An unparalleled investor behind changes in US titanium metal industry

2015/12/02


 US titanium metal industry is drastically changing.

 In March of this year, the world’s largest aluminum manufacturer, Alcoa acquired RTI International Metals (RTI), a leading US component manufacturer for the industries such aerospace, defense and automobile. And, in August, Berkshire Hathaway Inc. led by the world’s most famous investor, Warren Buffett, acquired Precision Castparts Corp. (PCC), a major metal processing company in US at $37.2bn.

 Original company names are sometimes lost in the US where acquisition integrations have been very often seen. But, the great investor’s entry into titanium metal industry might completely change the existing titanium metal supply chain.

 A source from a Japanese major titanium manufacturer said in worried tones, “A completely different industry or a stranger has entered into the titanium industry.  That means that the US titanium metal industry might seem to be attractive to them (Alcoa and Warren Buffett). They must have considered it possible to have a huge income from the industry. The industry change in the US might inevitably have an impact on the Japanese titanium industry.”

 PCC, which previously acquired TIMET, a US titanium ingot manufacturer and titanium scrap processor, was acquired by Berkshire Hathaway Inc. led by Warren Buffett. Series of acquisitions like a food chain can be seen. It’s not too much to say that Buffett is taking control of the US titanium market in a sense.

PCC focuses on inventory management ordered by Buffett

 Buffett is pressing on with inventory reduction in PCC saying, “Reduce excess inventory. Don’t have a stock.” It means to reduce all the inventories, including not only titanium components but also titanium scraps. Also in Japan, most of the profitable companies often try not to have too many inventories considering it bad to have inventories. It’s true that highly profitable companies including Toyota think it good not to have unnecessary inventories.

 Currently, the inventories of titanium sponge and titanium scrap reach around 45,000 tons, the highest level ever recorded (as of the 2nd quarter in 2015).

 Although the orders for airplanes, the biggest source of demand for titanium metal, are undoubtedly increasing, the titanium supply chain has been still overstocked. So the prices of titanium sponge and titanium scrap are gradually declining. It is said that the long-term contract price for titanium sponge for the next year will drop by 10% compared to that for this year. We might see more drops.


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 For example, titanium sponge prices remained around $9-10/kg for airplane grade and around $7-8/kg for steel in late September, but the price for airplane grade is dropping to $7/kg level at the end of November. In line with this, titanium scrap prices have declined. Ferrotitanium prices have stayed around the $3/kg level.

 Basically, US titanium source inventories remain in titanium melting and rolled precision processes, and in airplane manufacturers. The issue now is that excess inventories have been significant. So, PCC led by Buffett is focusing on reduction of inventory as if having inventories was bad.

 A source from the titanium industry said, “Under the Buffett’s policy not to increase the inventory, neither virgin titanium nor titanium scrap may be purchased next year.” It’s a realistic and strict forecast.
 If so, considering the current Japan’s situation with a sufficient stock, it’s possible that fresh buying may be absent until the US inventory reduces to a level which Buffett considers appropriate after suppliers reduce their supply.

 The source from the Japanese major titanium manufacturer pointed out, “The Japan and US titanium industries have been buddies who were apt to make a decision on both sides’ silent conversation. In short, even if they have an inventory, they have purchased a significant amount of virgin titanium or titanium scrap. However, now that a person who has a thoroughly rational way of thinking without past relationships in the industry manages the market, Japan’s titanium industry cannot afford to be idle. We have already been in a tough situation, but we will be forced to change drastically whether we like it or not.”

 The fact that the seawater desalination project will start next year is a blessed relief for the titanium metal market. However, as for the key airplane sector (including military uses), the purchases of titanium sponge and titanium scrap will start after the US inventory levels are adjusted. It may take some time to have new demands for titanium source materials as airplane manufacturers are reducing costs, trying to improve yield rates and promoting to recycle titanium scraps generated in the manufacturing process and at the same time, the use of non-metal jet engine components is increasing.

 Even while waiting for the US inventory adjustments, titanium sponge manufacturers in the world including Japanese ones should continue the production. So, even if we entered a new cycle, inventories might increase soon and then, prices might drop and it might take 3-4 years to adjust inventories. Such a worried negative loop might be maintained.
 In this situation, a titanium trader says, "Titanium market is like a tundra area where spring never comes longer than forever…”

(Edited by Sasaki)

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