New aircraft boom will see titanium price take off
Growing trade between Asia and the Middle East has meant new routes for airlines and fresh demand for aeroplanes. And in air transport, the key metal is titanium. Eoin Gleeson looks at the sector and explains how you can get in on the start of a new boom in the metal.
The Chinese town of Yiwu doesn't show up in the guidebooks. But it's home to a sight every bit as awesome as the Great Wall the Yiwu International Trade City. Spread over 2.6 million square metres, the world's largest flea market is the Wall Street of counterfeit goods, according to Eamonn Fingleton in The Jaws of the Dragon. They used to call it Sock Town more than three billion pairs of socks leave Yiwu for the US each year. But not anymore. An explosion of trade with Africa and the Middle East over the last ten years has changed the town beyond recognition. English signs in the market have been replaced with Arabic; there are dozens of Arabic restaurants on the main street.
It's the same story in towns from Dubai to Delhi. Booming trade between Asia and the Middle East is redrawing the global trade map. In 2000, China's exports to the Arab world came to just $6bn. By last year, that figure had risen to $48bn. And those new trade routes have created formidable demand for international flights. Dozens of new flight connections are opening up each year. Despite the global slump in trade this year, politicians continue to approve plans for vast new airports. Emirates Airline will grow its passenger fleet by 14% this year alone.
There are investment opportunities to spin out of this from airlines to aircraft manufacturers. But the greatest opportunity lies in the speciality metals used to make new aeroplanes, says Chris Mayer in his Capital & Crisis Letter. Think how lithium has taken off on demand for electric vehicles. Or rare earth metals on demand for laptops and wind turbines. Speciality metals in short supply don't stay cheap for long once industrial demand picks up.
In air transportation, the key metal is titanium, says Mayer. It's an integral part of the new designs for the next generation in aircraft making them lighter, quieter and more fuel-efficient. Titanium has the highest strength-to-weight ratio of all the metals. It is exceptionally resistant to corrosion. Titanium alloys were even used in the controversial swimsuits that have led to an unprecedented number of broken world records this year. The new BA 787 uses 250,000lbs of titanium in every plane, according to Lisa Reisman of Metal Miner. Boeing has a backlog of 878 orders.
Titanium is also the common link in a host of industries which will show strong demand over the coming decade. Its corrosion-resistant properties make it ideal for water systems and deepwater oil drills. And it's the best choice for condenser tubing in nuclear and gas-fired power stations.
But the commercial aerospace industry is the big one, accounting for 50% of titanium demand, with a further 34% going towards military planes, according to International Metals. As you might expect, there has been a slew of cancellations on aircraft orders this year. When Boeing announced plans to delay the launch of its 787 aircraft, the industry was left with a titanium inventory overhang estimated at as high as 50 million lbs, says Frank Haflich in American Metal Market. This has kept prices depressed for months. The price of a standard titanium ingot is down from $30 in January 2008 to below $10 now.
But the fall in production will be short-lived. "We are living amid massive changes in air transportation," says Mayer. Eventually, Boeing will have to scale up production due to Middle Eastern and Asian demand. Over the next 20 years, an average of 1,200 new planes a year will be demanded, says Airline Monitor. That's an order book worth nearly $3trn. If even half those planes are made, titanium will soar. We look below at how you can profit.
The best bet in the sector
Titanium Metals (NYSE: TIE) is a giant in the industry, with sales of over $1bn. Its smelting operations make up 20% of global capacity. It is the only titanium producer with major plants in the US and Europe the main markets for its products. The group's fortunes are tied to the aerospace order book. So it has been hit hard, falling from $40 a share a few years ago to $8.35 now. With titanium prices at current levels, it is likely to earn 20 cents per share, compared to $1.38 in 2007 and $0.89 last year. But the stock is a good long-term play on a recovery in the titanium market.
That may be a while coming. In July, US demand for big-ticket items, aircraft being the biggest of those tracked, rose 4.9%. But it could easily dip again. And China's top three airlines are trying to delay delivery of planes they ordered for 2010, says Reuters. China Eastern may even scrap an earlier order for nine Boeing 787s. But the news is in Titanium Metals' share price. Even in its depressed state, it will still generate $80m in free cash flow this year. It finished the last quarter with no debt and $106m in cash, so it can withstand further cancellations. Buy up to $12 a share, says Mayer.