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Titanium producers look to diversify downstream

Keywords: Tags  titanium sponge, RTI International Metals, Titanium Metals Corp., Timet, Allegheny Technologies, ATI, Dawne S. Hickton, Remmele Engineering Claro Precision

Titanium producers who just a few years ago were obsessed with bolstering their front ends are today looking downstream in a drive to integrate the aerospace supply chain.

At the height of the last market cycle, in 2006 and 2007, which was marked by panic-buying in sponge, each of the three major U.S. titanium producers was charting new capacity in the crucial upstream product:

• RTI International Metals Inc., Pittsburgh, planned a $300-million greenfield sponge operation in Hamilton, Miss.

• Dallas-based Titanium Metals Corp. (Timet) launched design and engineering efforts for a new sponge facility that would produce 22 million to 44 million pounds per year.

• Pittsburgh-based Allegheny Technologies Inc. (ATI) looked to build a new sponge plant in Rowley, Utah.

But fears of a front-end bottleneck had eased by 2008. RTI canceled its Mississippi project in late 2009, while Timet, which already produced sponge in Henderson, Nev., decided against a second plant. Both companies also expanded and extended their sponge supply agreements with the Japanese, who had substantially raised their own capacity. Only ATI’s plant, a $460-million facility with a capacity of 24 million pounds, was actually built.

“Today, the world looks quite different” than it did when the industry was concerned with sponge capacity, said Dawne S. Hickton, vice chairwoman, president and chief executive officer of RTI, which did build a mill products facility in Martinsville, Va.

In an effort to achieve “integrated titanium manufacturing” in forming, machining and assembly, RTI has directed its expansion efforts downstream. In February, it made its largest acquisition ever: the $182-million purchase of Remmele Engineering Inc., a New Brighton, Minn., machining and engineering company serving the aerospace, defense and medical device markets. This followed the 2011 purchase of the forming division of England’s Aeromet International Plc, now called RTI Advanced Forming Ltd., for $34 million. In 2004, RTI paid $30 million for Claro Precision Inc., a Laval, Quebec, manufacturer of aerospace components and complex mechanical and electrical assemblies, and later invested $100 million in the operations, quadrupling the size of its physical plant.

Hickton said that while small downstream aerospace manufacturers historically worked in “soft” metals, such as aluminum, more recently there’s been a shift into RTI’s field of expertise: titanium and other hard metals. She also pointed out that some aircraft builders have expressed concern that smaller machining shops might not have the capital to support a boost in production as airliner build rates ramp up. “One of the benefits we have as a larger company is the ability to take on smaller businesses and provide the resources to help them grow,” she said.

Meanwhile, ATI went downstream last year with the $778-million purchase of Cudahy, Wis., forgings and castings producer Ladish Co. Among other advantages, it gave ATI an in-house market for the nickel-based alloys and titanium feedstock produced by its ATI Allvac Inc. unit in Monroe, N.C., which has been expanding its furnace capabilities.

“The supply chain is demanding the integrated supplier,” an ATI spokesman said. “It wants someone who’s integrated through sponge, melt and nearly all the product forms, and who can control the quality, productivity and delivery of product.”

The trend isn’t obvious just to titanium metal producers. It’s also evident to the aerospace supply chain itself. In 2009, Portland, Ore.-based Precision Castparts Corp. (PCC), already regarded as the largest producer of aerospace forgings through its ownership of Wyman-Gordon Co., spent $850 million for Carlton Forge Works, a Paramount, Calif.-based producer of nickel, titanium and steel forgings for jet engines and gas turbines, in a deal that also included another forging house, Arcturus Manufacturing Corp. in Oxnard, Calif. Since then, PCC has picked up aerospace forgings producer Unison Engine Components from General Electric Co., as well as two forgings support companies, Dickson Testing Co. Inc. of South Gate, Calif., and Aerocraft Heat Treating Co. of Paramount, Calif.

Acquisition-minded PCC, whose business previously had been focused on investment castings, forgings and fasteners, also has moved into machining and component manufacturing. It has acquired several aerospace machining and fabrication operations since 2010, doing its best to consolidate what president and chief executive officer Mark Donegan calls a “widely fragmented” aerostructures business.

