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May 17, 2011AMM’s 5th Aerospace Materials Conference
Pittsburgh, PA
Aerospace Raw Materials Market Outlook
Kevin MichaelsPartner
Ann Arbor, Michigan • Amersham, United Kingdom • Singaporewww.AeroStrategy.com
© 2011 AeroStrategy AMM
Agenda
Air Transport Production – Three Scenarios
Aerospace Raw Material Demand Outlook
Four Key Raw Material Supply Chain Trends
© 2011 AeroStrategy AMMAMM
Air Transport Production Rates Are Driven By The Complex Interrelations Of Several Factors
3
Air TravelDemand
EconomicGrowth
Air TravelValue
Proposition
RequiredAircraft
AircraftDemand
For Growth
Aircraft operatingfactors
(utilization, speed, size, load factors)
Current Fleet
TemporaryStorage
Retired/Scrapped
TotalAircraftDemand
AircraftDemand For Replacement
Air Transport Production Demand Drivers
Source: AeroStrategy
AIR TRANSPORT MANUFACTURING
SCENARIOS
© 2011 AeroStrategy AMMAMM
Oil Prices Are Approaching The High Levels Of The 2008 Price Spike…
4
Annual Average Fuel Costs 1978 to present(cents per gallon)
Source: Air Transport Association, IATA
2002: 11% of airline expenses
Current: 30+% of airline expenses
March 2011price
AIR TRANSPORT MANUFACTURING
SCENARIOS
© 2011 AeroStrategy AMMAMM
…Which Is Changing The Economics Of Aircraft Operation…
5
US Airlines – 2009 Fuel Costs/ASM (cents)
Winners
Winners Losers
Losers
Source: US Air Transport Association
* 2009 figures are based on $1.75 -$1.95 gallon fuel
gal
Fuel cost/ASM (cents)
High fuel costs exacerbate aircraft
cost differences
*
AIR TRANSPORT MANUFACTURING
SCENARIOS
© 2011 AeroStrategy AMM Source: Airline Monitor
Air Transport Retirements and Deliveries
...And Contributing To A Surge Of Aircraft Retirements...
Retirements
Deliveries
400 Retirements per year is the new normal
Production breakdown~60% for growth~40% for replacement
Aircraft
6
AIR TRANSPORT MANUFACTURING
SCENARIOS
© 2011 AeroStrategy AMMAMM
AeroStrategy Developed Three Scenarios For Air Transport Production Rates Based On Fuel Prices
7
2011 – 2021 Air Transport Production Scenarios
Sources: AeroStrategy analysis, Airline Monitor
Aircraft Demand Factor Optimistic Nominal Pessimistic
Long-term Oil Price(WTI) $50-60/bbl $80 – 120/bbl $150+/bbl
Average Global GDP growth ~4% ~3% ~2%
Average Global RPKgrowth 5.1% 4.4% 3.6%
Net Return of Parked Aircraft 400 Nil Nil
Total 2011-21 AircraftRetirements 5,100 5,600 6,000
Aircraft Utilization (hrs/day)
7.7 8.0 8.2
2021 Projected fleet(2010 = 20,500) 32,900 30,400 27,000
Aggregate 2011-21 Aircraft Production 17,000 16,000 12,500
AIR TRANSPORT MANUFACTURING
SCENARIOS
Downside Risk Outweighs Upside Opportunities
© 2011 AeroStrategy AMMAMM
In AeroStrategy’s Nominal Scenario, Air Transport Production Exceeds 1,600 By 2021
8Source: AeroStrategy
Air Transport Nominal Production Scenario 2011-2021*By OEM
* 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
0
200
400
600
800
1000
1200
1400
1600
1800
OtherATRBombardierEmbraerBoeingAirbus
Uni
tsAIR TRANSPORT
MANUFACTURING SCENARIOS
Aircraft Demand Factor Nominal
Long-term Oil Price(WTI) $80 – 120/bbl
Average Global GDP growth ~3%
Average Global RPK growth 4.4%
Net Return of Parked Aircraft Nil
Total 2011-21 AircraftRetirements
5,600
Aircraft Utilization (hrs/day) 8.0
2021 Projected fleet(2010 = 20,500)
30,400
Aggregate 2011-21 Aircraft Production 16,000
© 2011 AeroStrategy
Agenda
Air Transport Production – Three Scenarios
Aerospace Raw Material Demand Outlook
Four Key Raw Material Supply Chain Trends
AMM© 2011 AeroStrategy
AeroStrategy Recently Completed A Comprehensive Update Of Its Aerospace Raw Materials Forecast
The revision included several key changes to the prior 2008 forecast… Updatedproduction rates and included next generation
