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Aerospace continues to dominate the sector’s outlook

Keywords: Tags  Titanium, aerospace, automotive, IT, International Titanium Association, ITA, ATI, Allegheny Technologies Inc

Despite riding the ups and downs of an uncertain period recently for metals, the industrial titanium market still has room to expanded, a number of players in the sector say.

An expanded supply base has brought improved availability, reliable delivery and more economical pricing to the market, according to the International Titanium Association (ITA). The expanded application base has provided a robust reference list of successful applications for titanium to a variety of industrial applications. These success stories are fueling even more interest in using titanium products to combat corrosion and extend reliability of equipment in harsh seawater service, the ITA says.

Titanium has been traditionally used as a lightweight, extremely strong and exceedingly corrosion-resistant material in aircraft, electric power plants, seawater desalination plants, and heat exchangers, the ITA says. More recently, it has found increasing applications in consumer products, sporting goods and information technology (IT) equipment by making use of its aesthetic surface appearance and luxurious feel.

For now, however, aerospace remains a key end-user segment for manufacturers and suppliers.

“The commercial aerospace ramp for which we have been preparing is upon us, said Richard J. Harshman, chairman, president and chief executive officer of Allegheny Technologies Inc. (ATI), in an earnings call. “We saw the beginning of improving sales and operating performance in the first quarter 2016 results. ATI sales to the aerospace and defense markets grew 12 percent in the first quarter of 2016, compared to the fourth quarter 2015. Breaking that growth rate down by specific end markets, sales to commercial aerospace market grew approximately 20 percent, with jet engine sales growth of nearly 15 percent and airframe sales growth of nearly 30 percent.

ATI’s aerospace customers are increasingly monitoring the performance of their suppliers and demanding enhanced products and processes as the aircraft production ramp-up accelerates faster than expected.

“Our customers expect us to be ready for the significant ramp-up of next-generation programs without interruption,” Harshman said. “This is our commitment and our plan. While we have a few challenges we will resolve, we have earned the reputation of a reliable supplier.”

The Pittsburgh-based specialty materials and components producer also is engaging in “technical exchange meetings with strategic customers” to share supply chain cost reductions via the acceptance of new and better alloys and streamlined process changes, according to Harshman.

On the positive side, “structural changes are occurring in the aerospace industry,” Harshman noted. “The titanium content on next-generation airframes is growing, and there is a sense of the growing and future need of titanium alloys from the growing airframe market.”

In the short term, however, that trend has not buoyed the titanium business overall, due to weak industrial demand. 

Cost-cutting pressure that is working its way up the aerospace supply chain amid flattening demand and rising competition will increasingly squeeze aircraft original equipment manufacturers’ (OEMs’) bottom lines, business advisory firm AlixPartners LLP said.

“The pressure is building backwards through the supply chain to go after those margins that forgers and casters are making,” David Wireman, AlixPartners managing director and co-head of the aerospace and defense practice, told AMM. He cited aggressive competition between the world’s two largest aircraft manufacturers, Chicago-based Boeing Co. and Toulouse, France-based Airbus SAS, as the main driver.

“Competition for new orders is fierce between Boeing and Airbus right now,” Wireman said. “They are both being very aggressive in their attempts to capture new orders—which have been harder to capture in 2015—and box out some potential entrants such as Bombardier (Inc., Montreal).”

Meanwhile, the two big aircraft makers “are doing everything they can to drive down costs. ... There’s nothing left from an operating perspective to squeeze, so they have to look in the supply chain,” he said.

“Plus everybody is looking at the trends in metal prices and wondering why their prices aren’t going down,” Wireman added. “We’ve spent a lot of time reminding our clients at lower tiers that if you haven’t re-sourced your metals very recently, you’re paying too much.”

As a result, each player in the aerospace supply chain—from material suppliers to equipment and engine OEMs—will likely face tougher bargaining sessions with their customers in the coming months and years as everyone seeks to pass on the cost-cutting impacts.

