aerospace raw materials market outlook - amm.com · may 17, 2011. amm’s 5th aerospace materials...

May 17, 2011AMM’s 5th Aerospace Materials Conference

Pittsburgh, PA

Aerospace Raw Materials Market Outlook

Kevin MichaelsPartner

Ann Arbor, Michigan • Amersham, United Kingdom • Singaporewww.AeroStrategy.com

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© 2011 AeroStrategy AMM

Agenda

Air Transport Production – Three Scenarios

Aerospace Raw Material Demand Outlook

Four Key Raw Material Supply Chain Trends

© 2011 AeroStrategy AMMAMM

Air Transport Production Rates Are Driven By The Complex Interrelations Of Several Factors

3

Air TravelDemand

EconomicGrowth

Air TravelValue

Proposition

RequiredAircraft

AircraftDemand

For Growth

Aircraft operatingfactors

(utilization, speed, size, load factors)

Current Fleet

TemporaryStorage

Retired/Scrapped

TotalAircraftDemand

AircraftDemand For Replacement

Air Transport Production Demand Drivers

Source: AeroStrategy

AIR TRANSPORT MANUFACTURING

SCENARIOS


Oil Prices Are Approaching The High Levels Of The 2008 Price Spike…

4

Annual Average Fuel Costs 1978 to present(cents per gallon)

Source: Air Transport Association, IATA

2002: 11% of airline expenses

Current: 30+% of airline expenses

March 2011price


SCENARIOS


…Which Is Changing The Economics Of Aircraft Operation…

5

US Airlines – 2009 Fuel Costs/ASM (cents)

Winners

Winners Losers

Losers

Source: US Air Transport Association

* 2009 figures are based on $1.75 -$1.95 gallon fuel

gal

Fuel cost/ASM (cents)

High fuel costs exacerbate aircraft

cost differences

*


SCENARIOS

© 2011 AeroStrategy AMM Source: Airline Monitor

Air Transport Retirements and Deliveries

...And Contributing To A Surge Of Aircraft Retirements...

Retirements

Deliveries

400 Retirements per year is the new normal

Production breakdown~60% for growth~40% for replacement

Aircraft

6


SCENARIOS


AeroStrategy Developed Three Scenarios For Air Transport Production Rates Based On Fuel Prices

7

2011 – 2021 Air Transport Production Scenarios

Sources: AeroStrategy analysis, Airline Monitor

Aircraft Demand Factor Optimistic Nominal Pessimistic

Long-term Oil Price(WTI) $50-60/bbl $80 – 120/bbl $150+/bbl

Average Global GDP growth ~4% ~3% ~2%

Average Global RPKgrowth 5.1% 4.4% 3.6%

Net Return of Parked Aircraft 400 Nil Nil

Total 2011-21 AircraftRetirements 5,100 5,600 6,000

Aircraft Utilization (hrs/day)

7.7 8.0 8.2

2021 Projected fleet(2010 = 20,500) 32,900 30,400 27,000

Aggregate 2011-21 Aircraft Production 17,000 16,000 12,500


SCENARIOS

Downside Risk Outweighs Upside Opportunities


In AeroStrategy’s Nominal Scenario, Air Transport Production Exceeds 1,600 By 2021

8Source: AeroStrategy

Air Transport Nominal Production Scenario 2011-2021*By OEM

* Drop in production rates from 2014 to 2016 is due to a change in orders, shifting from legacy aircraft to next generation—see following page

0

200

400

600

800

1000

1200

1400

1600

1800

OtherATRBombardierEmbraerBoeingAirbus

Uni

tsAIR TRANSPORT

MANUFACTURING SCENARIOS

Aircraft Demand Factor Nominal

Long-term Oil Price(WTI) $80 – 120/bbl

Average Global GDP growth ~3%

Average Global RPK growth 4.4%

Net Return of Parked Aircraft Nil

Total 2011-21 AircraftRetirements

5,600

Aircraft Utilization (hrs/day) 8.0

2021 Projected fleet(2010 = 20,500)

30,400

Aggregate 2011-21 Aircraft Production 16,000

© 2011 AeroStrategy

Agenda




AMM© 2011 AeroStrategy

AeroStrategy Recently Completed A Comprehensive Update Of Its Aerospace Raw Materials Forecast

The revision included several key changes to the prior 2008 forecast… Updatedproduction rates and included next generation

aircraft Refined material composition assumptions and buy-to-

fly ratios Incorporated the time-lag between aircraft production

and pull for mill Modeled the impact of inventory overhang

1

2

3

4

100+ Interviews

300K Line Database

ARM 1.0 (Feb-May 2008)

Aerospace Industry Raw Material Market Assessment

Ann Arbor, Michigan • Amersham, United Kingdomwww.AeroStrategy.com

6 May 2008

Final Report

ARM1.0

ARM 2.0 (Dec 2010-March 2011)

