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In softer times, titanium industry proves economic strength

Keywords: Tags  Titanium, aerospace, Frank Haflich,

While the rest of the world was fretting about global economic stagnation this summer and Wall Street uncertainty was fueling speculation about a double-dip recession, titanium industry analysts kept the faith.

"It’s unusual to be talking about something that’s exhibiting strength when everything else is going in a different direction," John Mothersole, principal in Washington for IHS Global Insight’s pricing and purchasing service, said about the titanium industry’s prospects.

Mothersole, for one, was impressed by strong industry shipments in the first half and was "particularly struck" by domestic mill product shipments of about 22.7 million pounds in the first quarter. Seen on a "backward-looking basis," the four quarters through the first three months of this year represented nearly 87 million pounds of titanium "out the door," he pointed out.

Until a surprisingly robust first quarter, Mothersole had expected 2011 shipments to reach 87 million pounds, moving ahead of last year’s record 84.4 million pounds. With indications that his expectations were "too tame," he’s looking for an even better year at around 89 million pounds.

With the demise of the F-22 Raptor program and delays on the Lockheed Martin F-35 Joint Strike Fighter helping to dampen the metal’s defense sector outlook, the fate of aerospace titanium hinges increasingly on commercial transports, the future of which is ultimately determined by global economics.

But Guatam Khanna, who follows specialty metals and the aerospace supply chain for Cowen & Co., Boston, agreed that while economic issues can’t be ignored, technological advances such as Boeing Co.’s 787 Dreamliner "tend to do better" than the overall economy during times such as these.

"We appear to be very close to a multiyear ramp on the 787," Khanna said. He thinks execution—the industry’s ability to perform during the ramp-up—rather than the economy may be more critical for success than overall economic conditions.

Boeing is likely to continue building titanium inventory into late 2012, taking the minimum annual amounts under its long-term supply agreements with producers, Khanna pointed out. On the other hand, Boeing rival Airbus SAS this year is ordering more mill product from Pittsburgh-based RTI International Metals Inc. than was expected, and it will also boost its requirements in 2012, while the non-aerospace industrial market continues to recover from its 2009 slump.

Mothersole sees the combination of strong shipments, healthy backlogs, increasing production and declining inventories all pointing in the direction of higher prices.

"All these key pieces of data line up on the wrong side of the ledger for buyers," he said, noting that most pricing data have been showing "some reasonable amount of strength." The U.S. producer price index for mill products, which includes long-term contract pricing, was flat through the first seven months of this year, but in July it was 6 to 7 percent higher than a year earlier and IHS Global Insight’s own spot price index was up about 19 percent year-over-year.

Noting that spot transactions tend to lead pricing, Mothersole pointed out that when lead times move out and inventories burn off, this sets up conditions for a "snap in prices."

David MacGregor, who watches the industry for investment research specialist Longbow Research LLC, Independence, Ohio, cited growing evidence that the prolonged de-stocking period in the supply chain has ended.

"Order books are building in both commercially pure (CP) titanium and alloy grades, and people are feeling a little more comfortable about putting down more inventory," MacGregor said. He noted that the non-aerospace CP market overall seemed to be showing "a little more strength" than aerospace, with prices up 8 to 9 percent in the second quarter vs. the first three months of this year, while aerospace alloys were flat to up in the low to mid-single digits. Moreover, CP lead times are around 30 weeks compared with 20 to 24 weeks for alloy grades.

Still, pricing hasn’t moved up as much as lead times.

"One thing is that spot activity remains pretty sluggish," analyst Kuni Chen of CRT Capital Group LLC, Stamford, Conn., said in late August. "I have yet to see any signs of a pickup in that segment of the market."

But Chen doesn’t think this undercuts the "overall message" that, fundamentally, "nothing has changed from what it was," and forecasts for increasing build rates on the titanium-intensive Boeing 787 and Airbus A350—the latter of which is due to enter service in 2013—will remain unchanged. He said the kind of concerns that accompanied 787 delivery postponements during the downturn in 2009 aren’t being heard today.

So what will it take for prices to catch up with lead times? While CRT had no formal forecast, Chen pointed out that prices essentially are a function of demand and utilization rates. Khanna noted that there’s been "tremendous consolidation" in both fastener manufacturing and distribution during the past five years. Today, most of these companies are owned by large, publicly owned firms that have come out of the economic downturn by conserving cash—and holding back from loading up on raw materials. The result? There’s been little inventory buildup in 787 fasteners over the past two years.

"At some point, the 787 production ramp will require more fasteners," Khanna said.

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