Aerospace Raw Materials Market Outlook

Transcription

1 Aerospace Raw Materials Market Outlook Kevin Michaels Partner May 17, 2011 AMM s 5th Aerospace Materials Conference Pittsburgh, PA Ann Arbor, Michigan Amersham, United Kingdom Singapore

2 Agenda Air Transport Production Three Scenarios Aerospace Raw Material Demand Outlook Four Key Raw Material Supply Chain Trends

3 AIR TRANSPORT MANUFACTURING SCENARIOS Air Transport Production Rates Are Driven By The Complex Interrelations Of Several Factors Air Transport Production Demand Drivers Aircraft operating factors (utilization, speed, size, load factors) Economic Growth Air Travel Value Proposition Air Travel Demand Required Aircraft Current Fleet Temporary Storage Retired/ Scrapped Aircraft Demand For Growth Aircraft Demand For Replacement Total Aircraft Demand Source: AeroStrategy 3

4 AIR TRANSPORT MANUFACTURING SCENARIOS Oil Prices Are Approaching The High Levels Of The 2008 Price Spike Annual Average Fuel Costs 1978 to present (cents per gallon) Current: 30+% of airline expenses March 2011 price 2002: 11% of airline expenses Source: Air Transport Association, IATA 4

5 AIR TRANSPORT MANUFACTURING SCENARIOS Which Is Changing The Economics Of Aircraft Operation US Airlines 2009 Fuel Costs/ASM (cents) Fuel cost/ ASM (cents) Losers Winners Losers High fuel costs exacerbate aircraft cost differences Winners * gal * 2009 figures are based on $ $1.95 gallon fuel Source: US Air Transport Association 5

6 AIR TRANSPORT MANUFACTURING SCENARIOS Aircraft...And Contributing To A Surge Of Aircraft Retirements... Air Transport Retirements and Deliveries Production breakdown ~60% for growth ~40% for replacement Deliveries 400 Retirements per year is the new normal Retirements Source: Airline Monitor 6

7 AIR TRANSPORT MANUFACTURING SCENARIOS AeroStrategy Developed Three Scenarios For Air Transport Production Rates Based On Fuel Prices Aircraft Demand Factor Long-term Oil Price (WTI) Average Global GDP growth Average Global RPK growth Net Return of Parked Aircraft Total Aircraft Retirements Aircraft Utilization (hrs/day) Air Transport Production Scenarios Optimistic Nominal Pessimistic $50-60/bbl $80 120/bbl $150+/bbl ~4% ~3% ~2% 5.1% 4.4% 3.6% 400 Nil Nil 5,100 5,600 6, Projected fleet (2010 = 20,500) 32,900 30,400 27,000 Aggregate Aircraft Production 17,000 16,000 12,500 Downside Risk Outweighs Upside Opportunities Sources: AeroStrategy analysis, Airline Monitor 7

8 AIR TRANSPORT MANUFACTURING SCENARIOS In AeroStrategy s Nominal Scenario, Air Transport Production Exceeds 1,600 By 2021 Air Transport Nominal Production Scenario * By OEM Aircraft Demand Factor Long-term Oil Price (WTI) Average Global GDP growth Nominal $80 120/bbl ~3% Units Other ATR Bombardier Embraer Boeing Airbus Average Global RPK growth Net Return of Parked Aircraft Total Aircraft Retirements Aircraft Utilization (hrs/day) 2021 Projected fleet (2010 = 20,500) 4.4% Nil 5, ,400 Aggregate Aircraft Production 16,000 * 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 Source: AeroStrategy 8

9 Agenda Air Transport Production Three Scenarios Aerospace Raw Material Demand Outlook Four Key Raw Material Supply Chain Trends 2011 AeroStrategy

10 Raw Material Demand AeroStrategy Recently Completed A Comprehensive Update Of Its Aerospace Raw Materials Forecast 100+ Interviews ARM 1.0 (Feb-May 2008) 300K Line Database ARM1.0 Aerospace Industry Raw Material Market Assessment Final Report The revision included several key changes to the prior 2008 forecast Updatedproduction rates and included next generation aircraft Refined material composition assumptions and buy-tofly ratios Incorporated the time-lag between aircraft production and pull for mill Modeled the impact of inventory overhang ARM 2.0 (Dec 2010-March 2011) 6 May 2008 Ann Arbor, Michigan Amersham, United Kingdom 30 targeted interviews & extensive additional modeling 2011 AeroStrategy AMM

11 Raw Material Demand Total Aerospace Material Demand In Buy Weight Is 1.14B Pounds, Led By The Air Transport Sector 2010 Aerospace Raw Material Buy Weight* (Fundamental Mill Demand) Rotary Wing 5% Military 12% Air Transport 73% Air transport is nearly threequarters of the total demand Business & ** Gen Aviation 10% Total 1.14 B lbs Military fixed wing is the second largest category, which includes platforms such as the Boeing tanker program (KC-46A) and the Joint Strike Fighter * Maintenance, repair and overhaul (MRO) included in total * * Includes air transport aircraft used as VIP transport, contributing roughly 12% to the total Source: AeroStrategy analysis 11

12 Raw Material Demand Aluminum Constitutes Nearly 50% Of Total Demand 2010 Aerospace Raw Material Buy Weight* (Fundamental Mill Demand) Super Alloys 9% Titanium Alloys 10% Composites 3% Other 7% Total 1.14 B lbs Aluminum Alloys 49% 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 Steel Alloys 22% Composites is just 3% of total demand due to its low buy-tofly ratio * Maintenance (MRO) included in total Sources: AeroStrategy 12

