A shortage of raw materials is a hot issue in the metals industry today, a problem that carries over into those markets that depend on a steady supply to get their products built. The helicopter market is a prime example.
The helicopter industry is booming, with order books on the verge of overflowing as more offshore drilling platforms are erected. Yet the industry can't keep pace with demand, with wait times for parts stretching as far out as two years—and the gap between placing an order and the delivery of a helicopter isn't expected to narrow in the near term.
At present, builders average 18 to 24 months to make a helicopter, and the process is so heavily reliant on the timely delivery of components that if a customer needs a helicopter sooner they'll have to pay a hefty premium to get it.
The world's largest helicopter fleet operator servicing offshore oil rigs, CHC Helicopter Corp., Vancouver, British Columbia, is expecting significant growth in its business and plans to acquire between 50 and 70 new helicopters in the next three to five years, according to analysts. Of that, around 20 to 30 percent will be replacements for aging aircraft; the rest of the machines will be needed to service new offshore oil platforms.
On a global basis, about two-thirds of civilian helicopter flights are linked to oil and gas production activities, and of that about 10 to 15 percent are tied to drilling activities. According to Baker Hughes Inc., 296 offshore rotary drill rigs were in operation in July, up 27 from a year earlier and a gain of 79 rigs since July 2001. This growth has helped drive demand for civilian helicopters, but there are questions over how long the boom can last.
Several analysts said they expect the growth rate in offshore oil drilling will flatten out soon, leaving the helicopter market saturated in three to four years' time. Others said that new deep-water oil discoveries will increase demand for rigs that can operate further from shore, thus fueling demand for newer helicopters with increased range and capacity.
"The oil price is pretty high overall and the helicopter industry is more correlated to oil prices than gas prices. The oil price will be sustainable for the next few years, but in terms of drilling we may start to see things plateau three to four years down the line," an analyst in Calgary, Alberta, said. "In terms of helicopters, everybody is building new equipment and in three to four years' time the market will be saturated."
But another analyst said he sees strong helicopter demand outstripping supply for at least another 10 years. Richard Aboulafia, vice president of aerospace and defense industry research firm Teal Group Corp., pegged civilian helicopter production at 7,138 machines by 2015, representing about $28.9 billion in capital. The influx of new helicopters will represent around 100-percent growth over production the previous 10 years, when companies pumped out $15.6 billion worth of civilian helicopters. This year alone, Aboulafia forecasts deliveries will total a record 677 machines valued at $2.8 billion, up from 539 deliveries worth about $2.1 billion last year.
A third analyst agreed, saying that while the peak in offshore oil rig use might be around the corner, he is not convinced that helicopter demand will peter out anytime soon. "I think it's tough to say when the market will be saturated. The offshore oil industry may have peaked in some regions, but there are still plenty of areas that remain to be explored," he said. "It seems that all the oil platforms you can see from the shore have already been drilled, so now you have to go further offshore, and this creates the need for more helicopter miles. And it's not just the number of platforms you have to consider, but it's the distance—that will also propel demand for more helicopters."
In addition, the increased distance between drilling platforms from shore will drive more stringent safety standards. "Standards aren't going to slacken over time, so these guys will demand safer service as a requirement," the analyst said. "And to meet those higher standards, they will require new helicopters."
The combination of more stringent safety standards and larger helicopters needed to go further out to sea will mean higher-priced machines, analysts agreed. Still, they note the industry has already absorbed the rise in raw material costs over the past few years, and speculate that production costs will increase only marginally in the next few years, in line with better technologies and lighter materials.
On the London Metal Exchange, the three-month price for high-grade aluminum has climbed just 2 percent to $2,500 per tonne in the past six months. By comparison, aluminum was $1,900 a tonne two years ago and $1,300 five years back.