Revved Up

Titanium is hot as an F-16’s afterburners. Nickel markets are flying high, too. It is no accident that the specialty metals markets are nudging new highs on a weekly basis. Civil aviation and military spending levels are both up and demand is strong.

With titanium scrap prices pushing hard at $6 per pound, there are those who see it touching $7 by the end of Q1 2005.

There are some wild cards, such as whether a Chinese company will end up owning Noranda. That is one of the many questions involving the Chinese and North American specialty metals markets.

Noranda, the Toronto-based producer of nickel and copper, has said it has ended an exclusive negotiating period with China Minmetals Corp. But that does not mean the dealing is over. Indeed, by the time this article hits readers’ mailboxes, a deal for Noranda could be completed—if not with the Chinese firm, then with Brazil’s Companhia Vale do Rio Doce, an Asian consortium or another bidder.

While there is uncertainty, that does not mean Noranda’s production will simply disappear. Nor does it mean that when the uncertainty is resolved, output will double overnight.

TITANIUM. "Demand for titanium is strong," says Bob Swenson, president of Global Titanium, Detroit. "Supply is squeaky."

He is a cautious bull on titanium. "I think conditions in 2004 are going to continue well into 2005." He looks into the second or third quarter before he sees any major changes. In the meantime, he says demand for ferro-ti into steel and for scrap units going back into titanium is strong.

"The supply side is still relatively tight," Swanson says. The titanium companies continue to work harder to control the in-house circle of scrap, he says.

"The first half of 2005 will be pretty good, but with a lot of volatility," says Stuart Freilich, Universal Metal Corp., Worcester, Mass. While prices in 2004 trended steadily upward, he expects large swings in Q1 and Q2 2005. "The second half, we’ll have to wait and see," he says.

Freilich agrees with Swanson that supply is still tight. He sees more demand than supply, but the activity is not bullish. Freilich says he sees some backup in domestic auto sales in light of the sluggish economy and higher fuel prices.

More worrisome is the fate of the commercial aircraft fleet. He concedes that aerospace and military sales will continue. While the market for private jets and regional commercial jets is holding up well, he worries about the financial condition of several of the large, high-price legacy airlines like

"Other airlines will pick up those airlines’ newer aircraft and cancel orders for new planes," Freilich says. Because about 10 percent of the current 300 planes on order with companies like Boeing and Airbus are from legacy airlines, the loss of those sales would be significant.

Citing a need to improve its finances, in late November, American Airlines postponed—but did not cancel—delivery of 47 Boeing 737s and seven 777s.

On the supply side, the government is selling its last block of titanium sponge. This sale continues at a pace of 5,000 to 7,000 tons per year since before the turn of the century. Most of the government-auctioned titanium has gone to steel mills or aluminum application alloy makers.

"This has been going on for a while. We didn’t think much of it while the sponge was there," Swenson says. "Now, with titanium in short supply, people are getting more interested."

Swenson says he expects the tight supply will force some increased scrap generation to the point where it might affect the supply side of the equation.

"I’m pretty bullish," Swenson says, "but I’m cautious. I expect something to happen…you never know when it will happen. But I don’t expect it to happen until mid-year."

"When the end comes, it will come fast and furious," Freilich says. "There will be cancellations, and it will just die." He worries about the possibility of double-bookings, too.

FERROCHROME. "Ferro-chrome for 2005 will not be plentiful, but will be in balance," says Larry Pryor at Sudamin Corp.’s Sewickley, Pa., office. He says prices could increase in the United States, mainly because of currency fluctuations. But he feels there will be pressure from buyers to keep any increases in check.

"2005 will be equally as good as this past year," Pryor continues. He says he does not think prices will peak suddenly, but that any increases will be gradual.

Aerospace—probably the single most important key driver in the market—is doing extremely well. "We are seeing significant scrap being generated from aerospace," Pryor says. He expects aerospace production to do well through the second half of 2005.

