Commodity Focus: Grounded

The commercial airline sector has been in financial turmoil in the past year, and the reduction in new aircraft manufacturing has negatively affected the consumption of specialty and high-temp alloys, such as titanium, chromium and nickel.

According to a report in the December 13 edition of Manufacturing News, civil aviation sales will drop from $51 billion to $31 billion between 2001 and 2003. The article quotes comments by John Douglas, president of the Aerospace Industries Association, delivered at the association’s annual forecast luncheon: "This part of our economy is the seed corn for 11 percent [that commercial aviation contributes] to our gross domestic product and about 11 million jobs across the U.S. When that kind of contraction takes place, it has a huge effect on the economy. It has a huge effect on employment."

The civil aviation industry was growing at a rate of 40 percent in 1996, according to the Manufacturing News article. Presently, it is contracting at a rate of 30 percent yearly.

Douglas also commented on the United Airlines bankruptcy, saying that, "I think there is a feeling that we need to go through this; we need to restructure. It’s better for this situation to be clarified than it is to just drag on, on the verge of bankruptcy. But over the long haul, somehow we’ve got to find a way to make the airline industry profitable. It sure isn’t the way today."

Despite the continued gloom in the forecast for the commercial airline sector, some within the metals industry believe a slight improvement may be in store for specialty and high-temp alloys.

"Ferro-titanium is an additive that steel mills use," Stuart Freilich, president of Universal Metal, Worcester, Mass., says. "The ferro market has been strong." However, Freilich says that demand for revert units, which go directly to titanium mills and are available for future recovery, is "nonexistent."

Tim Rupert, president of the International Titanium Association, headquartered in Broomfield, Colo., and president and CEO of RTI International Metals, Niles, Ohio, says that demand for titanium "will continue to be weak from our principal market, which is commercial aerospace."

However, increased military spending is helping to buoy titanium somewhat. "One of the big markets that we have is military, not only military airplanes, but also ground vehicles. With the increase in military spending, that market is actually growing a bit. Unfortunately, not enough to offset the downturn in commercial aerospace, but it is helpful," Rupert says.

"The third big category is industrial and consumer applications," he says. "That’s kind of a mixed bag." Industrial projects that require capital spending programs, like chemical plants or power generation units, are off because of the general economy, Rupert says.

Rupert adds, "There are some bright spots. One of the things that our company has been very involved in has been the use of titanium in offshore oil and gas exploration. We’ve seen some growth in that market, despite the economy. Consumer applications are pretty healthy, too." Consumer applications using titanium include golf clubs, bicycles, jewelry and cutlery.

"Boeing delivered 527 planes in 2001, 380 in 2002 and estimates 275 to 300 in 2003," Freilich says. "It’s own schedule as of October 8 was only 153 planes, of which 103 737s are with Ryanair Air. Its production rate is about 50 percent less than 2001 and represents, in general, smaller 737 aircraft models versus 777 and 747s in 2001."

Freilich adds that Airbus will produce about 300 planes this year and next according to Airbus’ projected build schedule.

"It’s a stagnant market," he says. "The lower production of commercial aircraft by Boeing and Airbus will be offset in a minor fashion by some increased military aircraft production, but 2003 should be fairly much of a repeat of 2002."

"You get the same strength of steel for half the weight," Rupert says. "It is twice as flexible as steel. It is highly corrosion resistant. It also performs well at high temperatures."

The military and aerospace sectors are cyclical consumers of titanium. "Military spending budgets tend to come in waves," Rupert says. "While it [titanium] has always been used, certainly right now, with military activity increasing, that is an area of increased demand."

However, Freilich is not as optimistic about the boost from military budgets, as fewer aircraft are needed to fight today’s battles. "The government is trying to do it with technology, through computers, through better communication, through laser-guided ordinance," he says. "You don’t need as many planes."

"In terms of increasing the demand for nickel as a result of military applications, that’s really not happening compared to the overall reduction in the civilian aerospace sector. That completely dwarfs it," Barry Waters, director of the Americas chapter of the Nickel Development Institute, Toronto, says. "The military buildups that we’re seeing at the current time are not a real factor in increased nickel consumption."

Nickel is used in gas turbines, armor plate, gun barrels and even mess kits as an alloying element in stainless steel.

