Tier4 Market Survey Projects Positive Outlook Despite Aerospace Supply Chain Uncertainties

By Michael C. Gabriele

Earlier this year, Chris Olin, the lead analyst for Tier4 Research, LLC, Avon OH, issued his Specialty Materials Update/Second Quarter Market Survey for the titanium industry, which provides insights on business trends and forecasts for the near term. Much of the information in the survey relates to projected business conditions in the aerospace supply chain.

Olin tracked and analyzed key data points and trends that he deemed to be positive leading indicators for his “specialty materials peer group” (titanium, nickel based alloys, cobalt alloys and specialty stainless steel grades), which indicate a favorable outlook for for upstream producers, distributors, and premium forgers/ fabricators through the balance of 2021 and going into the first half of 2022. Despite current levels of uncertainty and a few expected caveats, the survey revealed an overall “positive market outlook” for the near term.

Titanium Market Outlook

The consensus calendar year 2021 upstream supplier growth forecast of down 12-13 percent looks to be in-line with our western world mill demand forecast of 145 million to 150 million pounds (down 13 percent versus calendar year 2020), according to Olin. “However, there could be some aerospace demand leakage over the next two quarters if the Boeing 787 production disruption turns out to be more problematic than expected. “We plan to review our full-year assumptions after getting a firmer read on the Boeing build rate schedules.”

Olin said that, despite recent negative headlines regarding a disruption in 787 aircraft production, “we are sticking with a bullish thesis on the specialty materials group following a review of better-than expected quarterly survey results. Communications with industry contacts confirmed much stronger demand/pricing trends in the second quarter of 2021, improving channel sentiment and upward forecast revisions, approaching catalysts, and more manageable inventory situations. Key data points collected over the past few months suggest there is an upward bias to consensus forecasts (looking out three to four quarters), with emphasis placed on companies levered to jet engine OEM demand and the premium alloy product categories (nickel-based alloys, cobalt-alloys, and specialty stainless steel).

Earlier this year, several news organizations, including The Wall Street Journal, Fortune.com and Reuters, reported Boeing halted deliveries of its 787 Dreamliner due to production difficulties. It’s uncertain how this situation will play out in the months ahead.

Excess channel inventory

While the average shipment comparisons reported by the entire survey group did reflect a modest sequential improvement, titanium performance dropped 6 percent in the first quarter of 2021, year over year, which included an upstream supplier drag of down 12 percent. “Once again, our contacts cited aerospace supply chain destocking as the main factor behind the lagging recovery. Most titanium suppliers anticipate negative growth in calendar year 2021 and do not anticipate a market recovery before the first quarter in 2022. We believe the latest 787 news complicates the situation and could push the recovery timeline about two months to the right. While formal targets are uncertain, aerospace suppliers expect the 787 Dreamliner build rate to drop to three or four per month (through the end of 2021). Contacts would not label this event as a game-changer but said it may add another layer of channel noise.”

Four Survey Data Points

The survey data gathered by Olin provided the foundation a for positive market outlook, which he summarized in four points. First, there was an 850-basis point improvement in the consensus growth outlook for premium alloys in calendar year 2021 following a series of favorable headlines and OEM updates. Second, producer lead times improved by three to four weeks (on average) since the first quarter 2021, led by a positive six to seven-week upswing for nickel-based alloy and specialty stainless steel products. Third, survey contacts indicated they are seeing broad-based end-market demand strength, including distinct improvements in medical, power

generation, jet engines, the Airbus supply chain and aerospace fastener customer sourcing. Fourth, there is an early upswing in spot pricing for benchmark titanium mill products.

The results from Olin’s quarterly specialty materials survey work provided “an increasingly favorable outlook for the companies within our coverage universe levered to premium alloys and specialty stainless steel production. Despite conceding to renewed titanium alloy and composite material volume uncertainties related to negative 787 production headlines, we believe key data points collected from the channel over the past few months indicate an upward bias to

consensus forecasts (looking out three to four quarters), focusing on the jet engine suppliers.” Aerospace and defense mill-shipment comparisons turned positive during the second quarter of 2021, following five consecutive periods of volume contraction, with many contacts pointing to a pronounced rebound in Boeing supply chain, Airbus supply chain, jet engine OEM, and aero fastener sourcing. – Chris Olin

The Bottom Line

The latest channel intelligence has seemingly confirmed the premium alloy group entrance into the initial stages of recovery, according to Olin. “We now expect management teams of upstream-levered companies to confirm a reversal in underlying alloy demand and provide a favorable market outlook. There was a pronounced improvement in channel sentiment throughout the month of June and specialty material contacts provided us with data points that generally supported our bullish thesis for the peer group. Emphasis was placed on a pronounced rebound in short-cycle orders, the enhanced commercial aerospace demand visibility (along with improving customer communications), and upward mill price momentum.”

Olin added that the projected positive market outlook included the increasingly favorable aerospace demand outlook, a rising mill pricing environment and expectations for a higher 737 build rate. “However, we plan to revisit some of the near-term modeling assumptions considering the disappointing 787 production news and Federal Aviation Administration statements.” Survey contacts reported higher transaction values for titanium and premium alloy products in relation to the first-quarter 2021 averages, driven by the favorable demand environment and upward cost pressure. Spot quotes for the benchmark product categories have already increased by 2 to 4 percent since March (on average) and were generally expected to hold in a steady up remain in a similar trajectory for the rest of 2021.

Mill Shipments Turned Positive

Aerospace and defense mill shipment comparisons turned positive during the second quarter of 2021, following five consecutive periods of volume contraction, with many contacts pointing to a pronounced rebound in Boeing supply chain, Airbus supply chain, jet engine OEM, and aero fastener sourcing. At the same time, a

growing number of suppliers are benefitting from a modest improvement in industrial-related activity or greater spot-purchase frequency.

Olin asked his survey contacts about the sequential demand momentum (for actively tracked end-users) in an attempt to get better understand the current catalysts and future opportunities. “Five customer groups were frequently referenced as stronger or gaining momentum: medical; aero fasteners; jet engine OEM; Airbus supply chain, and power turbine. Perhaps more importantly, no customer group was collectively reported to be turning negative or trending lower versus the first-quarter levels.”

Flashback to 2020

By way of comparison from the dark days of Covid-19, the grim July 2020 Titanium Status Report put together by Olin found that the titanium peer group was navigating through the most challenging market environment ever seen. The Covid-19 global pandemic disrupted supply chains and severely undercut major industrial markets including commercial aerospace. “At this point, we assume the specialty material providers in our focus group are trending 500-600 basis points below consensus expectations (from a sales perspective), with implemented cost reduction efforts unlikely to counteract the top-line pressure anticipated over the next two quarters,” Olin said.

(Editor’s note: Tier4 Research LLC (website: www.tier4research.com) is a “bottom-up” aerospace research provider focused on timely analysis of the entire supply chain, with an upstream channel focus (or “Tier4” peer group), specialty materials markets, and other niche suppliers. The proprietary surveys are driven by feedback collected from the high-level industry Chris Olin contacts. Olin has compiled over 21 years of experience, a vast network of industry contacts, and the propensity to provide opinionated research on lesser-covered companies in the aerospace industry’s vast supply chain. The company offers a subscription-based service for industry participants interested in quarterly updates, market intelligence, and industry data.