9-2009 Military Metals Market
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Defense Defies the Downturn

Demand for metals by military contractors is relatively unaffected by the change of administration and the poor economy. New programs for aircraft, ships and troop carriers promise long-term business for defense suppliers.

By Myra Pinkham, Contributing Editor

While big annual increases in defense spending appear to be in the past, as the Obama administration struggles to contain the growing federal budget deficit, suppliers of metals to military contractors remain positive. Demand has leveled, but it has not collapsed, and it is not likely to in the foreseeable future, they say.

“I think the defense market will continue to offer growth-oriented business for both metal service centers and producers,” says Bob Mraz, vice president of sales and marketing for TW Metals Inc., Exton, Pa. “It is going to be an important part of our growth strategy for the future.”

The Obama administration is looking for cost savings “by getting back to more streamlined basics and away from pie in the sky concepts,” says Steve Buzash, president of Standard Metals Inc., Hartford, Conn.

Larry Ryczek, vice president of sales and marketing for beryllium products at Brush Wellman Inc., Cleveland, says the federal government’s approach is a mixed bag for his company. Brush Wellman’s defense sales should meet expectations for the next year, “but it’s a little cloudier beyond that.”

In a recent speech to the Veterans of Foreign Wars, President Barack Obama expressed his commitment to defense spending: “We need to keep our military the best trained, the best led and the best equipped fighting force in the world. That’s why, even with our current economic challenges, my budget increases defense spending....”

That increase is quite small, however, says James McAleese, principal of McAleese & Associates PC, McLean, Va., who maintains that Department of Defense funding has been “flatlined,” albeit at a high level. It includes cuts in the procurement of equipment for air, land and marine programs that some metals producers and distributors have come to rely on for a significant portion of their business.

“Not just was the baseline defense budget very strong [under the former Bush administration], but so was the supplemental spending focused on the war effort,” notes Keith Harvey, vice president of sales and marketing for distribution and aerospace at Kaiser Aluminum Corp., Foothill Ranch, Calif. “Under the current administration, certain programs are being scrutinized and some funding is being cut.”

Nevertheless, demand for defense-related metal products remains solid despite the poor economy, says Richard Aboulafia, vice president of the Teal Group, Fairfax, Va. “The defense market hasn’t collapsed by any means. We are still seeing growth, even if it is just a trickle.”

At first glance, the current administration’s proposed increase in defense spending appears substantial at $19 billion, McAleese says, but the supplemental portion of the budget actually declines by $15 billion. The result is an increase of just $4 billion, or about six-tenths of one percent of the $664 billion total.

Explaining this, President Obama told the VFW that his administration is seeking to reform defense procurement. “Even as we increase spending on the equipment and weapons our troops do need, we’ve proposed cutting tens of billions of dollars of waste that we don’t need.” Those cuts affect funding for more F-22 fighter jets, an alternative second engine for the new F-35 Joint Strike Fighter and a new presidential helicopter program.

“The cancellation of the F-22 is really net neutral to net positive for us because it allows us to move some material into the F-35 JSF program,” says Dawne Hickton, vice chairman and chief executive officer of titanium producer RTI International Metals Inc., Niles, Ohio. “The longer-term strength of the JSF is a nice positive factor for us.”

Mraz explains that the F-22 is exclusively a fighter plane, while the F-35 is a multi-role aircraft that can be equipped for conventional takeoffs and landings, short takeoffs and vertical landings. It will replace a number of existing aircraft already in service.

“The F-35 represents the single largest defense expenditure in history and is a great opportunity for domestic suppliers,” Mraz says. Seventy-five percent of the aircraft will be machined, and 100 percent of them assembled, in the United States.

The F-35 is also very metals intensive. In its first five years of production, it will require 180 million pounds of aluminum plate alone, not including other forms of aluminum such as sheet, tubing, forgings and castings, Mraz notes.

Production of the F-35 will also consume up to eight million pounds of titanium each year once the project is ramped up, adds Richard Leone, a spokesman for RTI.

Defense Secretary Robert Gates is a big advocate for the JSF program, which not only is more affordable, but is a stealth fighter unlike the F-22, says Fred Latrash, vice president of business development for Navy and Air Force programs at Alcoa Inc., Pittsburgh.

It isn’t that the F-22 doesn’t have superior technology for what it has been developed to accomplish, says Harvey at Kaiser, “but the argument being made is that it was meant to fight a different war than we are currently engaged in.”

The sheer volume of the JSF program—to produce about 2,900 aircraft over its 10 to 20 year tenure—excites metal suppliers, especially in contrast to the 187 F-22s to be produced before the program ends later this year. “We knew that the F-22 was a transition program as the JSF (which will consolidate the F-15, F-16, F-18 and AV-8) ramps up,” says Leone.

Funding for the JSF is expected to increase to $10.4 billion in 2010 from $6.8 billion in 2009, but the transition from the F-22 program, as it produces its last 20 planes over the next few months, may be somewhat “lumpy,” says McAleese. Even if the JSF ramp-up is accelerated, “it won’t be sufficient to cover the abrupt cutoff of the F-22 program,” he adds.

The fate of the C-17 large strategic transport plane built by Boeing is also up in the air. Some view the C-17 as a costly program geared more to the high-intensity conflicts of the past vs. the conservative type of war being fought in Iraq and Afghanistan. While the Obama administration has requested that funding be discontinued for this program, McAleese says it is likely Congress will add anywhere from three to 12 C-17s back into the 2010 budget.

