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Titanium sponge hurts ATI bottom line

Keywords: Tags  ATI, Allegheny Technologies, Richard Harshman, Rowley plant, titanium sponge, titanium scrap, Frank Haflich

LOS ANGELES — Allegheny Technologies Inc. (ATI) is paying the price for running its Rowley, Utah, titanium sponge plant at a higher rate than might be expected during a period of low-priced scrap.

Operating earnings by ATI’s High Performance Metals segment were reduced in part "by our strategic decision to use ATI-produced titanium sponge rather than titanium scrap" to make certain products, chairman, president and chief executive officer Richard J. Harshman said during the company’s third-quarter earnings conference call.

Harshman said that Rowley has begun the qualification process to produce premium-quality sponge, which is used in rotating parts for aircraft engines, a critical milestone for a sponge plant.

"Until the completion of the (premium quality) process, we will continue to assess the optimal production rates at Rowley based on market demand for standard-quality titanium products," Harshman said. ATI expects "full" premium-quality qualification for Rowley’s process within 18 to 24 months.

Rowley, the newest U.S. greenfield titanium sponge operation, has an annual capacity of 24 million pounds. ATI said earlier this year that the Utah facility was operating at about 60 percent of its annual capacity, but no rate has been mentioned since (, May 1).

Explaining ATI’s use of sponge instead of "lower-cost titanium scrap," an ATI spokesman said there had been an "abnormal" decoupling of the normal relationship between prices of the two raw materials. "This disconnect between the price of sponge and the price of scrap is always temporary," he said, stressing the importance of ATI producing the highest-quality sponge as aircraft build rates move up. "We need to go forward with (premium-quality) qualification to be ready for the big ramp, particularly on engines."

Rowley, which started up in late 2009, became qualified for standard aerospace-quality sponge last year (, March 14, 2012).

Although furnace mix can vary greatly depending on the economics of the competing raw materials, the specific melting process used and the particular titanium alloy being produced, a general rule of thumb in the industry is that it can swing 70-to-30 sponge-to-scrap—or the reverse—based on the competitive economics of each material.

The decoupling of scrap and sponge prices first became evident about two years ago, when sponge prices from Japanese producers, pressured by escalating costs of rutile feedstock, began shooting up (, Oct. 4, 2011) while scrap tags were declining from midyear highs. Although market sources note that this rise in sponge tags has since stalled, and may even be reversing, scrap has continued eroding to the point where there’s general agreement that the economics for melters today are squarely on the side of scrap.

Ironically, some titanium sources said, had ATI not chosen to continue running Rowley at its current rate and had increased its scrap purchases instead, it might have helped push scrap prices up and left the sponge-scrap relationship more in balance.

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