“That pressure to go after some of the lowest-tier suppliers’ margins is going to continue to exist and build,” Wireman said. “There’s going to be a lot of pressure there.”

Aircraft OEMs could be the prime target for margin squeezing, as they earned the highest share of the aerospace supply chain’s profit pool in 2015 with about 25 percent, down from a record 29 percent in 2014, according to the New York-based advisory company’s 2016 global aerospace and defense outlook. That’s higher than the 2015 profit share of aircraft lessors, at 24 percent; engine OEMs, 23 percent; equipment OEMs, 10 percent; maintenance, repair and overhaul providers, 9 percent; material suppliers, 4 percent; aerostructures suppliers, 3 percent; and cabin suppliers, 3 percent.

Meanwhile, demand for new commercial airplanes appears to be plateauing, despite Boeing and Airbus’ forecasts for substantial fleet growth over the next 20 years, according to Wireman.

“Net orders were down substantially in 2015, and 2016 orders aren’t blowing the doors off, so there is some reason to believe that at least in the interim the very steep order volume in the past couple of years is flattening out,” he said, pointing to last year’s 35-percent drop in net aircraft orders noted in the report.

“If you’re an aerospace supplier, in the next year I’d be paying attention to the Asian low-cost carriers—that’s the softest place in the existing backlog,” Wireman said. “I’d also pay attention to my suppliers’ ability to manage the ramp-ups; OEMs are hell-bent on achieving those rates, but the suppliers have to be able to keep up—and the jury is still out.”

Still, risks of serious disruptions are limited due to the strong backlog and ability of aircraft OEMs to reshuffle slots, according to the outlook report. The order backlog now stands at about 7.6 years and 5.7 years for narrow-body and wide-body aircraft, respectively.

Meanwhile, on the defense side, renewed global security threats and a drop in commodity prices could lead to an uptick in the defense budgets of North Atlantic Treaty Organization member countries and allies, the report said.

Although global demand for aerospace is up, the busy supply chain still hasn’t inspired higher metals pricing.

Harshman said that “oil and gas sales were good during the first half of 2015, largely due to shipments of nickel alloy plate for a large pipeline project. However, demand from the oil and gas market fell dramatically throughout 2015 and we expect demand to remain low throughout 2016. There are a few bright spots in oil and gas. Aging wells continue to require enhanced or recovery techniques that use our nickel-based alloy products and demand is stable from long planned subsea projects that use our materials.”

“We’re optimistic about the opportunities for growth and the chemical processing and the hydrocarbon industry over the next several years. In the US, low prices and consistent availability of natural gas liquids from shale is expected to drive growth in the petrochemical market. Domestic and foreign companies continue to evaluate plans to build CPI plants in the US to diversify their geographical portfolio where secure long-term supplies of affordable feed stock exists,” Harshman said.

Non-aerospace global industrial markets are expected to present a bumpy ride for titanium business in 2016 and through the first half of 2017, dictated in large part by the vicissitudes in global oil and gas sector. However, a decline at one end of the industrial business spectrum may in fact create opportunities at the other end for the titanium market, according to an ITA blog report.

Market analyst Chris Olin, the president and founder of the Olin Research Group LLC, Avon, OH, said that, compared with business activity in the aerospace sector, non-aerospace industrial markets for titanium are likely to be tepid for most of 2016, going into early 2017. Olin, on Dec. 18, 2015, conducted a conference call to share his outlook for titanium business in 2016.

Olin said his list of key non-aerospace global industrial markets include desalination, oil and gas, power generation, general industry and infrastructure, chemical processing, ocean and naval, and nuclear power. “We’ve been seeing weakness in the industrial categories—everything non-aerospace,” Olin observed, noting that, year to year, business levels could be down as much as 10 percent in 2016.

“The main problem has been the collapse in oil and gas prices. At the moment, there really are no positive outliers in industrial markets for titanium business.”

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