NICKEL. About two-thirds of the world nickel supply goes to stainless steel, with alloys and platings consuming another quarter. About 3 percent goes to batteries.

Aircraft, military and electrical applications drive the market. And the market looks good. "Even with levels over $6 [per pound], nobody is running and hiding," observes Barry Hunter of Hunter-BenMet Associates, New York. In November, the three-month futures contract was pushing the $7-per-pound range.

"There is no shortage of nickel if you want to pay the premium," Freilich says. He says the 2005 price for nickel will be $6.50, plus or minus a quarter.

"On the primary side, nickel is very sound going into 2005," says John Vorberger, sales and marketing manager of special products with Eramet North America, Coraopolis, Pa. "We see limited upside potential on the supply side."

Most nickel mines are at or near capacity. While Vorgerber concedes there could be supply interruptions, he is not overly worried.

"The scrap side is more interesting than the [primary] supply side," Vorberger says. Yet, he thinks prices have run up pretty spectacularly. "In view of the physical supply, $7 per pound is overstated," he says. He feels a 2005 price range of $5 to $6.50 is reasonable. "Over $7 per pound is overdone," he states.

Hunter sees good growth in the stainless sector. "High temp is showing a regeneration after two years," he says. "As long as you can buy and sell with a spread, we are comfortable."

That comfort level seems to extend to the consumer, as well. "You don’t want to hear that the consumer is not interested in buying. My assumption is that everyone producing nickel, molybdenum and chromium is okay with the market," he says.

Hunter has not heard of anyone in the market who cannot make sales because prices are too high. "They still can pass on any surcharge and maintain their order books," Hunter says. "The mills will continue to look for materials because they have a need."

Demand for nickel and stainless, especially from the resurgent aerospace industry, drives the market. Order books and melt rates look strong. Some power industry business is returning. And, there is a lot of growth outside the United States.

"An airline bankruptcy would not be a positive contribution, but the order of magnitude relative to growth in other segments is slight," Vorberger says.

Daniel Marx of the New York office of Considar Inc. told the annual Nickel-Stainless roundtable, held this past fall by the Pittsburgh Chapter of the Institute of Scrap Recycling Industries Inc. (ISRI), that demand from China and reviving U.S. and Japanese economies should keep nickel prices high and demand strong for stainless steel scrap.

The price for ferrochrome products had more than doubled, going from 32 cents per pound in January of 2003 to 74 cents per pound in April of 2004. While prices may have peaked, Marx said they are unlikely to drop significantly in the near-term, as demand still exceeds supply.

THE CHINA CARD. Across the board, the growth of metals production in China has slowed from the double-digit rates of 2002-2003. However, China is definitely a player in the nickel and nickel-bearing scrap markets.

Stainless steel makers in the United States, Western Europe and Eastern Asia are now competing for existing supplies of stainless scrap.

China also remains active in the titanium and ferro-ti market. Should China slow its manufacturing, it would turn down the heat under that sector.

Freilich says the Chinese will have a significant impact on stainless, much as the Koreans did several years ago. He says that South Korea had a voracious appetite for scrap—until that nation started to produce its own.

"What happens when the Chinese suddenly stop buying?" Freilich asks. He does not see that happening in 2005, but admits to concern for 2006. "And 2007 may be worse," he adds.

Vorberger says Eramet sees stainless scrap demand from China going up again a few percentage points in 2005.

"In our view, China was de-stocking in the first part of 2004," Vorberger says. While he concedes it was a very precipitous falloff in apparent consumption, he notes that the mills were not cutting back production. "It was more that they were eating down stocks," he says.

Vorberger is mildly concerned about the more distant future. "Scrap generation is a function of industrial development," Vorberger says. "But you have to believe that demand for scrap units will outpace supply of scrap units."

THE RUSSIAN WELL. Several observers say the availability of stainless steel scrap from the former Soviet Union is dwindling. That area has been a prime supplier of stainless and other specialty metals over the past few years.