January 2009

Nickel, Titanium Users ‘Running Off the Cliff’

Despite serving some of the stronger end-use markets, suppliers of high-performance metals are feeling the effects of the recession, too.

By Philip Burgert, Contributing Editor

With aircraft manufacturers delaying production and other industries “running off the cliff,” the poor economy is playing havoc with demand for high-performance metals like nickel and titanium.

Most major users of nickel alloys and stainless steel have seen sharp reductions in demand for their products as the economy has deteriorated. Few observers forecast any upturn in orders before late 2009 at the earliest.

Though the long-term outlook for titanium suppliers remains bright, they’ll have to wait longer than expected for that payoff as commercial airplane builders push production of new titanium-intensive aircraft into 2010.

Markus Moll, managing director and senior market analyst for Steel & Metals Market Research GmbH, Reutte, Austria, says virtually all end-use segments for stainless steel and nickel alloys have been hurt by the global financial crisis. “The earliest and hardest hit were building and construction products, household appliances and consumer durables,” Moll says.

Now even the process equipment segment—which uses stainless alloys, nickel alloys and titanium in heat exchangers, tanks and refinery operations—has also been hit by the downturn as oil and chemical companies reconsider expansion projects.

“In chemical and petrochemical, almost 100 percent of the planned expansion projects for 2009 are on hold right now,” Moll says. “In the oil and gas sector, probably about 50 percent are under review. There’s a chance they will happen, but it depends, of course, on if the oil price holds or slips further.”

Moll describes the power generation industry, where a number of projects planned for 2009 are still moving ahead, as “one small safe haven or prize.”

In the pulp and paper industry, most expansion projects have been brought to a halt, Moll says, which means that the flow of metal orders for projects already under way will last only to the end of the first quarter.

“There are various cliffs coming,” Moll adds. “The cliff in building and construction, we’re over already. The cliff in automotive, we’re over already. But the cliff for some process equipment industries will come in the next two or three months.”

Dave Christiansen, vice president of investor relations and business development for nickel-based alloy and stainless producer Carpenter Technology Corp., Wyomissing, Pa., says his company is among those that have seen a falloff in business recently. “It certainly has slowed down over the last few months,” he says. “It’s a competitive situation out there.”

Christiansen says some customers have been pushing out orders over the last couple months, though he expects Boeing Co. to resume buying as it works to bring production back up to speed following a 60-day strike by aircraft workers.

The Boeing strike curtailed demand for some components used in engine applications in the company’s 737 aircraft program, but the market for materials used in fasteners like nuts and bolts has held up fairly well, Christiansen says. “We’re expecting to see some excess inventory in that supply chain,” he adds. “We’re waiting to see what the demand is going to be over the next quarter or two.”

In addition, Christiansen believes there is excess inventory in the channel for the specialty stainless alloy products used in oil and gas exploration. “We also have some material that goes into power generation and that seems to be holding up fairly well, but we’ll have to see how the industrial gas turbine business goes moving forward from here,” he says.

Carpenter sells titanium for medical, aerospace and sports applications, as well. “Particularly on the medical side, there was a lot of inventory in the supply chain over the last couple of years, but we think a lot of that inventory has been drawn down,” Christiansen says. “For now the sales and the volume seem to be fairly steady.”

Richard E. Leone, manager of investor relations for titanium producer RTI International Metals Inc., Niles, Ohio, says that because of delays in Boeing’s 787 aircraft program, the current outlook for the titanium supply chain is one of excess inventory.

The new 787—a large, titanium-intensive aircraft—is expected to consume a mill buy weight (as opposed to a fly weight) of 250,000 pounds of titanium in each plane. Boeing initially planned to produce and ship 109 of the 787s next year, but delays in the program have since reduced that to just 25, Leone says. That cutback will reduce titanium demand in 2009 by more than 20 million pounds—a substantial hit for U.S. titanium producers who made an estimated 70 million pounds of the metal in 2008.

“What Boeing did was push out their delivery schedule about 18 months to two years,” Leone says. “As a result, there is an excessive amount of inventory already in the supply chain.”

Despite its reduced needs, Boeing continued to take delivery of mill products under some contracts through 2008. “That’s going to exacerbate that overhang of inventory [in the supply chain], which is estimated to be 25 to 30 million pounds,” Leone says. The industry oversupply is expected to persist through 2009 and spill over into the first half of 2010.

RTI supplies finished assemblies each worth approximately $1.5 million to Boeing’s Seattle 787 production line and will lose substantial top-line income because of the schedule pushback in 2009, Leone says.

Last year, 50 percent of RTI’s business came from commercial aerospace, while 33 percent involved military business. The other 17 percent was related to industrial and consumer products, the biggest portion energy-related.

Leone recalls a conference last September when the International Titanium Association predicted the industry would double its worldwide production from 150 million pounds in 2005 to more than 300 million pounds by 2015. Except for the aerospace market, titanium demand has deteriorated sharply ever since. Assuming the economy rights itself, Leone adds, “the long-term outlook is still very healthy and encouraging. But these speed bumps in the road have certainly slowed us down.”