30 targetedinterviews

&extensive additionalmodeling

Raw MaterialDemand


Total Aerospace Material Demand In Buy Weight Is 1.14B Pounds, Led By The Air Transport Sector

Source: AeroStrategy analysis 11

Air Transport73%

Business & Gen Aviation

10%

Rotary Wing5%

Military12%

Total1.14 B lbs

* Maintenance, repair and overhaul (MRO) included in total* * Includes air transport aircraft used as VIP transport, contributing roughly 12% to the total

**

2010 Aerospace Raw Material Buy Weight*(Fundamental Mill Demand)

• Air transport is nearly three-quarters of the total demand

• Military fixed wing is the second largest category, which includes platforms such as the Boeing tanker program (KC-46A) and the Joint Strike Fighter

Raw MaterialDemand


Aluminum Constitutes Nearly 50% Of Total Demand

12Sources: AeroStrategy

* Maintenance (MRO) included in total

Aluminum Alloys49%

Steel Alloys22%

Titanium Alloys10%

Super Alloys9%

Composites3%

Other7%

Total1.14 B lbs


• Aluminum alloys are half of the total demand

• Steel alloy and titanium increases in importance (relative to the percentage of fly weight, 17% and 8% respectively) due to relatively high buy to fly weights for the materials

• Composites is just 3% of total demand due to its low buy-to-fly ratio

Raw MaterialDemand


Primary Aerostructures

37%

Components26%

Interiors8%

Nacelle Systems

6%

Secondary Aerostructures

1%

Hardware1%

Engine14%

MRO7%

Primary Structure And Components Are The Largest Categories Of Raw Material Buy Weight…

Source – AeroStrategy13

Total1.14 B lbs


• Primary aerostructuresaccount for 37% of raw material demand, followed by components (27%)

• Engines account for nearly 15% to raw material demand

• MRO/aftermarket comprises 7% of total mill demand; engine replacement parts are a key driver

Raw MaterialDemand

* Maintenance (MRO) included in total


Boeing And Airbus Aircraft Comprise 63% Of Total Raw Material Demand


Airbus32%

Boeing31%

General Electric

4%

CFM Int'l4%

Embraer3%

Lockheed Martin

3%

Bombardier3%

Rolls Royce3%

Pratt & Whitney

2%

IAE1% Other

14%

Total1.14 B lbs

2010 Aerospace Raw Material Buy Weight(Fundamental Mill Demand)

• Airbus and Boeing aircraft are the clear leaders in material consumption

• The top programs in terms of annual material consumption are the A320 Family and the 737 NG

• The single largest engine program is the CFM56-7, followed by the GE90, which round out the top 10 top platforms

Raw MaterialDemand


Aluminum26%

Titanium26%

Super alloy20%

Composites

13%

Steels11%

Other4%

• Aluminum and titanium are the largest material markets by value – both are worth ~$2.3B

• Super alloys is third largest category, with at total value of $1.7B

• Composites and steel alloys are the next largest categories at approximately $1B each

The Total Value Of The Raw Material Consumed In 2010 Is Nearly $9 Billion

2010 Aerospace Raw Material Value ($B) By Aircraft Category


Total$8.7B

Raw MaterialDemand


0.0

0.2

0.4

0.6

0.8

1.0

1.2

FLY BUY


Overall buy-to-fly is

~ 5.5B lb

s

• The overall “buy to fly” ratio is approximately 5.5

• Values range from 1.5 (composites) to >7 (steel alloys) and are driven the different production processes

• Buy to fly has increased over the past decade due to great use of monolithic structures

The Overall Aerospace ”Buy To Fly” Ratio Is 5.5

2010 Aerospace Raw Material Fly Vs. Buy Weight (B Lbs)

Raw MaterialDemand


Future Raw Material Demand Will Be Shaped By Production Rates, Which Will Reach 5,000 By 2017…


Aggregate Aircraft Production Forecast 2011-2021

0

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Military Fixed Wing, -4.5%Rotary Wing, 0%Business & Gen Aviation, 5.2%Air Transport, 2.8%

Uni

ts Market, CAGR

Total CAGR = 1.9%

Raw MaterialDemand

2021


…And Total Material Demand Will Approach 1.4B Pounds By 2013…

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

B lb

s

2010 Aerospace Raw Material Buy Weight (Realized* Mill Demand) • Air transport will

demand will ramp up through 2013 as a result of production rate increases and burn-down of excess inventory

• Business & general aviation was increase mostly quickly, yet the overall material demand is quite small

• Military fixed wing and rotary wing are declining markets


Raw MaterialDemand

* Adjusted for current inventory overhang

Assumes 12 month lag between aircraft production and material demand from mill


… With Growth Led By Composites And Titanium

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Other, 1.6%Composites, 12.6%Super Alloys, 2.9%Titanium Alloys, 8.5%Steel Alloys, 0.3%Aluminum Alloys, 0.9%

