Superior Outlook for Superalloys
Prospects are good for nickel-based superalloys, with demand on the upswing in power generation, aerospace, and oil and gas markets.
By Myra Pinkham, Contributing Editor
Nickel suppliers are cautiously optimistic that the market for superalloys will strengthen at least modestly in 2013, following the correction that occurred in the second half of 2012.
While demand for nickel-based superalloys was significantly higher across all the major end-use markets in the first half of 2012, activity slowed to 2011 levels during the last three months of the year, says Blain Tiffany, president of Castle Metals Industrial, Oak Brook, Ill. “Our customers are concerned with the possibility of an economic decline if the government doesn’t resolve its budgetary issues,” Tiffany says. Buyers are also concerned about factors affecting the global economy, including the European debt crisis and the slowing of growth in China.
The majority, perhaps 60 percent, of nickel-based superalloys are sold directly by the mills, but distributors’ role will grow, Tiffany predicts. “Going forward, traditional mill customers will be looking for distribution partners that could provide added value through processing services and other supply chain solutions.”
Given the headwinds created by the macroeconomic and political unknowns, demand for nickel-based superalloys should remain soft and inventories tight among both distributors and OEMs, at least for the short term, says Richard Harshman, chairman, president and chief executive officer of Pittsburgh-based Allegheny Technologies Inc. “But I’m confident that as these issues are addressed and resolved, growth in demand for our products will strengthen,” he adds.
The superalloy market reached “a steep inflection point” in 2011 as lead times extended, causing a buying frenzy as customers rushed to build up inventories, recalls Stephen Peskosky, vice president of forged bar and billet for Carpenter Technology Corp., Wyomissing, Pa. The current supply of nickel-based superalloys is plentiful, with relatively short lead times and additional production capacity being added in the United States, Europe and Asia. That lingering oversupply scenario is the reason for the slight inventory correction in late 2012, Peskosky says.
Carpenter and ATI are among the producers adding superalloy production capacity in the next year or two. Carpenter is building a new facility in Athens, Ala., that will give it the capability to produce an additional 27,000 tons of premium products annually once it comes online in 2014. That is about the same time ATI’s new advanced hot-rolling and processing facility in Brackenridge, Pa., is scheduled to start up. It will produce up to 48-inch-wide nickel alloy, titanium and zirconium coils, as well as 60-inch-wide stainless sheet and plate.
Current lead times for high performance metals, though varying by alloy and product form, are very short from a historical perspective, ranging from 4-12 weeks, Harshman estimates.
Most buyers remain cautious. “Given the uncertainty of the economic climate, most distributors are being very conservative in inventory management and are not willing to go out on a limb when it comes to replenishing stocks,” Tiffany says. “Rather they are working closely with their mill partners to manage inventories appropriately.”
This was especially true at year's end, which is traditionally the time service centers try to increase their cash flow by cutting back their inventories. “With the decline of nickel prices, there has been no urgency to buy more metal, especially if they expect nickel prices, and therefore nickel-based superalloy prices, to continue softening,” says Larry Paul, technical marketing manager for ThyssenKrupp VDM USA, Florham Park, N.J.
The London Metal Exchange’s three-month bid price for nickel in December averaged about $17,527 per metric ton. That’s up from the 2012 low of $15,722 per ton in August, but down from the year’s high of $20,547 per ton in February. Nickel has ranged from as high as $31,442 per metric ton in March 2008 to as low as $9,777 in March 2009 during the recession. Though they inched up a bit in the last quarter, nickel prices are floundering at levels many consider only marginally profitable.
“Customers buy nickel-based alloys for a specific need,” typically corrosion or high-temperature resistance, Tiffany says. “These alloys are used in extremely demanding applications, such as components for the aerospace, power generation, oil and natural gas, and chemical process industries.” In the first half of 2012, demand in those industries was surprisingly strong. “In general, the U.S. manufacturing sector was stronger than many people gave it credit,” he adds.
Despite some slowing in the second half, U.S. industrial production remains fairly strong, with November production 2.5 percent ahead of November 2011 and manufacturing production up 2.7 percent year on year, according to the latest data from the Federal Reserve Board.
“The aerospace market continues in an accelerated growth cycle driven by the large commercial airplane segment,” says James Callan, president of Castle Metals Aerospace, with aircraft backlogs at both Boeing and Airbus at record levels. “This continues to drive increased demand for superalloys and other metals that are part of this dynamic supply chain.”
Dan Greenfield, ATI’s vice president of investor relations and corporate communications, says the industry is in the midst of a once-in-40-year event. The future generation aircraft now under development will be equipped with more efficient jet engines, which burn hotter and require more parts made of heat-resistant superalloys. In fact, aerospace R&D is leading to the development of new, complex superalloys by metals producers, including ATI’s 718 Plus and General Electric’s proprietary Rene 65 alloy. ATI reports that sales of its patented 718 Plus alloy increased 20 percent from a year ago. “That is impressive considering this alloy is in the early stage of adoption by engine OEMs,” Harshman notes.
