Supplies tighten as aviation soars

"Good times are back," says the aerospace industry. Upshot for metals buyers: Prepare for inconsistent deliveries and increased prices.

By Tom Stundza -- Purchasing, 10/6/2005

Buyers of specialty alloys made from nickel, cobalt, titanium and beryllium metals may have to endure many months of headaches caused by concerns about supply, quality, delivery and price. Superalloys are used to make products for the petrochemical, nuclear energy and medical industries, but commercial aviation and aerospace consume almost 60% of these metals—and that high-flying manufacturing sector has begun a cyclical upswing.

The purchasing supervisor for a precision machined parts maker says that "aerospace metals already are in very short supply." And, leadtimes are out 70 weeks for some key mill products. "Business is up dramatically," according to the director of global purchasing for a manufacturer of components used in aircraft engines, "but such key raw materials as high nickel alloy steels, especially special shapes and tubing, are getting harder to obtain." Atop all that, buyers expect prices to remain high by historical standards.

At a recent meeting of the Aerospace Industries Association, Bradley Morton, the president of aerospace components firm Eaton Aerospace in Irvine, Calif., told attendees: "We're getting pinched between some very dramatically escalating material costs and leadtime extensions." That's because Boeing, rival Airbus and smaller jetliner makers expanded assembly over the past 18 months, and now expect aircraft deliveries to be robust through 2008. Reason: Recent airline traffic growth has outpaced fuel-efficient jetliner capacity and triggered a turnaround in demand for new-generation, fuel-efficient long-distance commercial airliners. In fact, aviation's latest rebound could last throughout this decade, if the military aerospace market comes out of its current funk.

All this props up the market for superalloys, the high-performance specialty metals containing at least 30% nickel and cobalt. There are about 400 different mixes of superalloys available for use in the aerospace industry (airfoil turbines), in industrial gas turbines (used in power generation, pumping stations and other activities), in the automotive industry (turbo wheels) and in medical products. Aerospace is by far the largest user of superalloys (60% by some estimates), followed by automotive.

Superalloys makers are seeing strong new-order bookings because commercial jetliners require long leadtimes—at least two years—from order to delivery. It takes quite a while for engines, myriad parts and blueprinted components to be manufactured and delivered to meet aircraft production schedules. Example: Package delivery firm United Parcel Service in January announced an order for 10 superjumbo A380 aircraft with delivery from Airbus starting in 2009. Then, in mid-August, UPS announced a "firm order" for eight new Boeing 747-400 jet freighters. Boeing Commercial Airplanes will deliver these airplanes, with their new General Electric-made turbine engines, between June 2007 and the end of 2008.

"These are the boom times," agrees David Napier, research director for the Aerospace Industries Association in Arlington, Va., "The new-order uptick began last year, and has been accelerating and we're expecting it to continue through next year."

In the first half of this year, the world's two largest aircraft builders have booked orders for a combined total of 690 large airliners—even more than the 633 airliners with at least 100 seats ordered from the two companies in all of 2004. Boeing Commercial Aircraft executives tell PURCHASING that all of the plane builders have expanded airplane model offerings and are striving to competitively price their products.

John W. Douglass, president of the AIA trade group says that today's aerospace industry is economically healthy. "U.S. industry sales alone in 2004 were $161 billion, the highest level of current-dollar sales in the industry's history," he tells the AIA membership in the 2004 annual report on business. "We expect sales to increase by 7.5% in 2005, fueled by increases in defense and commercial spending. Military systems and space-related programs accounted for $99 billion in aerospace sales in 2004 while civil aircraft revenue, including engines and parts, totaled $35 billion." And then there are the aerospace industries of Europe, South America and Asia.

Still, buyers are being cautioned that soaring prices and leadtimes for key metal-alloy materials are a cloud on the horizon by Wayne Ferguson of the Ferguson Metals high-temperature and stainless-steel service center company in Hamilton, Ohio. In an interview with PURCHASING, he accentuates the need of buyers to improve supply chain efficiency to keep costs down for their customers. "Aerospace and general aviation definitely are back in business," says the marketplace veteran, and that's become obvious when nickel-based alloy sheet went from six-month leadtimes to one-year leadtimes in a matter of weeks this summer.

The average modern jetliner consists of millions of pieces, parts, and sub-assemblies; the most important metal raw materials tend to be heat-treated aluminum, titanium and the superalloys. The average jetliner serves a useful life of more than 20 years. That is described by Boeing engineers as a very efficient use of raw materials. However, getting timely deliveries has become a problem, buyers report.

"Suppliers have become busier and the availability of specialty alloys material has become an issue," says the supply chain management director for a jet engine components maker. Superalloys supply is tight—with deliveries out 18 months or more—because of limited global supply. In fact, monthly buyers surveys by PURCHASING show that superalloys buyers have been accelerating their sourcing—and keeping the limited number of nickel, cobalt and titanium-based specialty metals busy of late.

For example, Allegheny Technologies' chief executive, L. Patrick Hassey, tells Wall Street analysts that sales in the second quarter ended June 30 increased 57% for the Pittsburgh-based company's high-performance metals segment to $301.6 million. By product group, shipments increased 14% for nickel-based and specialty steel alloys, 11% for titanium alloys, and 7% for exotic alloys.

And this has occurred despite the cost inflation impacting superalloys. Note that Allegheny Ludlum this summer announced price increases of as much as 10% for nickel-based superalloys and various other super stainless- steel and high-strength specialty alloys. Commercial executives at the Allegheny Technologies unit say the action on strip, sheet and plate was necessary because of the continuing rise in nickel costs and the fact that cobalt and tungsten increased by more than 100% in the previous year. So, in adjusting the alloys surcharge for nickel-based superalloys and other specialty alloys, the firm added tungsten and cobalt to the surcharge calculations that already include nickel, chrome, molybdenum, titanium and iron.