Luke Folta, a specialty metals analyst with Longbow Research, Independence, Ohio, notes that developments in aerospace design—most notably on Boeing’s 787, but also on Airbus’s also-delayed A380 and A350—will fuel future demand for titanium. The Boeing 787 utilizes a composite airframe rather than an aluminum fuselage, and the mechanics and metallurgy of titanium work better with composites, Folta explains.

“You’re seeing a lot more titanium being used in the 787. As a result of this program, domestic producers, and also the international producers, have built up a lot of capacity for titanium,” he says.

The glut of inventory, mainly in the commercial aerospace channel, is affecting prices. The price of 6-4 titanium ingot (6 percent vanadium and 4 percent aluminum), the most common aerospace grade, was down to about $13 a pound in December from $18 a year ago (a 28 percent decline) and a peak of $30.50 a pound in the summer of 2006 (about a 57 percent decline), Folta reports. “There’s really no support in sight for the next 12 months. There’s over a year’s worth of material in the channel right now just kind of sitting around.”

Boeing is still taking shipments on mill contracts, causing the inventory situation to worsen. “We haven’t heard that there is any pushback yet,” he adds.

While industrial markets for titanium have been fairly stable over the last couple years, some have begun deteriorating in the most recent quarter, Folta says. “Chemical processing projects in the Middle East, and oil and gas projects globally, have started seeing some push-outs,” though no titanium production cutbacks have been announced.

Specialty metals are entering 2009 with a global consumption level that is probably 25 percent lower than the average for 2008, Moll estimates. Depending on how the industry fares, there could be recovery or a long stagnation at this lower level. “Overall, for all industries, we think the market will bottom out in the second or third quarter,” he says.

In the third or fourth quarter, Moll predicts a gradual upturn. “That’s the most likely scenario,” he says, “but year on year the market is probably at minus 10 to 15 percent in terms of global consumption volumes of stainless and nickel alloys. Nickel alloys are less affected and stainless more.”

Nickel-based products represent about a 1.5 million-ton market with about 75 percent going into stainless and 10 to 12 percent going into nickel alloys. The remainder goes into other applications such as plating.

Nickel prices have suffered an even worse downturn than titanium. London Metal Exchange nickel prices declined from a peak of more than $54,000 per metric ton in early 2007 to about $10,000 per ton in late December 2008.

Moll says the time for profit taking is over. “It is belt-tightening time right now,” he asserts. “There will be some consolidation and downsizing in the industry. I know of a lot of service centers that currently want to sell their businesses. The mood in the stainless distribution business is particularly bad at the moment. It’s no fun to be a distributor.”

William K. “Bill” Sales, senior vice president of nonferrous operations at Reliance Steel & Aluminum Co., Los Angles, disputes that view, however. The market is “definitely softer than last year,” he says, noting that the Boeing 787 delays affected his company’s results in 2008. “But all in all, if you look at where we are today and at 2008 on a historical level, our business is still relatively good,” he says. “I think we’re all worried about where the nickel price is and what has happened to the titanium price. Our view is we’re getting pretty close to the bottom, if we haven’t hit it yet.”

Decreasing prices have put pressure on margins, Sales acknowledges. “When you combine that with softer demand, that definitely has put some pressure on the business this year,” he says. “Hopefully as we look into next year, we’re not going to have the declining pricing we had to work through in ‘08.”

Reliance has been aggressive about selling down its inventory, so it has already corrected for much of the price erosion. Not so of many other service centers.

“Rig­ ht now there is still too much inventory at the distributor level. Given the decline in prices we’ve seen, a lot of them are selling at replacement cost, which is probably quite a bit lower than what their inventory is priced at,” Folta says.

Carpenter has what Christiansen describes as a relatively small involvement in the distribution market with about 10 percent of its sales from stainless and some aerospace high-temperature materials going through its own distribution units. “Our impression of the distributor market is that their inventories are probably not all that full, but they don’t seem to be replenishing,” Christiansen says. “It seems like they are kind of keeping their powder dry to see what happens with market demand.”

North America is feeling the brunt of the storm in high-performance metals, in Moll’s view. “We think that Europe and North America are particularly hard hit and probably North America a little bit harder than Europe,” he says. “I think that the bottom is deeper in North America than it is in Europe, but the recovery there will also be a little bit faster.”

Structurally, the North American stainless and nickel alloy industry is in better shape than Europe’s, he says. “You’re falling from a higher cliff. Your economy is shaking harder than the European one, even though the mood in Europe is very bad at the moment.”

With 27 individual countries in Europe, it is easier for the state to intervene and prop up struggling industries. “In times like this it is good because deficit spending keeps certain segments of the market up,” he says. Despite any bailout of the U.S. financial sector or auto industry, private enterprise limits the direct influence of government on companies in North America, he notes.

Japan and Korea are on about the same level as North America and Europe, while the downturn in other areas will be less severe, Moll says. Nevertheless, stainless consumption will see no growth anywhere in the world next year, not even in China.

The stainless steel industry has reacted sharply, curtailing 30 to 40 percent of its production capacity. Up to 50 percent of the stainless in the supply pipeline is being destocked, Moll estimates, a process that will continue into the first quarter.

“People were mistaken in 2008 and they will be in 2009 if they think there is an automatic rebuilding,” Moll says. “Distributors have burned their fingers so badly and taken such significant losses that they are very risk averse. They don’t trust the raw material prices. And no raw material price relief can be expected in 2009."

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