Delayed Take Off

With a strong market for aircraft—both civilian and military—one might expect to see the sector provide a lift for recyclers in the specialty metals market.

Demand for and consumption of stainless steel, titanium and chromium are moving at a breakneck pace.

Yet, higher consumption of specialty metals in the aircraft market does not always trickle down to the scrap producer.

The reason, explains Bruce Glant, president and director of scrap metal sales at Pacifwic Iron & Metals Corp., Seattle, is that much of the titanium generated by the biggest companies—like Boeing, in his area—goes right back to the manufacturer and never sees the open market. The manufacturer controls the entire process.

"Flow is down because of these total return programs. Seattle is not a huge generator of titanium, like Los Angeles is. We don’t see a lot other than to collect material from local manufacturers," Glant continues. In that sense, Pacific Iron & Metals is more a service provider than a major player in the recycling stream.

But even in Los Angeles, there is little of interest happening in the titanium scrap arena. "Ti is extremely quiet for ingot-quality material," says Ron Donn, United Alloys and Metals, Los Angeles. "Prices are low."

Donn says he is more bullish on ferro grades. Although little moved at the end of the year, he credits that to seasonal reluctance of buyers. "I expect the first quarter to pick up," he says. "Demand will be at least as good as it was earlier in the fourth quarter."

Alasdair Gledhill, nickel product manager for ELG Metals Inc., McKeesport, Pa., says, "Dealers are nervous about base metal prices falling." Nickel, for example, is down.

Only toward the end of the year did Gledhill see material moving. "There has been more robust buying by processors," he says. Part of that he credits to year-end inventory liquidation. But anything that keeps nickel flowing at rates higher than they were in late summer and early fall of 2007 is welcome.

Not everyone is worried. "Metal is moving," says Larry Snyder, vice president of the nonferrous and stainless alloys division of Metal Management, Chicago. While he agrees that titanium is weak, he sees some real positives in the area of 18-8 stainless steel.

Noting that things have changed for the better, even since October and November, Snyder says, "The market is holding up. Mills de-stocked and took their inventories down."

Larry F. Levine, CEO of Nico Alloys Inc., Los Angeles, agrees that titanium is in the dumps and the outlook is not all that bright. "If I lit a match, I’d be in better shape," he quips. "Titanium is terrible. There are not enough sales."

That is true just about anywhere along the West Coast. In the Seattle area, borings are not going into the ferro-ti market. Instead, they are using ores, so the price of 64 turnings has come down.

"My indicators are that they have stopped buying 64 for the ferro-ti grades," Gant says.

Still, he sees supply and demand in the boring market being in sync. "But prices are considerably down from the peak highs (of early 2006)," he adds.

There are hopeful indicators, however. Gledhill notes that many domestic mills have been out of the business for the four or five months leading into winter. "They have to start buying in earnest into the New Year," he says.

Nickel prices are closely tied to the LME (London Metals Exchange). Premiums held strongly.

Levine, too, is impressed with the nickel market, even despite its drop before Thanksgiving. "It’s better than normal," he says. He notes that the Chinese, Europeans and Americans are taking turns driving the market.

"There are orders out there," Levine says, citing the truism that a savvy trader can make money by buying and selling, no matter where the price happens to be.

Coming off a good year or two, many people normally would fear the other shoe (and demand) falling in the specialty metals markets. But a downturn does not seem to be in the offing anytime in the current calendar year…or even in the next. Despite record sales in 2006 and 2007, aircraft manufacturers anticipate at least a continuation of the trend—and maybe an acceleration of sales.

Boeing, for example, reported its third-quarter of 2007 revenues rose 12 percent to $16.5 billion. The company credits higher commercial airplane deliveries and growth in its defense business.

How good are things at Boeing? The company sold out its entire 2007 capacity of commercial aircraft and, by early fall 2007, had sold out its expanded 2008 capacity, as well. The company says it expects to produce about 10 percent more commercial planes in 2008 than in 2007…and every one has a sold tag on it already.

The story is about the same at Airbus. The company says that, despite management changes and the industrial problems related to its A380, it experienced its best year ever in terms of deliveries in 2006. The company had its second best year ever in terms of sales, leading to a record backlog in 2007. In a very optimistic company statement, Airbus notes the backlog will ensure "work for the next five years at very high production rates."

Airbus’s fleet of delivered aircraft exceeds its earlier milestone of 4,500 aircraft. Last year was Airbus’s second best year ever in terms of the number of orders in its 35-year history. The company says 824 new firm orders were taken during the year.