aircraft Refined material composition assumptions and buy-to-
fly ratios Incorporated the time-lag between aircraft production
and pull for mill Modeled the impact of inventory overhang
1
2
3
4
100+ Interviews
300K Line Database
ARM 1.0 (Feb-May 2008)
Aerospace Industry Raw Material Market Assessment
Ann Arbor, Michigan • Amersham, United Kingdomwww.AeroStrategy.com
6 May 2008
Final Report
ARM1.0
ARM 2.0 (Dec 2010-March 2011)
30 targetedinterviews
&extensive additionalmodeling
Raw MaterialDemand
© 2011 AeroStrategy AMM
Total Aerospace Material Demand In Buy Weight Is 1.14B Pounds, Led By The Air Transport Sector
Source: AeroStrategy analysis 11
Air Transport73%
Business & Gen Aviation
10%
Rotary Wing5%
Military12%
Total1.14 B lbs
* Maintenance, repair and overhaul (MRO) included in total* * Includes air transport aircraft used as VIP transport, contributing roughly 12% to the total
**
2010 Aerospace Raw Material Buy Weight*(Fundamental Mill Demand)
• Air transport is nearly three-quarters of the total demand
• Military fixed wing is the second largest category, which includes platforms such as the Boeing tanker program (KC-46A) and the Joint Strike Fighter
Raw MaterialDemand
© 2011 AeroStrategy AMM
Aluminum Constitutes Nearly 50% Of Total Demand
12Sources: AeroStrategy
* Maintenance (MRO) included in total
Aluminum Alloys49%
Steel Alloys22%
Titanium Alloys10%
Super Alloys9%
Composites3%
Other7%
Total1.14 B lbs
2010 Aerospace Raw Material Buy Weight*(Fundamental Mill Demand)
• 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
• Composites is just 3% of total demand due to its low buy-to-fly ratio
Raw MaterialDemand
© 2011 AeroStrategy AMM
Primary Aerostructures
37%
Components26%
Interiors8%
Nacelle Systems
6%
Secondary Aerostructures
1%
Hardware1%
Engine14%
MRO7%
Primary Structure And Components Are The Largest Categories Of Raw Material Buy Weight…
Source – AeroStrategy13
Total1.14 B lbs
2010 Aerospace Raw Material Buy Weight*(Fundamental Mill Demand)
• Primary aerostructuresaccount for 37% of raw material demand, followed by components (27%)
• Engines account for nearly 15% to raw material demand
• MRO/aftermarket comprises 7% of total mill demand; engine replacement parts are a key driver
Raw MaterialDemand
* Maintenance (MRO) included in total
© 2011 AeroStrategy AMM
Boeing And Airbus Aircraft Comprise 63% Of Total Raw Material Demand
Source: AeroStrategy analysis 14
Airbus32%
Boeing31%
General Electric
4%
CFM Int'l4%
Embraer3%
Lockheed Martin
3%
Bombardier3%
Rolls Royce3%
Pratt & Whitney
2%
IAE1% Other
14%
Total1.14 B lbs
2010 Aerospace Raw Material Buy Weight(Fundamental Mill Demand)
• 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
Raw MaterialDemand
© 2011 AeroStrategy AMM
Aluminum26%
Titanium26%
Super alloy20%
Composites
13%
Steels11%
Other4%
• Aluminum and titanium are the largest material markets by value – both are worth ~$2.3B
• 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
The Total Value Of The Raw Material Consumed In 2010 Is Nearly $9 Billion
2010 Aerospace Raw Material Value ($B) By Aircraft Category
Source: AeroStrategy analysis 15
Total$8.7B
Raw MaterialDemand
© 2011 AeroStrategy AMM
0.0
0.2
0.4
0.6
0.8
1.0
1.2
FLY BUY
16Source: AeroStrategy
Overall buy-to-fly is
~ 5.5B lb
s
• The overall “buy to fly” ratio is approximately 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
The Overall Aerospace ”Buy To Fly” Ratio Is 5.5
2010 Aerospace Raw Material Fly Vs. Buy Weight (B Lbs)
Raw MaterialDemand
© 2011 AeroStrategy AMM
Future Raw Material Demand Will Be Shaped By Production Rates, Which Will Reach 5,000 By 2017…
17Source: AeroStrategy