One of the strongest areas of growth in the proposed defense budget is for rotorcraft, or helicopters, says Aboulafia, noting that rotorcraft will continue to have strategic relevance in the conflicts in Iraq and Afghanistan.

In fact, while there is a shift in the 2010 budget favoring the Navy at the expense of the Army, appropriations will include an increase for Army helicopters to $5.3 billion from a historical level of about $3.4 billion, says McAleese. These increases include funding for the UH-60 produced by Sikorsky, the CH-47F produced by Boeing, the Apache Block 3 also produced by Boeing and the Light Utility Helicopter produced by EADS.

Because of the harsh conditions in the battlefields of the Middle East, much equipment is being brought back for maintenance and upgrades, including significant “up armoring” with both conventional steel armor plate and aluminum armor plate, Mraz reports. Metal demand is also being driven by production of various types of ground equipment, including armored Humvees and MRAPs (mine resistant ambush protected vehicles).

McAleese observes that wheeled tactical vehicles, including AM General’s Humvees, BAE Systems’ FMTV (family of medium tactical vehicles) and Oshkosh’s FHTV (family of heavy tactical vehicles) continue to be well funded.

Metal suppliers, especially steel companies, have already seen much of the demand for MRAPs, as the whirlwind push to get the troop-protecting vehicles into the theater was largely accomplished last year. A total of 17,000 MRAP vehicles have already been deployed, says Andy Mills, Alcoa’s vice president of business development for Army programs. “But with modifications in the military mission, there is a need for a lighter, less top-heavy vehicle that can endure the conditions in Afghanistan,” he adds.

That need has led to the development and funding of the MRAP All Terrain Vehicle (MATV), a lighter, smaller vehicle containing both steel and aluminum that is better able to navigate tough off-road conditions. The MATVs, which are being produced by Oshkosh, weigh about 25,000 pounds each vs. 32,000 to 50,000 pounds for the legacy MRAP.

The fact that the MATV is a much smaller vehicle means that each one requires less armor plate, especially less steel plate, which is replaced with lighter-weight aluminum where possible, says Scott Montross, vice president and general manager of Evraz Oregon Steel, Portland, Ore.

A total of 5,244 MATVs are expected to be produced for the Army and the Marines. The Army has already placed 3,944 orders. The first few thousand MATVs went into production in June and July and will begin shipping to the theater in December, Montross adds.

The MATV program is much smaller than the original MRAP program. Even with this shift, demand for steel armor plate remains strong, Montross says. “We are still getting a decent amount of orders for armor plate, just not at the same magnitude as the previous program. We are also continuing to supply armor for Humvees and other vehicles.” He pointed to the Joint Light Tactical Vehicle (JLTV) program currently on the drawing board, to contain a combination of aluminum and steel, which eventually will replace the aging High Mobility Multi-Wheeled Vehicle (HMMWV) fleet.

According to Alcoa’s Mills, three teams currently are competing for the JLTV contract: Lockheed Martin and BAE, BAE and Navistar, and the General Tactical Vehicles joint venture of AM General and General Dynamics. The new tactical vehicle probably won’t go into full production for another three years, though up to 140,000 may be produced over 30 years.

Currently, metal suppliers that sell into certain Naval programs are waiting for them to “pop,” says Buzash at Standard Metals, who hopes to see some increased activity in the next 30 to 60 days. “The boat yards are releasing long-lead-time items, such as nuclear propulsion systems, but not shorter-lead-time items, including certain submarine contracts,” he says. “Everyone is quoting and quoting, but with copper and other metal prices going up and up, the final contracts aren’t being signed. It’s a shame the contracts were not let a few months ago.” In the long run, he does not expect metals suppliers’ Naval business to be either positively or negatively affected by the new administration.

Alcoa’s Latrash points to another trend that will influence metals consumption for Naval applications over time—the transition from a “deepwater, blue water Navy to a more brown water, coastal Navy.” He explains: “Coastal operations mean there are more threats—more submarines, mines and fast boats. In order to increase survivability, ships need to go faster. The only way to do that is to make them lighter.”

Speed is the objective of several new Naval programs, including the Littoral high-speed warship, the Joint High Speed Vessel logistics troop and cargo carrier, and the Ship To Shore Connector high-speed hovercraft, all of which contain aluminum and other lightweight materials rather than the traditional all-steel construction.

Two Littoral combat ships are already in the water (one built by General Dynamics and the other by Lockheed Martin), and the administration is requesting three more for 2010. Work on the Joint High Speed Vessel will start in the next 18 months, while the Ship to Shore Connector program is scheduled to go into production in a couple of years.

Meanwhile, McAleese says, the DDG-1000 destroyer program has been truncated and will end this year. As a compromise, an initial DDG-15 destroyer has been ordered for 2010, and two more will be built in 2011.

Brush Wellman’s Ryczek says the EKV (exoatmospheric kill vehicle) and MKV (multiple kill vehicle) ground-based interceptor programs have been cancelled due to the Obama administration’s different take on missile programs. However, the Standard Missile 3 program, which is the next upgrade, should consume a lot of beryllium, he adds.

Leone says RTI continues to receive orders for the M777 Howitzer artillery system. The Howitzer was redesigned at the end of the last decade to make it lighter—9,000 pounds vs. 17,000 pounds—and easier to transport largely through the use of titanium. Only the gun barrel and the wheels on the Howitzer remain made of steel.

“What the Obama administration is doing is going away from technologically ambitious programs to more traditional platforms that take into account how the United States is currently fighting wars,” says Aboulafia. This new thinking on the defense budget is likely to put further pressure on spending for materials and equipment going forward, he adds.



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