In its largest acquisition in the sector, PCC paid $900 million last year for Primus International Inc., a Bellevue, Wash.-based supplier of composites and machined aluminum and titanium components and assemblies to the aerospace industry. This year, PCC bought Centra Industries Inc., a Cambridge, Ontario, manufacturer of machined airframe components and assemblies, and has agreed to acquire Klune Industries Inc., a North Hollywood, Calif.-based manufacturer of aluminum, nickel, titanium and steel aircraft structures, as well as three machining operations of Montreal-based Héroux-Devtek Inc.

Additionally, PCC indicated it has been looking upstream into melting as it seeks the same kind of mill-to-forge shop integration that ATI has achieved with Ladish. During a July telephone conference with securities analysts, Donegan said that PCC aims to maximize profitability by “controlling our own value stream.”

PCC owns Special Metals Co., New Hartford, N.Y., a producer of nickel-based and superalloy long products. Titanium, on the other hand, represents “the one hole” at PCC in terms of feedstock for its forging operations, said Donegan, who suggested he’d like to fill that void. “We’d love to get forged titanium capability in terms of input stock,” he said.

The most obvious producers of forging feedstock are Timet and RTI. While the three companies would not comment earlier this year on what industry sources called PCC’s interest in the other producers, most observers said Timet and RTI aren’t eager to be taken over.

“I don’t see any of the obvious companies raising their hands and saying, ‘I’m for sale,’” said Kuni Chen, an analyst with CRT Capital Group LLC in Stamford, Conn.

So where on the supply chain will be the next big takeover? After the Carlton and Ladish acquisitions, the universe of available large-press aerospace forging houses appears limited. Some sources said the biggest remaining prize could be Shultz Steel Co., South Gate, Calif.

Shultz Steel declined to comment, but the company is viewed by most outsiders as fiercely independent. Reports in 2009 that Pittsburgh-based Alcoa Inc. was talking about a tie-up with the West Coast forging shop were met with strong denials by Shultz.

The interest in adding forging and machining capacity is likely to continue, according to Kevin Michaels, vice president of Ann Arbor, Mich.-based consultant ICF SH&E. At AMM’s Aerospace Materials Conference in Pittsburgh earlier this year, Michaels called PCC’s acquisition of Primus—as well as ATI’s purchase of Ladish and this year’s $558-million merger of Latrobe Specialty Steel Co. and Carpenter Technologies Corp.—“harbingers” of continued consolidation in Tiers 3 and 4 of the aerospace supply chain. Those tiers include not only raw material producers and “process” suppliers, such as forging companies, but also “thousands” of machine shops and other “make-to-print” operations, Michaels said.

That hasn’t gone unnoticed by the commercial aerospace industry’s largest domestic prime contractor, Boeing Co. “We’re generally positive on the trend,” said Jeff Carpenter, senior manager for raw materials for the supplier management group of the parent’s Boeing Commercial Airplanes (BCA) subsidiary in Everett, Wash.

Carpenter said that, in some respects, this development “makes for a more efficient supply chain.” He pointed out that Boeing itself is no stranger to downstream participation through its experience with Ural Boeing Manufacturing, its joint venture in Russia with VSMPO-Avisma Corp., which provides primary machining on forgings produced by VSMPO for the Boeing 787 and other aircraft.

At Longbow Research LLC in Independence, Ohio, one of the few investment companies that has followed the titanium industry on a consistent basis for more than a decade, one analyst agreed that—at least for the next few years—superior returns on incremental investments are more likely in downstream assets.

“Without a doubt, that’s where people are employing capital, where the money’s being spent,” said the Longbow analyst, who pointed out that as commercial aerospace programs ramp up, forging and fabrication requirements are growing. “People will deploy capital in the downstream markets until there’s too much capacity there.”

In other words, interest might one day swing back to the front end, or sponge. ATI, whose Utah plant has been moving to qualify its premium sponge at jet engine builders, doesn’t disagree. “There’s no shortage, but there’s not a lot of capacity, either,” the ATI spokesman said. He suggested that the current lack of concern about sponge might not last as the titanium-intensive Boeing 787 Dreamliner reaches its build rate of 10 per month, targeted for late 2013, and production of Airbus SAS’ competing A350 airliner ramps up. “Let’s see where we are then,” he said.

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