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The aerospace
industry is flying high and bringing its metals suppliers along
for the ride.
By
Myra Pinkham,
Contributing Editor
Sidebars
and Tables:
With
strength on all aerospace fronts—commercial and military aircraft
alike—demand for lightweight aluminum and other specialty alloys
should remain robust through 2007 and perhaps well beyond. The main
concern for aircraft manufacturers is how hard they have to scramble
to get enough material for their production lines, and how high
a price they must pay.
Metals
suppliers also are scrambling to meet the needs of their customers.
In some cases, mills are even investing in new production capacity.
Despite these efforts, supplies of aerospace metals, including aluminum,
titanium and nickel-based superalloys, are expected to remain very
tight for at least the next 12 to 18 months.
“These
are the good times,” says David Napier, manager of the economic
data service at the Aerospace Industries Association of America
in Arlington, Va., who asserts that the industry is at the beginning
of a major upturn. “Once the aircraft cycle starts, it tends
to go on for eight to 10 years, and I think this one will be prolonged,”
agrees industry analyst Lloyd O’Carroll, vice president and
chief economist with BB&T Capital Markets in Richmond, Va.
It
is very unusual that both commercial and military aerospace markets
spike simultaneously, says Richard Aboulafia, president of the Teal
Group in Fairfax, Va. Each is being propelled by a very different
set of drivers—defense by world events such as the Iraq and
Afghanistan wars, and commercial by strong passenger and freight
traffic.
“Last
year was the first year that passenger travel growth exceeded the
previous record levels set in 2000,” completing a recovery
from the Sept. 11, 2001, terrorist attacks, says Peter Conte, spokesman
for Boeing Commercial Airplane in Seattle.
The
increase in passenger miles continues to be significant, adds John
Walsh, president of Walsh Aviation, Annapolis, Md. Air travel increased
12 percent in 2004, another 7 percent this year, and is likely to
maintain that trend.
Passenger demand and enthusiasm for new aircraft designs—such
as the Boeing 787 Dreamliner and the Airbus A380 and A350—have
kept commercial airplane orders and build rates at surprising levels,
especially in light of the severe financial problems faced by many
U.S. airlines. It is primarily air carriers outside of the United
States that have responded to the increased passenger travels by
adding to their fleets, opening new routes and increasing the frequency
of flights, notes Boeing’s Conte.
Airbus
reported 417 orders for new aircraft in just the first nine months
of this year, a 30 percent increase over the 320 orders it received
in full-year 2004. Boeing reported an even more impressive increase,
with 647 orders through mid-October, more than double its 277 total
orders last year.
Foreign
carriers have the means to purchase new aircraft, Aboulafia says.
Worldwide, airlines are expected to lose $8 billion this year. Those
in the United States alone are projected to lose $9 billion, which
means airlines in the rest of the world will actually earn $1 billion.
And
it isn’t as if U.S. airlines aren’t buying any planes.
While so-called legacy airlines are facing bankruptcy reorganizations,
new low-cost carriers such as Southwest Airlines and its imitators
are doing very well financially, and investing in the future. “We
are seeing a whole new phenomenon,” says Napier. “It used
to be that you started a new airline with used planes, but what
seems to be happening is that the new airlines are buying new planes.”
In
addition, there has been a lot of growth among U.S. leasing companies.
The largest fleet owner in North America is GE Capital, which makes
$1 million a day leasing planes to various airlines, notes Robert
Mraz, vice president of sales and marketing for TW Metals Inc. in
Exton, Pa.
Don’t
write off the legacy airlines yet, adds Keith Harvey, vice president
of sales and marketing for aerospace and distribution at Kaiser
Aluminum, Foothill Ranch, Calif. “At some point, the legacy
carriers will come back into the market,” he says, though perhaps
not until some weaker players shake out of the competition. “They
need to figure out a way to carry more people at a lower cost. When
they reach that point, they will need to replace their fleet with
newer, more efficient planes.”
U.S.
carriers may replace old fleets even if there is no shakeout, says
Simon Pickup, business operations director for Airbus North America
in Herndon, Va.
The
North American fleet is the oldest in the world on average, so it
may make sense to replace the oldest equipment with newer planes
that are far more fuel-efficient. New planes could actually lower
operational costs for commercial airlines, Napier agrees.
Meanwhile,
demand for military aircraft is expected to remain strong at least
through 2008. “We’ve seen pretty robust orders in the
last several years, with military spending up,” says Rod Hogan,
procurement manager for metallic raw material at Lockheed Martin
Aeronautics in Fort Worth, Texas.
