On Wall Street and its outposts, the clues to a turnaround
in aerospace titanium lie in the global economy, the airlines'
ability to maintain their financial health and aircraft
delivery schedules, and signposts unique to the titanium
marketnot the least of which is the prospect of drawing
down the supply chain's big inventory overhang.
With economic indicators pointing toward an eventual, if
fitful, return to growth, the worst fears about a collapse in
commercial aerospace demand probably won't be realized,
although it might take a while before pre-recession optimism is
"Our expectation is that this global recovery doesn't gain
traction until late next year," John Mothersole, IHS Global
Insight Inc.'s senior analyst in Washington, said.
While airlines have done a good job of managing capacity
during the recession, the result has been to "rationalize"
their volume as opposed to adding new capacity. "This doesn't
help (to bring in) new orders," Mothersole said of airline
economizing and cost cutting. However, it also implies "there's
still room" for airlines to grow going forward.
Luke Folta, analyst at Longbow Research LLC, Independence,
Ohio, said the crucial factors affecting the titanium outlook
are, most importantly, a "massive inventory overhang" and,
secondly, the pushouts and adjustments that have occurred on
big programs such as Boeing Co.'s 787 Dreamliner.
"The real big titanium-consuming programs aren't really
going to move until 2011 and beyond," Folta said, citing not
only the 787 but also Lockheed Martin Corp.'s F-35 Joint Strike
Fighter and, to a lesser extent, the Airbus A380.
"I think you're going to see prices and shipments lower in
2010 than in 2009, with spot prices lower than in 2009," he
said, noting that he also expects to see downward adjustments
in long-term supply contracts, whose pricing is keyed to
indices. "My view is that spot pricing doesn't stop falling
until the inventory situation is at or near parity," Folta
added, noting this is a good rule of thumb in any metal.
As of late November, Mothersole was looking for U.S.
titanium mill product shipments to total 65.4 million pounds in
2009, down about 14.7 percent from 76.7 million pounds the
previous year, but rebound nearly 9 percent to approximately
71.1 million pounds in 2010, with the ramp-up occurring in the
second half of the year.
Boeing has said that beginning in June 2010 it will cut back
production of its 777 aircraft to five per month from seven,
while it also postponed plans to increase production of the 767
airliner and the 747-8, which is the latest version of the
industry's original wide-body jet.
Meanwhile, Europe's Airbus SAS, which at one time was
looking to raise production rates for its A320 family of
single-aisle airliners to 40 aircraft per month, instead
dropped monthly output to 34 from 36 and "paused" production
rates for its A330/A340 family instead of increasing
production, as previously planned.
Boeing subsequently stressed repeatedly that it has no
intention of curbing production of its most popular legacy
program, the 737, from 31 per month, and there's been no
announcement of further cuts in other existing programs. "There
has been no change in our assessment that we can hold the 737
at its current production rate," Jim McNerney, chairman,
president and chief executive officer of Chicago-based Boeing,
told investors in October, describing both the 737 and 777
programs as "rock solid."
Nevertheless, earlier cutback announcements in 2009 raised
fears that, despite the company's intentions, a lagging economy
and airline-delivery pushouts might force Boeing and Airbus to
absorb greater build rate reductions.
Folta emphasized that while Longbow has taken no position on
whether or not additional cuts are likely, the company's
contacts in the supply channel have shown "a lot of skepticism"
on the ability of large commercial transport manufacturers to
hold build rates.
But opinions on the issue are evolving. In mid-November,
Gautam Khanna, vice president of Cowen & Co., Boston, was a
bit less pessimistic than two months earlier, when he addressed
the International Titanium Association and expressed skepticism
that aircraft manufacturers would be able to get through 2010
without paring deliveries, forcing their suppliers to cut
More recently, however, Khanna has seen indications that the
bottom might have been reached. He cited as examples Portland,
Ore.-based aerospace forgings, castings and fastener producer
Precision Castparts Corp. and BE Aerospace Inc., a Wellington,
Fla.-based diversified supplier of various products to the
industry, among them spare parts and fasteners. Both companies,
he said, had reported that their customersjet engine
manufacturers in particularwere buying in 2009 in amounts
sharply below actual build rates and their underlying demand,
resulting in big drawdowns of these customers' inventories.
Khanna said that unless there's a "double dip," or
backsliding in underlying demand, this destocking "can't
continue in perpetuity." He believes it's likely that, at some
point in 2010, jet engine builders in particular must resume
buying in volumes that at least support their build rates. Even
if buyers aren't restocking, just a return in requirements for
underlying demand means a pickup for their suppliers, he