While the military sector won’t provide enough of a boost to vastly improve the outlook for high-temp alloys, some see an improvement on the horizon in terms of the demand for scrap.

"From a scrap dealer’s point of view," Freilich says, "it should be a little bit better. I’m guessing 10 percent to 20 percent better predicated on my assumption that Boeing and Airbus as well as their suppliers have used up a fair amount of their inventories and will have to come into the market to make some purchases."

As most scrap material is generated by commercial aerospace, less scrap is being produced and machined because of the declining manufacturing rate. "Although, I guess I should point out that the demand is probably falling just a little bit faster, so actually the prices for titanium scrap have been softening despite the drop in supply," says Rupert.

Larry Snyder, vice president of the nonferrous and stainless alloys division of Metal Management Inc., Chicago, says that though generation is down, "there is still metal that does not have a home in the aerospace melting industry. A lot of it is going into stainless steel blends.

"It’s obviously been a weak year, one of the weakest in recent memory. Our industrial volumes are way down." Snyder adds, "Also, General Electric’s land-based turbine business is way down. We really don’t see much pick-up until the whole major world economy picks up, which hopefully will be late 2003 or 2004. Hopefully."

Freilich says that as of November 2002, 1,179 narrow body jets and 408 wide body jets were in storage in the western U.S. desert, a total increase of 13 jets from September. "Fortunately, about half of these planes are older models," he says. "Unfortunately, the planes do supply a source of spare parts, thereby reducing that market, too.

"This has been a very unusual cycle. In years past when the commercial airline business went south, usually the spare parts business is what kept us afloat, because, typically they [the airlines] had older planes. Older planes are like older cars – the older they get, the more parts they need," Freilich says.

In addition to the reduction in spare parts business, Freilich says melting techniques that have been developed during the last four or five years require more virgin material. "Current chemistry requirements of engine manufacturers require more virgin material and less scrap to be used in melting to meet residual chemistry specifications," he says. Scrap now comprises 20 percent to 25 percent of the melt.

"Many major generators of high temperature alloy and titanium scrap have close-looped their scrap generation in recent years. Their scrap goes from the generating site to a processor then directly to a vacuum melter [mill]," Freilich says. "The mills must contractually take this material, thus reducing the demand for open market scrap until the closed-loop material is used." He adds, "That’s had an impact on our market also."

According to a presentation delivered at the ICDA (International Chromium Development Association) meeting in November 2002 by Fritz Terorde of ELG Haniel Group, the output of stainless steel has expanded an average of 5.1 percent annually between 1960 and 2001, with chrome expanding at 4.5 percent and nickel at 3.4 percent. This increase in output could actually lead to a decrease in scrap supply because of the longevity of stainless steel products.

"The rapid stainless capacity expansion in the West and the important increase of stainless production in China generates problems in maintaining stainless scrap supply at desired levels," Terorde said. "The scrap supply situation is worsened by the fact that scrap availability expands at a lower rate than before and as production reserves in the former Soviet Union are diminishing.

"As a consequence, external scrap ratios are likely to decline from some 35 percent in recent years to ranges between 30-31 percent in [the] future," Terorde continued. "This does not mean that everyone has the same scrap ratio – Countries which are prepared to pay ‘fair values’ for scrap might maintain their historical ratios, while others will have lower ratios." Tororde added that major stainless steel scrap processors are working on solutions to expand scrap collection and upgrading.

Tororde asserted that the combination of lower stainless scrap ratios in the West and of higher stainless production in China is expected to add more than 1.1 million tons of ferrochromium into the market.

Although the outlook for high-temp alloys is not as reassuring in the short-term, the cyclical nature of the market means that hope is on the horizon.

"United Airlines bankruptcy filing is probably a good ting for the industry, as it will allow them to reduce their overhead and compete in the marketplace more effectively," Freilich says.

"United and U.S. Air are scheduled to reduce their routes, which may allow the entrance of new airlines to fill these route voids," Freilich continues. "New airlines like Rayanair tend to buy new planes and not used planes as in the past. This change in the market will take some time to take place before we will see the final results."

Snyder says, "We’ve done everything we possibly can to cut our expenses and overhead and try to get through this downturn. Nothing good and nothing bad lasts forever, it just seems like a long time when you’re in the middle of it."