Roskill: COVID-19 offers mixed outlook for aerospace and its metals supply chains

Until the COVID-19 pandemic struck, the commercial aerospace sector had been enjoying an extended bull run. Passenger numbers were rising steadily, and most airline bottom-lines were seeing the benefits of access to cheap finance, stiff competition in the aircraft leasing market and improvements in fleet productivity and better management of capacity. Between 2009 and 2019, global passenger miles rose by 93% and the commercial aviation fleet climbed 45%. Record airline industry profits were reported in 2019.


London: UK, May 22, 2020 (GLOBE NEWSWIRE) -- This rising trend in passenger miles was mirrored in orders for new aircraft, with annual aircraft deliveries doubling in the decade-and-a-half to 2018. This has resulted in a growing backlog of orders for commercial aircraft. The backlog of orders at Boeing and Airbus at end-2019 had risen to over 15,000 aeroplanes – equivalent to 54% of the current large jet fleet or seven years’ production.

At the start of this year Roskill had been assuming that total commercial airline deliveries would rise by over 20% this year and by a further 30% in 2021. That very positive outlook has been quickly turned on its head by COVID-19 as aviation has been one of the sectors hardest hit by the pandemic and the restrictions on movement that have followed. Airline traffic has collapsed and major job losses have been announced by both airlines and aeroplane manufacturers and upstream suppliers. The International Airline Trade Association (IATA) has forecast that industry revenue will decline by 55% this year.

 

COVID-19 sees airline passenger numbers plummet

Recent weekly data on passenger numbers shows especially significant falls in Europe and on long distance routes. Passenger numbers at Heathrow, Europe’s busiest airport, for example fell 97% y-o-y in April and across Europe passenger numbers were down over 90% at end-April compared to the same period in 2019. In the US passenger numbers were down 64% compared to a year before.

Data from China – which was exposed to the full effects of the pandemic two months before the rest of the world and began easing its lockdown in late-March 2020 – suggests that even as restrictions on movement are eased the speed of recovery will be slow. Whilst Chinese passenger numbers have recovered from a 55% y-o-y fall in February, at end-April the number of travellers was still down by almost 40% compared to the same week in 2019.

Lockdowns in the major developed economies are now beginning to be gradually eased and economic activity is set to gradually resume in many sectors. However, unless a vaccine effective in preventing the spread of COVID-19 becomes widely available, it is highly likely that the recovery of airline passenger numbers will be much more gradual than other parts of the economy. As well as being impacted by lower incomes and broad economic activity, demand for air travel is likely to suffer from concerns by passengers of exposure to heightened risk of infection. 

Roskill is currently using two macroeconomic scenarios to model how the global economy is likely to emerge out of the COVID-19 pandemic. The first of these is a “Deep V” recession, implying a relatively quick bounce back in demand once lockdowns are eased. The other scenario is for a more “Prolonged Global Recession” where the recovery is delayed and global output ultimately remains 4-5% below the pre-COVID-19 trendline.

 

Implications for aerospace metals supply chains 

Demand for titanium metal is estimated to have been just over 185kt in 2019, of which 45% was attributed to aerospace applications – the bulk of which was for airliner frames and engines. In recent years strong growth in titanium metal demand has been linked to the aerospace sector driven by increasing aircraft production rates. Titanium has also benefited from the trend towards carbon fibre reinforced polymer (CFRP) airframes, which is correlated with a higher intensity of titanium use. 

Given the importance of the aerospace industry to the titanium metal market, and particularly the importance of the commercial airline sector, Roskill is expecting major short-term disruptions to titanium demand. Under the assumptions of a “Deep V” impact, Roskill expects a global reduction in demand for titanium mill products in aerospace of somewhere in the region of 30% followed by a reasonably swift rebound to just below 2019 demand levels in 2021 and a recovery to approximately the pre-COVID trend by 2024. Under the “Prolonged Global Recession” scenario, demand in 2020 could be less than half of 2019 demand and would recover much more slowly.

Other major materials used in aerospace include high-performance alloys. They are used particularly in aircraft engines (where nickel-base superalloys can account for 40-50% of the engine weight) and in the airframe. The primary superalloy metals include nickel, cobalt, tantalum, tungsten, and rhenium.

Rhenium is the metal most exposed to the performance of the superalloy sector, with aeroengine production accounting for 70% of rhenium demand in 2019, and the market has already witnessed several challenging years. However, near-term market fortunes may not be entirely dictated by lower aerospace demand. Rhenium is a high-value and rare metal, with production volumes of under 100tpy, and produced as a by-product of copper and molybdenum. COVID-19 lockdown measures have affected mine production of rhenium-containing feedstocks from the major sources in Chile, Peru and the USA. Reduced supply of secondary rhenium is also lowering the amount of feedstock units available to the market.

While tantalum is also reliant on the superalloy sector for a large proportion of its demand, COVID-19 impacts on tantalum supply appear to be outweighing demand loss. Lockdowns in Africa and Brazil have interrupted supply of feedstocks; Africa accounted for an estimated 47% of global primary tantalum production in 2019, with the majority coming from the DRC and Rwanda. Prices have consequently found greater support in recent weeks.

Cobalt feedstock supply is centred on the DRC and production is typically exported to China for further refining via the port of Durban. Roskill understands that logistical challenges in Africa have slowed the number of cobalt units able to be shipped. However, cobalt metal prices drifted to an eight-month low in May, owing to weakening demand from both battery and traditional applications such as alloys and tool materials. 

While substantial volumes of nickel are used in superalloys, the sector itself is relatively minor in terms of overall nickel consumption, with the stainless steel sector being the primary demand driver. The various measures imposed by governments across the world to halt the spread of the COVID-19 pandemic are forecast to drag down stainless steel consumption in 2020. Roskill is of the opinion that total primary nickel supply will remain relatively unaffected by short-term closures related to COVID-19. Prices are expected to remain subdued in 2020 as a result of the pandemic, but are forecast to rise in 2021 as the market recovers.

Tungsten is used in aerospace applications as a tool material, superalloy metal and in tungsten heavy alloys for aircraft counterweights. Around 80% of primary tungsten supply comes from China and so the initial COVID-19 outbreak in Wuhan led to concerns over supply security from the country. As Chinese businesses return to normal, the focus has instead turned to western refiners such as those in Europe and North America, which are still under varying degrees of lockdown as of mid-May. The COVID-19 pandemic has moved across the world at an unequal rate which has led to tungsten supply chain imbalance – consequently prices have started to weaken in recent weeks.

 

Roskill will be releasing its White Paper, “Impact of COVID-19 on the Aerospace Sector and Implications for Minor Metals”, to subscribers today. For more information contact:

 

 


            

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