Aerospace buyers jockeying to ensure supply, prices when demand rebounds
Keywords: The titanium market might not be headed for a quick turnaround, but large aerospace buyers are already set up to avoid the shortages and growing lead times that invariably accompany a surge in demand.
At the Aerospace Systems Sector of Los Angeles-based Northrop Grumman Corp., this has meant firming up its supply lines. Don Blue, the company's manager of airborne systems procurement, said that recently negotiated long-term supply agreements enabled the company's El Segundo, Calif., operation to lock in its price and assure "the availability of hardware."
John Miller, raw materials buyer at the Aerospace Systems Sector, said the current downturn left the market "glutted" with popular titanium alloys, which was a "good time" to establish extended supply agreements. The operation has signed five-year agreements with titanium mills before the next up-cycle begins, which Miller thinks might occur toward late 2011 through 2013.
There are currently a number of large aerospace programs on the "back burner" in terms of consumption, he said, pointing to various regional jet aircraft as well as the Lockheed Martin F-35 Joint Strike Fighter (JSF). Although not yet at full output, these programs nevertheless will be moving into early production phases as early as mid-2011, starting to chew up increasing amounts of metal. And there's also the impact of the new Boeing 787 Dreamliner, history's largest per-plane consumer of titanium. The time to team up with long-term supply sources is before all this occurs, he added.
"If people aren't aligning themselves today in this market, they will definitely be impacted by pricing and lead times" as demand starts to move up, possibly as early as mid-2011, Miller said. The approximately 170,000 pounds of flat-rolled titanium that the Northrop Grumman unit consumes each year, in large part through its subcontractors, is used principally for the 40 percent of F-18 Navy fighter planes that it is building for Boeing Co. This doesn't include additional purchases of forgings, castings or plate. Miller noted that his operation also has signed long-term agreements with aluminum suppliers.
Lockheed Martin Aeronautics Co., the prime contractor on the JSF, also isn't looking for an imminent upturn in the titanium market, but the company is prepared for one.
"Our analysis says it's going to continue to be soft from a historical standpoint through 2010," said Rod Hogan, senior manager of procurement for the Fort Worth, Texas-based division of Lockheed Martin Corp., who thinks the market is likely to turn up in late 2011 and 2012.
Over the years Lockheed Martin has learned "it's very prudent to have a long-term contract - to have some kind of relationship with a supplier who's willing to stick by you in good times and bad times," he said, adding that good times for the mills, when prices are rising and lead times are usually extending, "are not necessarily what's good" for an airframe builder. That's when a long-term supply agreement pays off. The main titanium supplier for the JSF is RTI International Metals Inc., and Hogan noted that Lockheed Martin's long-term agreements with the Pittsburgh-based producer support the plane's production through 2020. RTI has estimated that its involvement in the program during that period will total more than $2 billion in revenue on more than 80 million pounds of titanium.
Is Lockheed Martin concerned it will be caught titanium-short once the market picks up? Not really, Hogan said, noting that both pricing and lead times are established in its long-term agreements, with prices mostly indexed to a formula provided by industry consultant IHS Global Insight Inc. that incorporates "plus or minus" annual limits.
The JSF, which contains between 30,000 and 45,000 pounds of titanium buy weight per aircraft, depending on the version (the carrier version has the most), is currently in low-rate initial production phase, which is something of a misnomer since it involves more than 500 planes. Nearly 3,200 planes are expected to be built, of which more than 700 are for the program's foreign partners.
While there's plenty of domestic titanium capacity for today's market, the industry now appears to be going slower on some previously planned front-end capacity expansion. RTI International which was initially due to bring a $300-million greenfield sponge operation in Hamilton, Miss., on stream by 2010, put the 20-million-pound-per-year project on hold due to the aerospace slowdown and may instead remain reliant on outside sponge sources. Additionally, Pittsburgh-based Allegheny Technologies Inc. temporarily idled its 20-million-pound-per-year Albany, Ore., sponge plant at the end of July while it also postponed startup of its 24-million-pound-per-year greenfield operation in Rowley, Utah, a delay of about a year from its initial target.
Miller said there's likely to be some "issues to face" in 2013 to 2015, when the marketplace turns tight again. He expects scrap prices to rise but "not as high" as during the market's last peak. Miller also pointed out that, even without expansion, the titanium industry today is considerably more efficient than it was five or 10 years ago. Frank Haflich