Linda
Zimmerman, Lockheed Martin director of procurement for airframe
commodities, reports that the company is producing about six F-16s
a month, and should be seeing further international demand for that
aircraft soon. Also in high demand are its F/A-22, C-130J and its
F-35 Joint Strike Fighter. “It has been pretty steady, and
we are looking for it to remain steady for the foreseeable future,”
she added, with new programs ramping up as others wind down.
Military
aerospace may eventually feel the pinch of defense budget cuts as
the federal government seeks ways to continue funding military actions
in Iraq and Afghanistan, as well as hurricane relief here at home.
Jeff Luckasavage, vice president of sales and marketing for TMX
Aerospace, Southfield, Mich., says demands on the federal budget
are likely to prompt debate over whether the U.S. really needs,
for example, a new Joint Strike Fighter aircraft.
With
the ongoing concern about terrorism, however, defense activity remains
a priority. All defense programs are being funded so far, notes
Bill Sales, senior vice president for nonferrous operations at Reliance
Steel & Aluminum Co. in Los Angeles.
Business
jets recovering
Certain smaller aerospace sectors, including business jets and an
emerging market for “very light jets” or VLJs, are gaining
strength. While business jet demand dipped after the last market
peak, Aboulafia says, it has recovered nicely in the last year due
to general economic growth, more fractional ownership and a desire
among flyers to avoid large air traffic hubs.
Eclipse
Aviation Corp., Albuquerque, N.M., sees a nascent market for “air
taxis” and plans to produce in excess of 6,000 six- to eight-passenger
VLJs in the next 10 years to meet that need. Aboulafia is skeptical
that Eclipse, which is supposed to deliver its first plane next
year, can achieve its claims. “There is a market for some light
jets, but not at the sales level they are talking about,” he
says. Other participants in the VLJ market include Cessna and Embrear.
Prospects
for regional jets are mixed. Demand has nose-dived for regional
jets that carry fewer than 50 passengers, Aboulafia says, but is
still strong for the 70- to 100-seater market.
Can
metals meet demand?
All of this demand for aircraft production, as well as pull from
some non-aerospace markets, is putting a severe strain on the supply
of certain grades of aluminum, as well as titanium and nickel-based
superalloys. In particular, heat-treated aluminum plate is in extreme
short supply, exacerbated by its use in certain non-aerospace military
applications such as the armoring of troop carriers in Iraq.
New
aircraft has been designed to use more plate and less sheet to better
handle the stresses of takeoffs and landings, says Jerry Bashir,
president of Falcon Aerospace in Davie, Fla. Planes used to be composed
of about half sheet and half plate, but today the ratio is 80:20
in favor of plate.
In
light of all of these factors, heat-treated aluminum plate is on
allocation in most cases, with mill lead times of about 24 weeks—30
to 40 percent longer than normal deliveries, suppliers report.
“It
is a day-to-day struggle to make sure we have ample supply to meet
our customer needs,” says Sales at Reliance. “Everyone
is wrestling to make sure they have enough plate. I don’t think
it is affecting build rates, at least not yet.”
While
aluminum producers have been working to crank out as much plate
as they can, their “de-bottlenecking” efforts haven’t
really solved the problem, says O’Carroll. “We should
see some light at the end of the tunnel when Alcoa brings its Russia
plate capacity on-stream,” notes Bashir.
Alcoa
is not only looking to ramp up in Russia, but to increase its overall
aerospace heat-treated sheet and plate production by 50 percent.
“It won’t be done quickly,” admits Kevin Lowery,
a spokesman for the company. “But part of the upgrades, which
we originally announced in June, are already in place. The rest
will be up and running within the next 15 months.”
Also
expected to relieve the pressure on plate is a reported move by
Austria-based Amag Rolling, an aluminum sheet mill, to start producing
plate up to three inches thick in mid-2006 or early 2007.
Supply
has been extremely tight for titanium and nickel-based superalloys
mainly used in aircraft engines. Titanium is also being used for
structural applications in some aircraft today. Mill lead times
for titanium are a year or longer, says John Odle, executive vice
president of RMI Titanium Co., Niles, Ohio, although certain distributors
offer shorter availability.
Substitution threatens aluminum
Titanium
supplies are likely to get even tighter as aircraft designers choose
titanium over aluminum for its higher strength-to-weight ratio and
its compatibility with new high-tech composites, says Dan Greenfield,
spokesman for Allegheny Technologies Inc. in Pittsburgh. “Starting
with the Boeing 777, planes have been using a significant amount
of titanium in their body, “ he says, and titanium should continue
to cut into aluminum’s material share as long as airframe producers
continue to increase their use of composites.
