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Drop in key titanium surcharge clouds outlook for '12 markets

Keywords: Tags  benchmark titanium surcharge, titanium market outlook, Allegheny Technologies, 6/4 titanium billet, F-22 Raptor, John Mothersole, IHS Global Insight, Frank Haflich

A benchmark titanium surcharge declined in the first quarter, complicating the outlook for the coming year amid contrary demand expectations.

Allegheny Technologies Inc. subsidiary ATI Allvac, Monroe, N.C., reduced its first-quarter surcharge for standard 6-aluminum/4-vanadium bar and flat products by 3.4 percent to $7.32 per pound from $7.58 and lowered its surcharge for 6/4 billet by 3.5 percent to $6.66 per pound. The reduction was somewhat larger than the 1-percent decrease in the fourth quarter of 2011, which was the first surcharge cut in two years.

Allvac doesn’t disclose the specific elements of its surcharge or their portions, although they are assumed to include scrap, sponge, master alloys and energy costs. Scrap is believed to be the largest component, estimated at 60 to 70 percent. As such, the first-quarter surcharge decline might reflect what market sources have described as a sharp falloff in scrap tags in the fourth quarter of 2011 that hasn’t yet shown signs of recovering.

“Scrap is still a buyer’s market,” said one manufacturer, who saw prices offered by dealers for his company’s scrap decline in the past quarter.

Meanwhile, titanium industry analysts believe the overall market for finished products will be good this year.

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

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.

Guatam Khanna, who follows specialty metals and the aerospace supply chain for Cowen & Co. LLC, Boston, agreed that economic issues can’t be ignored, but said that 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 might be more critical for success than overall economic conditions.

Boeing will be taking the minimum amounts under its long-term supply agreements with producers at least through 2012, Khanna pointed out. On the other hand, Boeing rival Airbus SAS last year was ordering more mill product from Pittsburgh-based RTI International Metals Inc. than was expected, and it also will boost its requirements in 2012, while the non-aerospace industrial market continues to recover from its 2009 slump.

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