After going ballistic around the spring of 2004, the make-or-break materials market has regained a semblance of balance of late, giving purchasing managersand OEMsa chance to catch their collective breaths. Better take a deep gulp, however; this could be merely the pause that refreshes. According to the AeroStrategy consultancy, spot prices for titanium sponge "increased by a factor of four in the first half of 2005, but started to weaken in late 2006 and early 2007."
When it comes to metals, "We've seen some softening in the marketplace," says John Byrne, director-procurement-common commodities and supply chain strategy at Boeing Commercial Airplanes. "We've seen it in aluminum, we've seen it in titanium and we've seen it in some of the more exotic metals" such as vanadium, which is critical to the manufacture of commercial airplanes. It works to clad titanium to steel and is mixed with aluminum in titanium alloys for turbine powerplants and high-speed airframes.
The price of that stuff is representative of what's happened to metals in recent months. The International Titanium Assn. concludes that some "balance" is returning to the vanadium market after a record run-up in the spring of 2005, when demand from China and the US depleted stockpiles. Byrne says the reason overall metal prices rocketed three years ago is that assets that had lain fallow since 9/11 had to be brought back online, and that doesn't happen overnight.
"It took a little bit of time for some of the assets to get to full utilization," he says. For the most part, it wasn't a matter of re-firing whole plants but of bringing "pieces of the capacity" back.
Perhaps the clearest sign sanity has returned is that double-ordering is down. Double-ordering is triggered when "somebody is worried they can't get something," says Byrne. "They order from one person and then they go out and try to find it somewhere else." The practice can prod prices higher by taking "a double bite out of the system."
Now that capacity has caught up with demandat least in certain key metals such as aluminum, titanium and high-tensile, corrosion-resistant steelsthe industry can take stock of what the stockpile is likely to look like in the coming years.
Despite the respite, there continues to be "a well-documented tightening of the [raw materials] marketplace . . . a well-understood scarcity," says Jason Dickstein, general counsel of the Washington-based Aviation Suppliers Assn.
A scarcity not just of raw material, but of parts fabricated from the elemental stuff, as is evidenced by the well-publicized fastener shortage experienced by Boeing and its suppliers on the 787 program that has contributed to the two to three month delay in the first flight. Charles Beard, a director for Oliver Wyman consultancy, believes "substantive barriers for new entrants, aggressive production schedules, and a distributed manufacturing model that is predicated on decreasing unit costs" renders some suppliers "either unwilling or incapable of taking on the capital risk for a market that experiences dramatic cycles."
Returning to the basic materials, one of the reasons "titanium went through the roof" is the sheer volume of it required by modern transports, says Beard. "On a 747, an estimate would be somewhere around 40 to 50 tons. In the A380 it's 77 tons." World titanium demand is expected to nearly double over the next decade, according to AeroStrategy, which cites data from RTI International Metals. Commercial aerospace must compete for it with the industrial/consumer (think titanium golf clubs) and defense sectors. If there's a scarcity of the stuff from which raw metals are rendered, there is also a scarcity of the energy required to make the metal. The cost of producing a block of milled metal "has gone up fairly dramatically," says Beard. Ore to sponge, sponge to ingot, ingot to milled metal, each step in the process "has a demand premium on it, and we don't see that demand premium going down."
Ironically, energy is pressuring aerospace OEMs in a couple of ways. Not only is there the overt cost of the energy itself, but the ability to drill for oil and gasto drill farther, deeper and fasteris predicated on the use of materials "which tend to match the types of materials used in aerospace," says Byrne.
LOOK WHO'S DRIVING
The energy cycle may be a circle, but it's certainly not a virtuous one. The circle of vendors, however, can be. And that's where OEMs can exercise some control.
In today's environment of material scarcity, suppliers are in the left-hand seat. "Some of our [aerospace manufacturing] clients are finding themselves sort of behind the curve," Beard asserts. In the past, OEMs bid suppliers against one another, and when they didn't perform sent a Six Sigma team to help them toe the line. "Today," he says, "you show up with a Six Sigma team and they'd say, 'We're glad you're here because your competitor just bought the next five years of my supply.'"