Aggregate Aircraft Production Forecast 2011-2021
0
1,000
2,000
3,000
4,000
5,000
6,000
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Military Fixed Wing, -4.5%Rotary Wing, 0%Business & Gen Aviation, 5.2%Air Transport, 2.8%
Uni
ts Market, CAGR
Total CAGR = 1.9%
Raw MaterialDemand
2021
© 2011 AeroStrategy AMM
…And Total Material Demand Will Approach 1.4B Pounds By 2013…
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
B lb
s
2010 Aerospace Raw Material Buy Weight (Realized* Mill Demand) • 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
Source: AeroStrategy analysis 18
Raw MaterialDemand
* Adjusted for current inventory overhang
Assumes 12 month lag between aircraft production and material demand from mill
© 2011 AeroStrategy AMM
… With Growth Led By Composites And Titanium
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Other, 1.6%Composites, 12.6%Super Alloys, 2.9%Titanium Alloys, 8.5%Steel Alloys, 0.3%Aluminum Alloys, 0.9%
2010 Aerospace Raw Material Buy Weight(Realized* Mill Demand)
• Steel alloys and aluminum will grow the slowest, being displaced by newer materials
• Conversely, composites and titanium alloys will increase the quickest
• Note a small subset of aluminum alloys is AL-LI which will likely have extremely high-growth potential
B lb
s
Commodity, CAGR
Total CAGR = 2.6%
Source: AeroStrategy analysis 19
Raw MaterialDemand
* Adjusted for current inventory overhang
© 2011 AeroStrategy AMM
Projected Demand For Aluminum Will Peak In 2014
0
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
M L
bs
2010 Aerospace Raw Material Buy Weight(Realized* Mill Demand)
• 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
Source: AeroStrategy analysis 20
Raw MaterialDemand
* Adjusted for inventory overhang** Includes aluminum-lithium as a small subset
Aluminum Alloys
Steel
TitaniumSuper Alloys
Composites Other
© 2011 AeroStrategy AMM
Agenda
Air Transport Production – Three Scenarios
Aerospace Raw Material Demand Outlook
Four Key Raw Material Supply Chain Trends
© 2011 AeroStrategy AMM
Four Key Trends Are Influencing The Raw Material Supply Chain
22
Key Trends Impacting Raw Material Market
Supply ChainGlobalization
InventoryOverhang
Supplier Consolidation And Vertical Integration
New ProgramExecution
FOUR KEY TRENDS
© 2011 AeroStrategy AMM
Aerospace Manufacturing Globalization Is Shifting Raw Materials Consumption Patterns
23
Global Aerospace Manufacturing Clusters
Southern California
Quebec
Southeast US
Central US
Mexico
Washington
Brazil
North Africa
France
United Kingdom Germany
Eastern Europe
UAEMalaysia
Singapore
China
Established Clusters Emerging Clusters
Connecticut
Russia
Spain
India Japan
Mills and distribution channels must adapt to emerging clusters
Raw Material Mills concentratedIn North America and Europe…
1. SUPPLY CHAIN
GLOBALIZATION
Source: AeroStrategy
…and Production is shifting South
© 2011 AeroStrategy AMM
A Second Key Trend Will Be The Pace Of Excess Inventory Burn-Down For Certain Materials
Source: AeroStrategy 24
• 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
2. INVENTORYOVERHANG
AMM
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
25
3. CONSOLIDATION
& VERTICAL INTEGRATION
© 2011 AeroStrategy AMM
On-Time Execution For Five New Aircraft Programs Will Shape Future Raw Material Demand
Source: AeroStrategy analysis 26
4. NEW PROGRAM
EXECUTION
B787
A320NEO
A350
C-Series
JSF
Projected 2016 Aerospace Raw Material Demand• 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 ProgramsWill Comprise 30% Of
2016 Demand!
© 2011 AeroStrategy AMM
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
© 2011 AeroStrategy AMM
1Thank you for your attention!
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