According to the Airline Monitor, commercial jet engine production is expected to rise 36 percent from 2,750 engine builds in 2012 to 3,740 in 2019. Those figures include an 8.5 percent increase in 2013, followed by another 5.4 percent increase in 2014.
Nickel-based superalloys are not just making gains in jet engines, but also in aerostructures such as engine mounts and wheel and braking systems, says Carpenter’s Peskosky. The ambitious aircraft build schedules pose double-digit growth opportunities for nickel superalloys in the next five to seven years, even with near-term economic conditions weakening demand in the jet engine MRO segment.
In the energy sector, demand for nickel superalloys used in equipment for oil and gas exploration also has been solid, even with the number of U.S. drill rigs declining in recent months, says Peskosky. Superalloys provide strength and corrosion resistance for parts used to drill in harsh environments, such as deep wells and those with sour gas. “There will be more of a need for superalloys as offshore drilling increases,” he adds, noting that offshore drilling has been on the increase around the world, even in the U.S. where it slowed considerably in the aftermath of the BP Deepwater Horizon oil spill.
According to Baker Hughes Inc., Houston, 1,799 drill rigs were operating in the U.S. as of mid-December, down 10.9 percent from a year earlier. Due to overproduction of natural gas, a larger percentage of those rigs are being used to find oil and natural gas liquids, and many are being capped. Taking wells out of production requires an increase in completion equipment, which also contains a lot of superalloys, Peskosky says.
Oil and gas exploration could rebound in 2013. Harshman notes that some fairly large oil and natural gas projects that were put on hold in 2012 could be back on the books in the coming year.
The outlook for the industrial gas turbine business is positive for the next three to four years, says Castle’s Tiffany, due to a combination of new builds and repair and refurbishment business. “Not only is natural gas plentiful at a low price, but also in the United States there are a lot of environmental concerns about coal.” Although burning coal continues to be the most cost effective way to produce power, it also results in high greenhouse gas emissions. “Natural gas is a very clean, cost effective answer,” he notes.
Coal concerns have spurred demand for both renewable energy and for gas turbines, says Bill Day, president of Longview Energy Associates, Kensington, Calif. “While there is increased use of renewables to produce power, they are a highly variable power source. They are only available when they are available, and that availability isn’t totally predictable. Utilities need to be able to ramp up quickly to fill the gap, and gas turbines can be ramped up and down quicker and more efficiently than a coal-fired plant.” As the economy and industrial production continue to rebound from the recession, demand for industrial gas turbines will only increase, he adds.
In the United States, natural gas is expected to generate almost as much electricity as coal by 2017, says Steve Bolze, president and chief executive officer of GE Power & Water, Fairfield, Conn., one of the largest producers of industrial gas turbines. Whether orders for gas turbines return to the levels of the late 1990s remains to be seen, says Greenfield at ATI. “While demand is picking up, you would think it would already be stronger than it is, with the price of natural gas being this low.”
Production of gas turbines this year will likely be “modestly” better than 2012, say the experts, depending on what happens with the domestic and global economies, as well as natural gas prices. With increased use of natural gas, not just for power generation but by the plastics and fertilizer industries, prices have risen to about $3.50 per MMBtu from under $3 early in 2012. “However, I don’t see it getting back up to $10 to $12 per MMBtu like it was prior to the downturn for a while,” Greenfield adds.
Bill Schmalzer, senior analyst for power systems at Forecast International Inc., Newtown, Conn., forecasts that 1,341 gas turbines will be produced for electrical power generation in 2013, up about 4 percent from 2012. For the next several years, the rate of growth will continue at 3-5 percent, he says. Peskosky predicts demand could grow more rapidly than that, especially in the 2013 to 2015 timeframe.
Major producers of large gas turbines are expanding or building new plants in the U.S. in anticipation of renewed demand. For example, Siemens AG is in the midst of an expansion project in Charlotte, N.C.; Mitsubishi Heavy Industries has built a plant in Savannah, Ga., and has agreed to acquire Pratt & Whitney Power Systems from United Technologies Corp.; Alstom SA has opened a facility in Chattanooga, Tenn.; and General Electric continues to expand its gas turbine product line.
Day notes that demand also has been strong for small turbines used for co-generation, combining a gas turbine with a steam turbine to take advantage of heat generated by another process. “Big process industries, such as oil refineries, could use them for self-power generation and, in some cases, sell unused electricity back to the power grid.”
Klaus Kleinfeld, chairman and chief executive officer of Alcoa Inc., told analysts earlier this year that the next generation of gas turbines are about 15 percent more fuel efficient, but need 3D airfoil cooling schemes to get air to critical areas. These turbines run much hotter, above the melting point of many materials, and need heat-resistant superalloys in order to function.
Another emerging use for superalloys is the more fuel efficient automotive engine. Years ago, there were no superalloy parts in car engines, Peskosky says. Today, almost every engine design includes some, especially those with turbochargers.
Most suppliers are bullish about demand for superalloys in 2013, especially with applications continuing to broaden and market drivers generally moving in a positive direction. “There will continue to be business out there as long as we don’t go over the fiscal cliff,” Tiffany says.