He adds, "The industry has consolidated." Private equity has purchased some of the remaining players and many of those players have scrapped the standard strategic sourcing model. They're willing to work with an OEM, but sometimes only on the basis of a "capacity service agreement," he says. The link with private equity? Capacity service pacts produce stable revenue streams, and those streams allow the equity firms to "go to their bank and get the money they need to invest in their business."
Public or private, large or small, lots of vendors are inking capacity agreements, and they're doing it for far longer periods than before. "We construct our contracts longer today than we've ever done," says Byrne. "In the past, we might tend to contract for three to five years. Now . . . it's significantly beyond five years."
Boeing, of course, is not alone. The International Titanium Assn. reports that RTI signed a 10-year deal to supply Airbus with titanium for its aircraft, including the A380 and A350 XWB. Alcan says it recently entered a long-term deal (it didn't specify how long) with Airbus to supply high-performance aluminum products. Alcan Rolled Products says it now has an agreement with Bombardier to supply the Canadian OEM with lightweight aluminum products for use in CRJ and Q-series regional craft. Titanium Metals Corp. will be supplying Rolls-Royce with titanium products for its turbine powerplants through 2016.
Beard says this is "great news for the suppliersall the way from raw materials to ingots. But it may mean that [OEMs] are locking in at a price that's slightly higher than that today." He maintains that's okay, that the ultimate aim is "to de-risk the demand side." He believes the only way OEMs can find surety in today's marketplace is to "lock up capacity agreementsor go out and start buying all these [suppliers]."
Long-term pacts are predicated on good forecasting. And forecasting, agree Beard and Byrne, may represent the biggest single challenge to OEMs today. "First and foremost," says Byrne, "we just need good information." Getting it can be a challenge, especially when your supply chain runs through countries strategically scattered around the globe. He says some suppliers break down their bill of material meticulously. Others simply aggregate the information, rendering it less useful for forecasting purposes.
The finer the grain, the better the forecast, he believes. He wants to know how much of a particular material a vendor consumes in a given month, what product it goes into and what options the subcontractor has for obtaining the material. "We've learned that the better the forecast we can put together with our big material suppliers, the more confidence they have."
Boeing makes it a point to ask for non-aggregated, finely detailed data. Has the effort paid off? "Yeah," says Byrne. Although "sometimes you have to communicate several times to get the answer."
Nobody has to communicate the fact that composites are king, or at least crown prince in waiting. Roughly 50% of the 787 is composite and the A350 XWB will be suffused with the stuff, as well. AeroStrategy predicts that the next-generation narrowbody could be made from as much as 70% composite materials.
The benefits of composites go beyond weight, range and fuel consumption. In some ways they actually are supply-chain-friendly. While acceding to the fact that capital investment is a "critical issue" in composite manufacture, Byrne contends, "additional composite capacity can be brought online relatively quickly compared to metals. That's because in some cases you're using chemicals that come out of the slipstream of the oil refinement process." Fine, but the problem is that because carbon fibers for aerospace production are controlled by strict specification, "it's not very common to have a plant that will produce the same composite material as a competitor," he says.
That's another reason OEMs are increasingly dependent on vendors, and why they're devising new ways to nurture partnerships. Perhaps no term in the industry has been more abused than "partner," but now consolidation of the supplier base is prompting airframe and engine OEMs to define purer relationships. Beard suggests OEMs provide tooling, perhaps even plant space, to suppliers on a leaseback basis, the better to wed them at the navel to a common purpose.
Boeing apparently is not averse to the idea. "We're doing a lot of things today differently than we have in the past," says Byrne. "We try to understand the value-add and move [things] further back in the supply chain if it makes senseeven back to our raw material suppliers." Some of them might take on machining, maybe even parts manufacturing.
Boeing may be on the bow wave of a change Beard believes is imperative. In an age of scarce supply, "The supplier relationship has to change," he says, and change "fairly dramatically."