What the Paris Air Show Tells Us About Metals Demand

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You have to wonder if Airbus’ announcement of the ZEHST plane project (zero-emission high-speed transport) at the Paris Air Show is more an exercise in upstaging Boeing than a serious proposition.

Interesting as the idea is a hypersonic plane capable of seating between 50 and 100 passengers and flying at more than four times the speed of sound (more than 3,000 mph) at 105,000 feet, according to the Telegraph newspaper report, but a prototype isn’t due to fly until 2020 and the plane is not scheduled to enter service until 2050 if ever.

Of more interest to the metals markets is an assessment of the health of the aircraft building industry and the impact that cream-skimming production for aerospace contracts will have on the commercial aluminum, titanium and nickel, cobalt, etc.-based alloys markets in the years to come. Metals manufacturers make better margins from and always give priority to aerospace work over commercial, so when aerospace order books are strong, premiums for standard products like 6000 series plate tend to remain firm and delivery periods more extended.

Boeing and Airbus: Where They Stand

The news from Paris is that both Boeing and Airbus are in rude health. Last year, Airbus and Boeing built more than 970 aircraft and this year’s total is expected to top 1,000 for the first time. Both airlines and all three major engine makers Rolls-Royce, Pratt & Witney and the world’s biggest, General Electric, are all trying to out-do each other with order announcements.

GE reckons it will book $10 billion of orders at the show (we all know these orders have been lined up months in advance and just announced at the show, so GE’s number is probably already a done deal), but Rolls hit the ground running with a $2.7 billion order from Brazil’s Tam Airlines for 27 Trent engines for a fleet of Airbus A350s. Airbus sold 60 A320 jets to GE Capital in a deal worth $5.1 billion, while according to Reuters, Boeing bagged some $9.3 billion of orders.

All mind-numbing numbers aside, the point is that emerging market and Middle Eastern airlines are on an aircraft spending spree that will keep the plane makers busy for some time to come; as a consequence, metals processors are likely to remain busy servicing that sector of the market regardless of commercial industrial activity softening in H2 this year.

Stirring the Waters – er, the Air

The other interesting snippet is a comment from Jim Albaugh, the head of Boeing’s civil jet division, who caused a stir with his warning about competition getting tougher. “The days of the duopoly with Airbus are over,” he is quoted as saying, pointing the finger at Chinese, Brazilian, Russian and Canadian manufacturers, particularly in the 100-seat-plus market for regional jets.

In an interview with Henri Courpron, CEO of lease company ILFC, Reuters reported his comments that China is set to double the size of its fleet over the next five years. Under the circumstances, it is no surprise that China, among others, is looking to actively boost its domestic aircraft building industry, as it has with rail, shipbuilding, wind turbines, computers, automotive…the list goes on.

Boeing is right to be anxious about the rise of emerging market competition. Much of the growth in aircraft sales comes from these markets and as domestic plane making capability grows, the market for Boeing and Airbus will suffer. For metal buyers, the interesting dynamic will be to what extent this encourages the growth of emerging market metal processors capable of meeting the very highest standards required by the aviation industry. China and Russia already have hands full of producers with the requisite equipment, know-how and quality approvals. Expect more to join them; particularly in China, where government support for value-add processing is particularly active.

Commercial metal buyers may be on the wrong end of relatively limited Western production capacity now, but in a few years expect a lot more emerging market capacity to come on the scene than the limited levels we have now.

–Stuart Burns

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