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Analysts see inventory workdown pivotal to titanium's price recovery

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On Wall Street and its outposts, the clues to a turnaround in aerospace titanium lie in the global economy, the airlines' ability to maintain their financial health and aircraft delivery schedules, and signposts unique to the titanium market-not the least of which is the prospect of drawing down the supply chain's big inventory overhang.

With economic indicators pointing toward an eventual, if fitful, return to growth, the worst fears about a collapse in commercial aerospace demand probably won't be realized, although it might take a while before pre-recession optimism is regained.

"Our expectation is that this global recovery doesn't gain traction until late next year," John Mothersole, IHS Global Insight Inc.'s senior analyst in Washington, said.

While airlines have done a good job of managing capacity during the recession, the result has been to "rationalize" their volume as opposed to adding new capacity. "This doesn't help (to bring in) new orders," Mothersole said of airline economizing and cost cutting. However, it also implies "there's still room" for airlines to grow going forward.

Luke Folta, analyst at Longbow Research LLC, Independence, Ohio, said the crucial factors affecting the titanium outlook are, most importantly, a "massive inventory overhang" and, secondly, the pushouts and adjustments that have occurred on big programs such as Boeing Co.'s 787 Dreamliner.

"The real big titanium-consuming programs aren't really going to move until 2011 and beyond," Folta said, citing not only the 787 but also Lockheed Martin Corp.'s F-35 Joint Strike Fighter and, to a lesser extent, the Airbus A380.

"I think you're going to see prices and shipments lower in 2010 than in 2009, with spot prices lower than in 2009," he said, noting that he also expects to see downward adjustments in long-term supply contracts, whose pricing is keyed to indices. "My view is that spot pricing doesn't stop falling until the inventory situation is at or near parity," Folta added, noting this is a good rule of thumb in any metal.

As of late November, Mothersole was looking for U.S. titanium mill product shipments to total 65.4 million pounds in 2009, down about 14.7 percent from 76.7 million pounds the previous year, but rebound nearly 9 percent to approximately 71.1 million pounds in 2010, with the ramp-up occurring in the second half of the year.

Boeing has said that beginning in June 2010 it will cut back production of its 777 aircraft to five per month from seven, while it also postponed plans to increase production of the 767 airliner and the 747-8, which is the latest version of the industry's original wide-body jet.

Meanwhile, Europe's Airbus SAS, which at one time was looking to raise production rates for its A320 family of single-aisle airliners to 40 aircraft per month, instead dropped monthly output to 34 from 36 and "paused" production rates for its A330/A340 family instead of increasing production, as previously planned.

Boeing subsequently stressed repeatedly that it has no intention of curbing production of its most popular legacy program, the 737, from 31 per month, and there's been no announcement of further cuts in other existing programs. "There has been no change in our assessment that we can hold the 737 at its current production rate," Jim McNerney, chairman, president and chief executive officer of Chicago-based Boeing, told investors in October, describing both the 737 and 777 programs as "rock solid."

Nevertheless, earlier cutback announcements in 2009 raised fears that, despite the company's intentions, a lagging economy and airline-delivery pushouts might force Boeing and Airbus to absorb greater build rate reductions.

Folta emphasized that while Longbow has taken no position on whether or not additional cuts are likely, the company's contacts in the supply channel have shown "a lot of skepticism" on the ability of large commercial transport manufacturers to hold build rates.

But opinions on the issue are evolving. In mid-November, Gautam Khanna, vice president of Cowen & Co., Boston, was a bit less pessimistic than two months earlier, when he addressed the International Titanium Association and expressed skepticism that aircraft manufacturers would be able to get through 2010 without paring deliveries, forcing their suppliers to cut back.

More recently, however, Khanna has seen indications that the bottom might have been reached. He cited as examples Portland, Ore.-based aerospace forgings, castings and fastener producer Precision Castparts Corp. and BE Aerospace Inc., a Wellington, Fla.-based diversified supplier of various products to the industry, among them spare parts and fasteners. Both companies, he said, had reported that their customers-jet engine manufacturers in particular-were buying in 2009 in amounts sharply below actual build rates and their underlying demand, resulting in big drawdowns of these customers' inventories.

Khanna said that unless there's a "double dip," or backsliding in underlying demand, this destocking "can't continue in perpetuity." He believes it's likely that, at some point in 2010, jet engine builders in particular must resume buying in volumes that at least support their build rates. Even if buyers aren't restocking, just a return in requirements for underlying demand means a pickup for their suppliers, he said.

Frank Haflich


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