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Aero growth set to buoy aluminum demand

Mar 26, 2014 | 09:57 AM |

Tags  aerospace, Boeing, Airbus, Alcoa, aerospace outlook, aircraft production, Andrea Hotter

NEW YORK — Historically high order books at Boeing Co. and Airbus SAS are set to keep the aerospace industry buoyant for some time.

The two aircraft makers have combined orders for around 8,000 planes, and both companies are starting to ramp up their production schedules. Analysts expect annual deliveries to exceed the record 1,000 aircraft over the next five years. This translates into continued demand for aerospace aluminum, even if the metal is in danger of losing its position as king of the raw materials used in that sector.

It is a growth story that the industry’s key metal suppliers are banking on.

Alcoa Inc., which supplies both Chicago-based Boeing and Toulouse, France-based Airbus, received more than half of its Engineered Products and Solutions division revenue from the aerospace sector last year. It expects global aerospace demand to grow 7 to 8 percent this year, 9 to 10 percent in 2015 and 8 to 9 percent in 2016.

Newer twin-aisle aircraft, such as Boeing’s 747-8 and the Airbus A380, are flying with newly developed Alcoa sheet and plate products, aluminum-lithium extruded floor structures and the world’s largest fuselage panels and wing skins.

Even the more composite-intensive jetliners rely on Alcoa products, from aluminum-lithium commercial aircraft plate on Boeing 787s and aluminum-lithium extruded floor structures for A380s, to new-generation fasteners developed specifically for primary composite structures.

Pittsburgh-based Alcoa clearly expects this demand to continue. The company signed a multi-year supply agreement with Airbus in December valued at approximately $110 million for value-add titanium and aluminum aerospace forgings (, Dec. 16). In October, it took the first step toward forming a joint venture with Russia’s VSMPO-Avisma Corp., the world’s largest manufacturer of titanium ingots and forged products, which is set to be operational in 2016 (, Oct. 22). It is too early to know if the planned joint venture will be impacted by proposed sanctions over Russia’s move in Crimea, but for the moment “our businesses and partnerships in Russia are functioning normally,” an Alcoa representative said in a statement (, March 13).

It’s a similar story with other suppliers. Cleveland-based Aleris International Inc. is producing commercial plate at a new hot rolling mill in China and will start supplying aerospace plate once it gets all the necessary permits.

According to Unai Franco, a capital goods equity analyst at New York-based Standard & Poor’s Capital IQ, the strong aircraft order intake the industry is experiencing is being driven by three key factors.

The first is economic growth in developing nations that has created a strong rise in air travel and new start-up airlines. “Emerging territories now account for over 50 percent of Boeing and Airbus’ combined order books, with Asia the largest region, accounting for 30 percent,” Franco said.

The International Air Transport Association, the trade organization of airlines, estimates global passenger air traffic grew 5.3 percent in 2012 and 2013 and is predicting 6-percent growth in 2014.

Another factor driving aircraft demand has been the rising cost of fuel, Franco said, which accounts for around 30 percent of airlines’ costs. “New aircraft developments have specifically been aimed at helping airlines reduce costs and both the Boeing 787 and Airbus A350 are considered to be 15 to 20 percent more fuel efficient than their current equivalents,” he said.

Finally, tightening environmental regulations also are driving demand for new aircraft. “The European Union will be including the aerospace sector in its Emissions Trading Scheme, which requires the purchase of credits once emissions exceed certain limits. Given the likelihood of continued growth in air travel, we believe this legislation will hasten the replacement of old aircraft,” Franco said.

But some analysts fear that aircraft manufacturers could be overproducing.

“It’s an impossibly high base year, with production having more than doubled in half a decade. The industry is running the risk of creating a bubble, and a balance needs to be struck,” said Richard Aboulafia, vice president of analysis at Teal Group Corp., Fairfax, Va. “The industry could be building for a colossal burp after watching costs and rates rise as new planes are produced.”

There also is increased competition from composites, particularly with Boeing’s 787 Dreamliner.

Aboulafia said the battle of raw material suppliers is a back-and-forth process, with aggressive marketing from competing sectors. “The Rolls Royce receivership in the 1970s was due to its use of composites in its engine. It became the watchword for overreach,” he said.

Composites have been used on business jets, but all except one failed, Aboulafia noted. The jury is still out on the latest release, which will be Montreal-based Bombardier Inc.’s Learjet 85.

“Companies are naturally drawn to the innovation story, but it is easy to oversell technology. This is the oversold nature of the composite revolution,” Aboulafia said.

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