than 75% of capacity."
General Electric expects jet engine deliveries to dip between 15-20% in 2003 for the second consecutive year.
With fewer aircraft being built and a falling need for aircraft-related parts and equipment, one needs to gaze at least two years into the future to find any glimmer of hope for superalloys in the aerospace market, according to Bob Mraz, vice president of sales and marketing at TW Metals, Exton, Pa. Ferguson agrees: "I don't see anything big changing; I don't think we'll see any turnaround for some time to come. In fact, you hear talk that it won't be until late 2004 or 2005 before we see some demand growth again." However, U.S. producers will be facing stiff competition from foreign sources once the industry does turn in 2004.
Jetliner assembly is down
Aviation market analysts still are expecting "steady performance" from aerospace-related businesses in 2004-2005. However, "given the low level of order intake for regional jets over the past six to seven quarters and the relatively high level of production, there is some risk that production of regional jets could be reduced if significant new orders don't occur in the next few quarters," says analyst Robert Fay at investment bank Canaccord Capital in Toronto.
As for commercial jet assembly, "the current short-term cycle is severe," says Tim Meskill, director of market analysis for Boeing Commercial Airplanes in Seattle. "The airline industry is in the midst of the most serious short-term downturn in modern aviation history." World traffic dropped in 2001 and has showed no growth in 2002 and 2003." For that reason and because of a continuing depressed market for new airliner sales, Meskill says Boeing has changed its outlook for 2003 airplane deliveries, downgrading them from between 275 and 300 airplanes to between 275 and 285 airplanes. "The company expects 2004 deliveries to be similar to 2003," he says, forecasting deliveries of 275 to 290 jets next year.
Meanwhile, a top executive at European plane maker Airbus still aims to deliver 300 jetliners, but declines to give a forecast for 2004. Chief Commercial Officer John Leahy says Airbus, which is majority-owned by Franco-German aerospace firm EADS, had suffered 24 order cancellations in the first seven months of 2003 because of weaker passenger demand. Leahy says Airbus' 2004 deliveries "will be in line with this year's level, give or take 10%." Many analysts doubt the Toulouse-based company will be able to deliver 300 planes this year amid a crisis in the airline industry. Analyst David Strauss at investment bank UBS in London, for example, predicts that Airbus and Boeing would see deliveries slip to 270 and 250 jets, respectively, next year.
The slump in jetliner assembly is evident by looking at consumption of nickel-based superalloys, which comprise more than 50% of the weight of the advanced-turbine aircraft engines. Purchasing is on track for a five-year low of 66.5 million lb.
Purchasing of titanium mill product has remained flat since the third quarter of 2002. "While not definitively rebounding, the industry can at least say it has hit bottom," says analyst John Mothersole at the Global Insight office in Washington. He and other mavens suggest that consumption will rise 3% to about 37 million lb in 2003, "with all the growth coming in the last half of the year." Still, he says, "this level of use would mark the worst two-year stretch since 1993-94." Although there are few substitutes for titanium in aircraft and space use, graphite-based materials may displace some titanium used in future military aircraft. And, for industrial uses, high-nickel steel and zirconium may be substituted for titanium-based superalloys. However, some producers expect to emulate Nippon Steels sales of titanium alloys to Nissan and Subaru for automotive mufflers.
The slump in the aerospace and power generation industries in 2002 led to a fall of 10% in chromium metal consumption over 2001. The analysts say this market could decline further in 2004. Record summer heat in Europe boosted global demand for cobalt metal; not for superalloys production, but for wear parts of nickel-cobalt alloys in industrial, commercial and residential air conditioning. As the weather has cooled, though, so has demand and pricing for cobalt-based alloys.
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