"Volumes are picking up and plant utilization is improving. It's not yet at pre-9/11 levels but it will be by the end of the year," says Mike Askew, divisional managing director for aerospace at Doncasters, which fabricates and machines superalloys in Melbourne, England. Askew tells sister Reed Business International publication Flight International of London that the rapid rebound in commercial aerospace has brought supply chain challenges. "The market remains very competitive and the recovery has been dramatic—in some areas we're struggling to get capacity back in place quickly enough," he says, although the situation is "generally better," with demand outstripping supply.

The superalloys market has a history of cyclicality. So, to understand what's been happening to the market recently, a review of recent commercial aviation history is necessary. Beginning in 2001, a confluence of events—weak U.S. and global economies, the terrorist attacks of September 11 and conflicts in the Middle East—had significant adverse effects on air travel and commercial aviation production.

The aviation/aerospace and superalloys downturn continued through 2003. Beginning in 2004 however, the world economies began to improve, air traffic demand rose significantly, commercial aircraft assembly began to improve and defense spending continued to grow—leading to a rebound in the demand for superalloys, titanium and other specialty metal products.

Boeing and Airbus reduced their build rates for aircraft to 586 planes in 2003, a 13.5% reduction from the prior year. However, a turnaround began in 2004, with the two major producers delivering 605 new aircraft. "These statistics confirm that the market is slowly recovering from the downturn of the first half of the decade," says Airbus' president, Noël Forgeard in commentary accompanying the data release. "That's why we are very confident in the long-expected growth of the air travel industry, which needs seats to cope with the ever-increasing demand for air transportation."

Overall, the U.S. aerospace industry is on track in 2005 to its best year in terms of orders and shipments since 1992. The industry logged $98.9 billion in net new orders through June, which will total $197.7 billion for the year if the trend continues. This compares to $164.9 billion in 2004 and would be well ahead of the previous peak (2000's $166 billion). Shipments totaled $83.5 billion through June, which would amount to $167 billion by the end of 2005 if the trend remains. That would outdo the $158 billion in 2004, the best year on record since 1992, the Aerospace Industries Association suggests.

According to the Airline Monitor, which tracks commercial aircraft market trends, the combined production of large commercial aircraft by Boeing and Airbus is forecast to reach 690 aircraft in 2005, 785 aircraft in 2006, 825 aircraft in 2007, and 880 aircraft in 2008. Even suppliers are forecasting the commercial aerospace sector will continue to be a very large consumer of superalloys, titanium and beryllium copper products over the next two decades due to the forecast need to repair and replace aging commercial fleets.

Airbus is producing the largest commercial aircraft in production, the A380, and Boeing has launched a totally new aircraft, the 787. Airbus is expected to produce another new aircraft, the A350, to compete with Boeing's 787 model. All three of these new aircraft will use substantially more superalloys per aircraft than the preceding models. As a result, when production of these new aircraft increases, the demand for superalloys is expected to increase significantly above previous peak markets for commercial aerospace applications.

And that could keep pressure on superalloys supply and pricing. The recently updated forecasts for materials demand ahead by the commercial aircraft industry "supports our belief that the titanium industry is in the early stages of the business cycle and that the current uptrend will likely continue through 2006 and beyond," says the most-recent report by management of producer Titanium Metals Corp. in Denver. "Over the past several quarters, the company has seen the availability of raw materials tighten, and, consequently, the shortage in raw materials (which include sponge, scrap and alloys) is likely to continue throughout 2005 and into 2006, which could limit the company's ability to produce enough titanium products to fully meet customer demand."

A new platinum-based superalloy is being developed to allow aircraft turbines and power generators to run more efficiently at higher temperatures than the nickel-based superalloys typically used in turbine blades. "We've got some very, very nice results which are comparable to the materials we're trying to replace, but ours can go to higher temperatures," Lesley Cornish, a scientist who heads the Platinum Development Initiative in South Africa, tells Reuters News Service. However, she believes widespread commercial use is still many years away.

The alloy-development project is being led by South African metals research institute Mintek. The idea is to create materials that can withstand higher temperatures because the higher the temperatures at which turbines can operate, the greater the efficiency—allowing less coal to be used in power plants and less fuel to be consumed in jet engines. Nickel superalloys can withstand temperatures up to around 1,150 degrees Celsius, but platinum should allow the new materials to remain solid at heat up to 1,350 degrees Celsius, says Cornish in a press release. The new material also is more resistant to corrosion and last longer than existing superalloys.

The research initiative—funded by the South African government and top platinum producers Angloplat, Implats and Lonmin—has five full-time researchers at Mintek in Johannesburg. Also assisting in research are scientists at four South African universities and six other institutions in Germany, Britain and Japan. The Japanese researchers also are working on superalloys using platinum group metals ruthenium and iridium. Replacing nickel alloys in aircraft turbines is a long-term goal for the group, which plans its first field trial at the end of 2005, six years after the research was launched.

The South Africa-based newsletter, Resource Investor, says Mintek scientists are seeking a South African firm to allow them to substitute a small component such as a nozzle or valve used in manufacturing with one built from the new platinum superalloys. After using several small niche applications to prove the alloy works outside the laboratory, the group wants to convince manufacturers of turbines used for power generation to adopt the superalloy. "To get into that market is very difficult ... in some ways the turbine industry is actually pretty conservative — they have to be because the consequences of failure are quite high," Cornish says.

A downside of the new alloy is that it is more expensive than nickel alloys. A higher cost, however, is expected to be recouped since materials built with the new alloy should last longer.