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.
"Its unusual to be talking
about something thats exhibiting strength when everything
else is going in a different direction," John Mothersole,
principal in Washington for IHS Global Insights pricing
and purchasing service, said about the titanium industrys
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 years record 84.4
million pounds. With indications that his expectations were
"too tame," hes 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 metals 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 cant 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
executionthe industrys ability to perform during
the ramp-uprather 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
"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 Insights own spot price index was up about 19
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 hasnt 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 doesnt 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
A350the latter of which is due to enter service in
2013will remain unchanged. He said the kind of concerns
that accompanied 787 delivery postponements during the downturn
in 2009 arent 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 theres
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
cashand holding back from loading up on raw materials.
The result? Theres 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.