Boeing
is making a “quantum leap” into composites with its 787
model aircraft, says Dean Blakeney, general manager of Corus Aluminum
Rolled Products USA, Schaumburg, Ill., using composite material
for major portions of the aircraft’s fuselage and wing. Boeing
reports that the 787 will be 50 percent composite, 20 percent aluminum,
15 percent titanium, 10 percent steel and 5 percent other materials.
By comparison, its 777 was 12 percent composites and 50 percent
aluminum.
Airbus
is also increasing its use of advanced materials, including composites,
with its newly launched A350 aircraft. It will be 39 percent composite
(including a composite wing), up from 22 percent in the A380. The
new aircraft will also be 21 percent aluminum lithium, including
in the fuselage. The company did not state the titanium content.
Harvey
admits that airframe manufacturers are moving toward more composites
for higher fuel efficiency and better range. “There lies the
challenge for aluminum,” he says. “We need to promote
new, stronger, lighter alloys and increase the applications for
existing alloys.” Aluminum lithium, for example, offers Airbus
some of the advantages they seek. “We need to convince airframe
manufacturers that aluminum still has a lot of valuable characteristics.”
If
Boeing’s 787 is as well received as it appears, it will only
fuel the trend toward greater use of composites and titanium. In
light of that, metals producers are looking to increase their titanium
output. In July, Allegheny announced it was planning to expand its
titanium production capabilities within the next 18 months by upgrading
and restarting its idled titanium sponge facility, constructing
a third plasma arc melt cold hearth furnace, expanding its high-value
plate products capacity by 25 percent and upgrading its cold-rolling
assets.
While
not as tight as titanium, nickel-based superalloys are also in short
supply with lead times extending, says Sunil Widge, president of
the forged bar and billet business unit of Carpenter Technology
Corp., Wyomissing, Pa. Producers are gearing up to make sure all
capacity is being fully utilized. Carpenter upped its superalloy
capacity about five years ago, he adds.
Likewise,
Allegheny announced early in September that it would be increasing
its capacity to produce premium-melt nickel-based alloys, superalloys
and specialty alloys by about 20 percent over the next 15 months.
With
production increasing on all fronts, Napier says, “2006 is
going to be a boom year, and that could extend to 2007.”
Aluminum
2006:
High Costs Temper Strong Demand
While any increase in U.S. demand for aluminum in 2005 has been
slight—other than in the red-hot aerospace market—next
year is expected to be better, since so much of the excess inventory
has been worked out of the system and a surge in demand is imminent
as the hurricane-ravaged Gulf Coast begins to rebuild.
Burgeoning
energy costs, especially for natural gas and electricity, however,
could cripple profit margins and even constrain aluminum production
levels. Coupled with tight alumina supplies, high energy costs could
cause further cutbacks of smelter capacity in both the United States
and Europe.
Last
year, U.S. aluminum shipments were quite strong, up 8.6 percent
over 2003. A big part of that gain was due to a buildup of inventories,
both on the distributor and end-user level, says Lloyd O’Carroll,
vice president and chief economist with BB&T Capital Markets,
Richmond, Va. In 2005, as companies worked down those inventories,
shipments grew at a much slower 2.5 percent rate.
At
this point, inventories are back in balance, says Robert Mraz, vice
president of sales and marketing for TW Metals Inc., Exton, Pa.
“We are now in a stable supply-demand dynamic.”
Though
service center inventories are fairly lean right now, it may be
awhile before they begin stocking up again. “Service centers
are a little jumpy about what is going on with the U.S. economy.
It doesn’t feel as if we are experiencing a 3 to 3.5 percent
growth in GDP,” says Keith Harvey, vice president of sales
and marketing for aerospace and distribution at Kaiser Aluminum,
Foothill Ranch, Calif.
While
worrying about being stuck with high-cost inventory is a fact of
life for service centers, Mraz thinks many are overly pessimistic
about 2006. “A lot of people think every silver lining has
a cloud. We think the market dynamics are strong. While we are being
cautious, the first thing is to be sure our customers have metal.
We would rather err on the side of having enough inventories to
meet their needs.”
Bill
Sales, senior vice president for nonferrous operations for Reliance
Steel & Aluminum Co., Los Angeles, sees strong market demand
for aluminum. Aerospace is leading the way, but non-aerospace business
has also stabilized, he says.
Demand
for aerospace-related aluminum—particularly heat-treated plate—is
absolutely booming in every aerospace sector, he adds, including
commercial, military, regional jet and business jet sectors.
“Heat-treated
plate is extremely tight, and I am looking for it to continue to
be tight [into 2007],” Sales says. Some non-aerospace defense
applications, including the armoring of military Humvees, are consuming
a lot of plate, leaving less for aerospace applications. “Plate
has been and will continue to be on allocation,” he adds.
