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2014 Outlook: Titanium

Keywords: Tags  Titanium, aircraft original equipment manufacturers, OEM, Boeing Co., ATI, ATI Allvac Inc., Kevin Michaels, ICF International Jeff Carpenter

The backlogs of aircraft original equipment manufacturers (OEMs) are bulging, but the titanium market in the waning days of 2013 continued to await a drawdown of inventories and a recovery in prices.

In the span of a few days during the Dubai Air Show in November, Boeing Co. unveiled orders for nearly 260 planes valued at more than $100 billion and European plane builder Airbus SAS announced orders for 160 planes worth $44 billion.

For Chicago-based Boeing, the Dubai haul was added to a backlog at the end of the third quarter of nearly 4,800 planes worth $345 billion, and stretched the backlog of both OEMs to perhaps eight years.

But the record backlogs were accompanied by sinking prices for titanium mill products and scrap in 2013. And while aircraft build rates were moving up, titanium mill delivery lead times were at levels more suggestive of a sagging market than one that’s poised for a surge in consumption.

By November, spot prices for standard aerospace 6-aluminum/4-vanadium ingot had fallen about 24 percent from the beginning of the year to $8.50 per pound, and probably lower for anyone with a substantial requirement, according to market sources, while lead times were reported as short as four to six weeks.

The benchmark surcharge posted by Monroe, N.C.-based ATI Allvac Inc., a unit of Pittsburgh-based Allegheny Technologies Inc. (ATI), which in large part is seen reflecting scrap prices, declined nearly 35 percent to $4.36 per pound in the fourth quarter of 2013 from $6.67 in the same period a year earlier.

All this was exacerbated by the reported  efforts of some titanium producers to move material before the fourth quarter ended.

“The mills wanted to push stuff out, but our customers didn’t want to take it,” said one distributor, who like most of his counterparts expressed the hope that these pressures were temporary and would mostly dissipate in the new year.

“Everything’s at a standstill,” a buyer of ingot and forging billet said about his company’s requirements.

The aircraft industry’s total titanium buy weight was expected to rise about 21 percent to 145 million pounds last year from 120 million pounds in 2012, Kevin Michaels, vice president of consultancy ICF International, Ann Arbor, Mich., told the International Titanium Association in October. But Michaels acknowledged that those figures didn’t factor in excess inventories, “which all of you are dealing with.”

The inventory that’s drawn the closest scrutiny—and is seen by many observers as key to reaching a balance—is material in the supply chain resulting from Boeing’s long-term supply agreements with ATI, Exton, Pa.-based Titanium Metals Corp. (Timet) and Russia’s VSMPO-Avisma Corp. While outsiders expected this drawdown to be completed earlier, Boeing maintains that the process is well under way.

“We are rapidly burning through it,” said Jeff Carpenter, manager of raw material procurement, supplier management, at the Boeing Commercial Airplanes unit of Boeing. “We’re down to less than two years (before) we’ll be down to operational inventory.” Boeing has defined operational inventory as sufficient to serve production requirements, plus an additional amount that allows for unforeseen requirements.

Mark Donegan, chairman and chief executive officer of Precision Castparts Corp. (PCC), Timet’s parent company, said in early December that the titanium producer should start to see a “meaningful step-up” in demand from Boeing in mid-2014 as PCC moves to increase its monthly build rates on fabricated products—castings, forgings and fasteners, among other products—it supplies for Boeing’s 787 Dreamliner.

Dawne S. Hickton, vice chairwoman, president and chief executive officer of RTI International Metals Inc., said the Pittsburgh-based titanium producer, fabricator and distributor expects its mill volumes to increase “only modestly” in 2014 above an expected 16.5 million pounds in 2013, which was essentially flat with 2012.

“We really don’t see the big acceleration starting to hit until 2015,” she told analysts in November. While RTI isn’t one of Boeing’s long-term suppliers of titanium mill product, it is the major North American source for Airbus as well as the primary source for the Lockheed Martin F-35 Joint Strike Fighter and also builds titanium seat tracks for the Boeing 787.

Domestic titanium mill product shipments in the first half of 2013 were running at an annualized rate nearly 4 percent above the 35,400 tonnes (78.04 million pounds) shipped in 2012 following a record 100.3 million pounds in 2011, according to U.S. Geological Survey data. About 75 percent of domestic mill product and castings shipments went to commercial and military aerospace.

John Mothersole, a senior principal analyst with Lexington, Mass.-based IHS Global Insight Inc., expected 2013 titanium shipments to be about 3.5 percent ahead of 2012 and he predicts a nearly 20-percent increase this year to 96.6 million pounds.

Mothersole said his prediction is consistent with both the aircraft production forecast of his parent company’s IHS Jane’s unit and with the U.S. economic industrial production outlook for aerospace products and equipment. His own forecast, along with the two correlating outlooks, “are telling a broadly consistent story,” he said.

Mothersole thinks it’s likely that inventory drawdowns could continue to weigh on the market during the first half of 2014, helping to restrain price increases. In the second half, however, the possibility that this drawdown turns into re-stocking represents a wild card.

Michaels has forecast a 4.6-percent compound annual growth rate for aerospace titanium requirements into the next decade, led by airframes and systems (such as landing gear) increasing nearly 6 percent per year while engines grow about 1.5 percent and maintenance, repair and overhaul around 2 percent.

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