Aluminum Premiums Coming Down Thanks Airbus and Boeing

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It would be unkind and inaccurate to liken Airbus’ monstrous A380 to a super tanker but production changes at the European aircraft maker certainly evolve at a super tanker’s pace. As the rest of the world faced a crisis of confidence, falling prices and gridlocked finances, last summer Airbus still planned to increase production of its most popular A320 from 36 to 40 aircraft a month and of its larger A330/340 aircraft from 8.5 to 10 or 11 per month according to the FT. Only in October when the extent of the crisis had finally dawned on Airbus’ management did they decide to leave production rates on hold at 36 for the A320. Now as manufacturers from steel to automotive have cut their capacity utilization in half, Airbus has just announced they will drop production rates from 36 to 34 and keep the A330/340 on hold at 8.5 aircraft per month.

True Airbus, like Boeing, have full order books but aircraft orders are being canceled or delayed at an unprecedented rate as airlines take capacity out of the market and struggle to raise capital for further acquisitions.

Meanwhile, across the Atlantic, Boeing is not faring any better. Their problem has been producing aircraft. For the latter part of 2008, they have been hit by production problems due to a machinist strike, the use of fasteners that did not have the required corrosion resistant cadmium coating and supply chain problems on the now further delayed 747-8 freighter version of the jumbo. Although Boeing’s order book is reported to be standing at 3,714 aircraft there will be cancellations from that total this year and net orders (new orders less cancellations) have been dropping off since early 2007 with a 53% drop in 2008 alone.

With Embraer just announcing a 20% cut in its work force in the face of falling sales and Bombardier maker of trains, ill fated planes and snow mobiles cutting staff and reducing production in the face of falling net orders the global aerospace market appears to be in the same position.

These cut backs will have serious repercussions for the supply chain. For example, current producers of aircraft quality aluminum plate earlier this decade, invested to increase production.  In addition, new suppliers upgraded plant and testing to qualify for aerospace work largely in the expectation of a huge demand for material for the A380 and smaller Airbus models, from Boeing’s stalwart 737 to 777 series aircraft (the Dreamliner has a much higher composite content) and from the upcoming short haul jet manufacturers such as Embraer and Bombardier. Within a couple of years of demand picking up it is being snuffed out again. By Airbus’ own admission, production will most likely drop by 40% up to 2012-2013 with a gradual resumption of growth only possible thereafter. We are already seeing reductions in mill fabrication premiums as aluminum mills fight for business. Mills happy to turn away commercial sales because of order books full with premium aerospace work are now dropping conversion premiums and offering quicker lead times. What may not be a good sign of the health of the civil aerospace market could be good news for consumers of top quality commercial metal products like plate and extrusions.

–Stuart Burns

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