Aluminum
mills are working to increase their plate capacity, though experts
say supplies are likely to remain tight for the next year or two
as producers ramp up their new lines. In June, Pittsburgh-based
Alcoa Inc., for example, announced expansions at its facilities
in Davenport, Iowa; Kitts Green, UK; Fusina, Italy; and Belaya Kalitva,
Russia. The expansions will increase Alcoa’s heat-treated plate
production by 50 percent over the next 15 months.
Besides
aerospace, the signs look positive for other aluminum applications,
such as marine, chemical, petrochemical and construction—especially
in the hurricane damaged markets in the South. “When the rebuilding
of the Gulf Coast starts, it will be a major boom that will last
awhile,” says O’Carroll. Called the largest public works
project ever in the United States, the hurricane reconstruction
could take several years to complete and boost demand for everything
from gutters to curtain walls. “It is very difficult to quantify,
but it has a very large potential,” he adds.
O’Carroll
was expecting a strong building and construction market in 2006
even before the hurricanes, with the lackluster office and commercial
sector picking up steam. “Nonresidential (construction) was
poised for a big year (in 2006) even before Hurricane Katrina, as
vacancy rates have been falling for more than a year now,”
he reported in his third-quarter Quarterly Aluminum Bulletin. “Vacancy
rates are down to their lowest levels since 2002. With expected
rebuilding after the hurricanes, aluminum shipments to the nonresidential
construction market should be up sharply, more than 9 percent, in
2006.”
Hurricane
cleanup could also boost the supply of aluminum scrap, thus lowering
prices, as was the case following storms in Florida last year, he
says. Much of the scrap in and around New Orleans could be contaminated
by floodwaters, however, and commingled with ferrous material due
to all the damaged automobiles. Scrap of this type is more likely
to be exported to China, where the labor cost to separate the alloys
is lower, and they are more tolerant of contaminated material, O’Carroll
notes.
U.S.
demand for aluminum common alloy is a bit softer than a year ago,
notes Reliance’s Sales. One culprit is the automotive market,
he says, where build rates, mainly among the Big Three, have declined.
O’Carroll
predicts U.S. auto sales will end this year up about 1 percent,
while North American vehicle production will be down 3 percent.
“In 2006, we expect U.S. sales to be off slightly, as some
of the would-be demand was pulled forward into 2005 by the aggressive
[discount] incentives. We expect 2006 production of 15.3 million
units, down about 1 percent.”
Aluminum
shipments to the auto sector will decline 0.4 percent this year,
but increase by 5.2 percent in 2006 due to substitutions for steel.
“We estimate aluminum content per vehicle should rise from
295 pounds [per vehicle] in 2004 to 320 pounds in 2006,” he
says. High gasoline prices give added incentive to replacement of
steel parts with lighter weight aluminum versions.
Aluminum
consumption by makers of heavy-duty trucks and truck trailers continues
to be positive, at least through 2006, as carriers buy ahead of
new EPA engine air-quality regulations set to take effect Jan. 1,
2007.
General
engineering plate remains in tight supply, Sales says, though demand
for this product has softened a bit, possibly due to the downturn
in the semiconductor industry. Aluminum plate is used in the machinery
used to make chips. “The market has weakened a little, partly
because of some movement of [semiconductor] production capabilities
to China and elsewhere in Asia. That has had some impact on the
business we do in the United States.”
Overall,
however, the outlook for aluminum demand in 2006 is positive, experts
report, though the outlook for profitability is not as rosy. “Energy
costs are raping profits. They have really ballooned,” says
Kaiser’s Harvey.
“The
impact of the price of natural gas is huge,” O’Carroll
says. “The largest users are alumina refineries. It could be
spring before all the drill rigs in the gulf are back in production.
But even once that happens, I don’t think natural gas will
ever be back to $5 or $6, where it was a year ago (it is now trading
at $12 to $13 per MMBTU). That leads to margin pressure and upward
pressure on prices.”
One
industry source has stated that if natural gas prices remain at
$8 or higher, and if aluminum and alumina prices drop, 6 million
to 8 million metric tons of alumina capacity could be shut down.
Increases
in electricity prices could result in further shuttering of smelter
capacity, O’Carroll adds. He reported in his recent quarterly
bulletin that 1 million metric tons—almost 3 percent of global
capacity—in Germany and the Netherlands alone is at risk. U.S.
smelters face the same power crunch. Alcoa recently told analysts
that if it cannot obtain an economic power source for its Eastalco
smelter in Maryland, it will have to curtail production.
Harvey
says that 2005 will turn out to be a good year for the aluminum
industry and that 2006 could be just as strong, “but there
is a need to address costs, especially energy costs. We need to
find a way to either pass them on or take part in conservation efforts
to minimize their effect. We can only absorb these costs for so
long.”
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