13 Raw Material Demand Primary Structure And Components Are The Largest Categories Of Raw Material Buy Weight 2010 Aerospace Raw Material Buy Weight* (Fundamental Mill Demand) Engine 14% Hardware 1% MRO 7% Primary Aerostructures 37% Primary aerostructures account for 37% of raw material demand, followed by components (27%) Secondary Aerostructures 1% Nacelle Systems 6% Interiors 8% Total 1.14 B lbs Engines account for nearly 15% to raw material demand MRO/aftermarket comprises 7% of total mill demand; engine replacement parts are a key driver Components 26% * Maintenance (MRO) included in total Source AeroStrategy 13

14 Raw Material Demand Boeing And Airbus Aircraft Comprise 63% Of Total Raw Material Demand 2010 Aerospace Raw Material Buy Weight (Fundamental Mill Demand) Pratt & Whitney 2% Rolls Royce 3% Bombardier 3% Lockheed Martin 3% Embraer 3% CFM Int'l 4% IAE 1% General Electric 4% Other 14% Total 1.14 B lbs Boeing 31% Airbus 32% 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 Source: AeroStrategy analysis 14

15 Raw Material Demand The Total Value Of The Raw Material Consumed In 2010 Is Nearly $9 Billion 2010 Aerospace Raw Material Value ($B) By Aircraft Category Steels 11% Other 4% Aluminum 26% Aluminum and titanium are the largest material markets by value both are worth ~$2.3B Composite s 13% Total $8.7B 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 Super alloy 20% Titanium 26% Source: AeroStrategy analysis 15

16 Raw Material Demand The Overall Aerospace Buy To Fly Ratio Is Aerospace Raw Material Fly Vs. Buy Weight (B Lbs) The overall buy to fly ratio is approximately 5.5 B lbs Overall buy-to-fly is ~ 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 FLY BUY Source: AeroStrategy 16

17 Raw Material Demand Future Raw Material Demand Will Be Shaped By Production Rates, Which Will Reach 5,000 By 2017 Aggregate Aircraft Production Forecast ,000 5,000 Units 4,000 3,000 2,000 Market, CAGR Military Fixed Wing, -4.5% Rotary Wing, 0% Business & Gen Aviation, 5.2% Air Transport, 2.8% 1,000 Total CAGR = 1.9% Source: AeroStrategy 17

18 Raw Material Demand And Total Material Demand Will Approach 1.4B Pounds By 2013 B lbs Aerospace Raw Material Buy Weight (Realized* Mill Demand) Assumes 12 month lag between aircraft production and material demand from mill 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 * Adjusted for current inventory overhang Source: AeroStrategy analysis 18

19 Raw Material Demand With Growth Led By Composites And Titanium 2010 Aerospace Raw Material Buy Weight (Realized* Mill Demand) 1.6 B lbs Commodity, CAGR Other, 1.6% Composites, 12.6% Super Alloys, 2.9% Titanium Alloys, 8.5% Steel alloys and aluminum will grow the slowest, being displaced by newer materials Conversely, composites and titanium alloys will increase the quickest Steel Alloys, 0.3% Aluminum Alloys, 0.9% Total CAGR = 2.6% Note a small subset of aluminum alloys is AL-LI which will likely have extremely high-growth potential * Adjusted for current inventory overhang Source: AeroStrategy analysis 19

20 Raw Material Demand Projected Demand For Aluminum Will Peak In Aerospace Raw Material Buy Weight (Realized* Mill Demand) 700 M Lbs Steel Aluminum Alloys Titanium Super Alloys Composites Other 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 * Adjusted for inventory overhang ** Includes aluminum-lithium as a small subset Source: AeroStrategy analysis 20

21 Agenda Air Transport Production Three Scenarios Aerospace Raw Material Demand Outlook Four Key Raw Material Supply Chain Trends

22 FOUR KEY TRENDS Four Key Trends Are Influencing The Raw Material Supply Chain Key Trends Impacting Raw Material Market Supply Chain Globalization New Program Execution Inventory Overhang Supplier Consolidation And Vertical Integration 22

23 1. SUPPLY CHAIN GLOBALIZATION Aerospace Manufacturing Globalization Is Shifting Raw Materials Consumption Patterns Raw Material Mills concentrated In North America and Europe Global Aerospace Manufacturing Clusters Washington Southern California Mexico Central US United Kingdom Quebec Connecticut France Southeast US Spain North Africa Germany Eastern Europe UAE Russia India China Malaysia Japan Singapore Brazil and Production is shifting South Established Clusters Emerging Clusters Source: AeroStrategy Mills and distribution channels must adapt to emerging clusters 23

24 2. INVENTORY OVERHANG A Second Key Trend Will Be The Pace Of Excess Inventory Burn-Down For Certain Materials 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 Source: AeroStrategy 24

25 3. CONSOLIDATION & VERTICAL INTEGRATION 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 AMM 25

26 4. NEW PROGRAM EXECUTION On-Time Execution For Five New Aircraft Programs Will Shape Future Raw Material Demand Projected 2016 Aerospace Raw Material Demand B787 A320NEO A350 C-Series JSF 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 Programs Will Comprise 30% Of 2016 Demand! Source: AeroStrategy analysis 26

27 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

28 Thank you for your attention! 1 EMEA London, England 43 Hill Avenue, Amersham Buckinghamshire HP6 5BX U.K. Phone: Fax: dstewart@aerostrategy.com Americas Ann Arbor, Michigan 101 North Main Street, Suite 400 Ann Arbor, Michigan U. S. A Phone: Fax: kmichaels@aerostrategy.com Asia Pacific Singapore 314 Tanglin Road, #01-05 Phoenix Park Office Campus Singapore Phone: Fax: dling@aerostrategy.com 28