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Titanium industry undergoes massive changes into 2013

Keywords: Tags  titanimum makret, Precision Casparts Corp., PCC, Timet, Titanium Metals Corp., 2013 outlook, Frank Haflich

Does the largest takeover in titanium industry history mean the days of the major independent producer are numbered? With the $2.9-billion acquisition of Dallas-based Titanium Metals Corp. (Timet), the industry’s largest producer, by Precision Castparts Corp. (PCC), that question might already have been answered.

The acquisition marked the biggest step so far in a consolidation trend that’s transforming what once was an industry of individual titanium mills into what essentially are the first stages of production in aerospace supply chains that have been built under the umbrella of individual parent companies.

It brings to PCC titanium production that in
the third quarter amounted to about 11.6 million pounds of melted and mill products, or some 47 percent of the 24.6 million pounds of titanium reported sold by the three major domestic producers, which includes Allegheny Technologies Inc. (ATI) and RTI International Metals Inc., both based in Pittsburgh.

Portland, Ore.-based PCC was already Timet’s single-largest customer, accounting for 16 percent of the producer’s 2011 sales and surpassing even Chicago-based aerospace giant Boeing Co., although many of PCC’s products end up on Boeing aircraft, according to documents filed with the U.S. Securities and Exchange Commission. PCC’s largest customer for the fiscal year ended April 1 was engine builder General Electric Co., according to PCC’s SEC filing.

The acquisition by PCC makes Timet part of the same company that owns Grafton, Mass.-based Wyman-Gordon Co., generally considered the largest U.S. aerospace forgings producer and itself believed to be a major Timet customer.

“Timet’s melting expertise and PCC’s forging and conversion assets are a complementary strategic fit,” Mark Donegan, PCC’s chairman and chief executive officer, said in announcing the agreement in early November. In addition to forgings, PCC is a major producer of castings and fasteners and, more recently, machined aerospace parts and components.

It also gives PCC an in-house source of titanium melting capacity to complement the nickel and cobalt alloys produced by its Special Metals Corp. unit in Huntington, W.Va.

“This transaction, in our opinion, is a major strategic move with benefits on the order of (Precision Castparts’) acquisition in (2006) of Special Metals,” Lloyd O’Carroll, senior vice president of research at investment firm Davenport & Co., Richmond, Va., said in a note to investors. The acquisition is “a major step in consolidating the supply chain,” with consequences for the titanium and forging industries and original equipment manufacturers (OEMs), both airframe and engine makers.

PCC didn’t respond to requests for comment on its plans for Timet, but Donegan told securities analysts in late November that the company will utilize the downstream assets of Special Metals to stretch Timet’s product range, utilizing the nickel alloy producer’s mill capabilities to complement Timet’s “fully integrated” melting capabilities.

Industry observers think one part of Special Metals that could prove particularly attractive to Timet is its 110-inch mill in Huntington, which could be used to convert Timet feedstock into aerospace alloy titanium plate.

While Timet’s takeover leaves RTI as the closest thing among the top three producers to a standalone titanium mill, the producer, fabricator and distributor would probably argue with this label.

RTI declined to comment on the impact of Timet’s purchase, but it has already embarked on a course to become a supplier of “integrated titanium manufacturing,” as described earlier in 2012 by Dawne S. Hickton, its vice chairwoman, president and chief executive officer.

RTI took its largest move beyond mill products and into the downstream aerospace, defense and medical device markets with its largest-ever acquisition: the $182-million purchase in February last year of Remmele Engineering Inc., New Brighton, Minn., following the 2011 acquisition of the forming division of Britain’s Aeromet International Plc, now called RTI Advanced Forming Ltd., and the 2004 purchase of Claro Precision Inc., a Canadian manufacturer of aerospace components and complex mechanical and electrical assemblies in which RTI subsequently invested $100 million.

Moreover, ATI moved down the supply chain in 2011 with its $778-million acquisition of Cudahy, Wis.-based castings and forgings producer Ladish Inc. A spokesman for ATI, which has its own in-house supply of both titanium and nickel alloys, said in September that the supply chain “is demanding” an integrated supplier. “It wants someone who’s integrated through sponge, melt, nearly all the product forms, and who can control the quality, productivity and delivery of product,” he said.

PCC’s interest in acquiring Timet shouldn’t have been a surprise. In July, Donegan--pointing out that PCC’s goal is “controlling our own value stream”--told securities analysts that the company would “love to get forged titanium capability in terms of input stock.”

Still, for all its interest in Timet, PCC might never have been able to seal the deal without the presidential election. It’s generally presumed that the re-election of President Obama, which raised the likelihood that capital gains taxes would go up, helped to convince billionaire investor Harold Simmons to sell his controlling interest in Timet.

The sale of Timet to Wyman-Gordon’s parent might be expected to push some of its other forge shop customers to seek other titanium sources instead of buying from what they might view as a competitor. But most titanium shipped today by the three major mills is part of long-term supply agreements with engine or airframe OEMs, some of which run for years. In 2011, 64 percent of Timet’s sales were under long-term agreements.

“Nonetheless, we would expect (Timet’s) competitors to try to gain whatever share is in play at aero forgers because of this transaction,” Gautam Khanna, who covers the titanium and specialty metals industry at Boston investment firm Cowen & Co. LLC, said in a note to investors.

While few would argue with Donegan’s description of the Timet acquisition as a “needle-mover” for PCC, on another level it merely confirms a consolidation trend that’s been evident for the past few years and is likely to continue.

“In today’s world, when aerospace manufacturers are trying to build supply chains inside their own companies, it may mean less than it did in the days when the industry was mainly made up of independent mills,” a titanium industry executive said about the takeover.

One sector where little concern was evident over the acquisition was distribution, where most service centers so far see little threat of losing market share.

“From time to time, mills have dabbled in building inventory,” a titanium distributor said, adding that he doesn’t expect this practice to be favored by a company with PCC’s reputation for efficiency. “They (PCC) probably won’t have a lot of tolerance for holding inventory. That’s our job.”

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