2010 Aerospace Raw Material Buy Weight(Realized* Mill Demand)

• Steel alloys and aluminum will grow the slowest, being displaced by newer materials

• Conversely, composites and titanium alloys will increase the quickest

• Note a small subset of aluminum alloys is AL-LI which will likely have extremely high-growth potential

B lb

s

Commodity, CAGR

Total CAGR = 2.6%


Raw MaterialDemand

* Adjusted for current inventory overhang


Projected Demand For Aluminum Will Peak In 2014

0

100

200

300

400

500

600

700

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

M L

bs

2010 Aerospace Raw Material Buy Weight(Realized* Mill Demand)

• Aluminum demand is projected to peak in 2014 then decline due to the introduction of high composite aircraft and the wind-down of the A330

• Composites demand is anticipated to grow at 12% CAGR, followed by titanium alloys at 8% CAGR


Raw MaterialDemand

* Adjusted for inventory overhang** Includes aluminum-lithium as a small subset

Aluminum Alloys

Steel

TitaniumSuper Alloys

Composites Other


Agenda





Four Key Trends Are Influencing The Raw Material Supply Chain

22

Key Trends Impacting Raw Material Market

Supply ChainGlobalization

InventoryOverhang

Supplier Consolidation And Vertical Integration

New ProgramExecution

FOUR KEY TRENDS


Aerospace Manufacturing Globalization Is Shifting Raw Materials Consumption Patterns

23

Global Aerospace Manufacturing Clusters

Southern California

Quebec

Southeast US

Central US

Mexico

Washington

Brazil

North Africa

France

United Kingdom Germany

Eastern Europe

UAEMalaysia

Singapore

China

Established Clusters Emerging Clusters

Connecticut

Russia

Spain

India Japan

Mills and distribution channels must adapt to emerging clusters

Raw Material Mills concentratedIn North America and Europe…

1. SUPPLY CHAIN

GLOBALIZATION

Source: AeroStrategy

…and Production is shifting South


A Second Key Trend Will Be The Pace Of Excess Inventory Burn-Down For Certain Materials

Source: AeroStrategy 24

• The delays in B787 and A380 introductions led to significant excess inventory for aluminum, CRFP, and titanium

• Excess supply equates to six months consumption – or more – for some materials

• The airframe/aerostructures supply chain is the most affected; the supply and demand for aeroengine supply chain is in balance

• The pace of burning through this excess inventory will have important ramifications for mill demand

2. INVENTORYOVERHANG

AMM

Raw Materials Consolidation & Vertical Integration Is Re-Shaping The Supply Chain

The Aerospace Supply Chain • Leading raw material suppliers are repositioning via vertical integration and consolidation

• Recent examples• PCC: Wyman-Gordon,

Carleton Forge, Special Metals

• ATI – Ladish (in process), Ti sponge capacity

• Alcoa – Howmet, fastener OEMs

• RTI - finished parts• Doncasters – APU modules

• The upshot: increases bargaining power vs. customers

25

3. CONSOLIDATION

& VERTICAL INTEGRATION


On-Time Execution For Five New Aircraft Programs Will Shape Future Raw Material Demand


4. NEW PROGRAM

EXECUTION

B787

A320NEO

A350

C-Series

JSF

Projected 2016 Aerospace Raw Material Demand• The impact of B787

and A380 delays are a reminder of the importance of new program execution to raw material demand

• Five new programs are projected to comprise 30% of raw material demand by 2016

Five New ProgramsWill Comprise 30% Of

2016 Demand!


In Summary….

• Fuel prices will have a strong impact on air transport production rates; aggregate production will be 16,000 units through 2016 in the nominal scenario

• Total aerospace material demand in buy weight is 1.14B lbs, led by the air transport sector

• The value of the aerospace raw material market is $8.7B• Demand for aluminum, which comprises 49% of total raw

material demand, is projected to peak in 2014• Total aerospace raw material demand will approach 1.4B

lbs in 2014, led by titanium and composites• Four key trends will shape the near-term outlook for the

raw materials market• Supply chain globalization• Burn-down of excess inventory• Supplier consolidation & vertical integration• New program execution

Source: AeroStrategy 27

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1Thank you for your attention!

EMEALondon, England

43 Hill Avenue, Amersham

Buckinghamshire HP6 5BX

U.K.

Phone: +44 1494 431-600

Fax: +44 1494 434-500

Email: [email protected]

28

AmericasAnn Arbor, Michigan

101 North Main Street, Suite 400

Ann Arbor, Michigan 48104

U. S. A

Phone: +1 734 821-0220

Fax: +1 734 821-0221


Asia PacificSingapore

314 Tanglin Road, #01-05

Phoenix Park Office Campus

Singapore 247977

Phone: +65 9111-8435

Fax: +65 6884-4951


www.aerostrategy.com

aerospace raw materials market outlook - amm.com · may 17, 2011. amm’s 5th aerospace materials...

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