The company entered relationships for materials and facilities with Russia, Turkey and others.

Donn notes that the production of Boeing’s 787 and Airbus’s A-380 have been delayed somewhat and that could be affecting the titanium market. Yet, it would appear that any downward effect would be temporary.

In the meantime, those manufacturers are improving their end products. Airbus notes that more composite materials are being used in aircraft structures. Structural Health Monitoring (SHM) technology will be indispensable in developing the next-generation commercial aircraft, Airbus says. SHM technology will immediately detect faults or abnormal transformations caused in the aircraft structure, even during flight. This will boost safety, reliability and maintenance programs on the next generation of planes.

While this does not create fireworks in the scrap market, it is good news. There will be consumption. As long as the primary metal prices are good and demand remains strong, the scrap market should continue to see decent flow. Of course, that assumes everything is on par with the primary market—an assumption some are not willing to make.

Donn says he suspects titanium sponge producers have quietly put a lot more product out on the market than they have led the public to believe.

"The first quarter does not look all that promising for titanium scrap," Donn says. "The price is trending down, but I think we are now near the bottom on ingot grades," he adds.

Glant says the overall specialty scrap market appears to be strong for the foreseeable future. "It looks good for years to come," he says. "Until new capacity comes on stream it is hard to see any change," Glant adds.

Producers had indicated that they would come back into the market in the fourth quarter of 2007. That did not happen. Now, they are talking about coming back in the first quarter of 2008.

Glant says the current situation can last only as long as it remains a sellers’ market. "We remember the bad times," he says. "We’d like to see companies active in the market."

Snyder, likewise, is optimistic, especially about the stainless markets, but his optimism comes from the international market. He spent a couple of weeks in November in Asia and came back impressed with the pent-up demand in the Asian markets.

"They have decades of build-up," he notes. While he concedes that there will be "blips and burps" in the market, he says that the overall trend for export scrap will be strong.

"The U.S. is a relatively small stainless market," Snyder notes, dismissing much of the weakness in the U.S. market through the middle of 2007. "As long as the rest of the world is a buyer, we’ll be all right."

Levine says, "As long as there will be an Olympic Games in China, there will be a strong market." Like the others, he points to the international markets as the driver of most of the basic materials.

"I like the stainless, nickel and cobalt markets," Levine says. All across Asia, countries are buying, feeding China. Korea and Taiwan are buying scrap and turning it into billets and ingots for the Chinese construction boom.

"Demand in the first quarter will be at least as good (for ferro grades) as it was in the last quarter (of 2007)," Donn says. While most of United Alloys’ material moves domestically or to Europe, he has seen some movement in the Asian market, as well.

"I expect the first quarter to pick up," he says, noting that the slowdown was seasonal, with consumers in Europe and the United States reluctant to buy material that would sit in their yards during the slow periods.

With all of the demand, will buyers for aircraft scrap come back onto the open market? Glant is optimistic that they will. "Programs go in and then the companies find they can buy cheaper in the open market," he notes. "They tried this for aluminum and for copper. These programs come and they disappear."

While there is no question that the Chinese intend to impress the world with their move to modernize and build an amazing infrastructure for the Olympic Games in 2008, there is the question of what will happen when the Games have concluded.

"China is a communist country," Levine points out. "They can turn the faucet off in 10 seconds." Yet, he indicates that he finds it hard to believe that will happen any time soon.

"Their economy has been growing. The real question is how long they can keep up that pace," Levine continues. "Anyone who has been to China knows everything is controlled by the government, and the government is controlled by very few people."

However, he is optimistic and happy for the present. "We are all benefiting from what is happening in China," Levine says. "Still, I’d feel more comfortable with a democracy and a free economy."

Another cloud is hovering over the entire business and it traces back to the free-market economy in the United States.

"My concern is that, if the broader U.S. economy goes into a recession in the first quarter, that would dampen the bullish influences," Gledhill says. "It’s all well and good for Airbus and Boeing to be doing well," he continues, "but, at the end of the day, it is steel and autos that will make the market," Gledhill says. Neither one of those businesses is exactly thriving in the United States.

"Infrastructure projects—new buildings and replacing bridges—are not coming on as we’d like to see them," Gledhill continues, noting that the general metals markets will depend on good times in those areas. However, the credit crunch has put a damper on much of the new building and construction across the country.

The author is contributing editor of Recycling Today and can be contacted at curt@curtharler.com.