Boeing, United Technologies Stockpile Titanium Parts
U.S. Firms Amass Reserves in Case Ukraine Tensions Affect Russian Titanium Producer
Boeing Co. BA +1.27% and United Technologies Corp. UTX +0.41% have been stockpiling titanium parts from a Russian producer in case economic tensions between Washington and Moscow disrupt supplies of the metal critical to building jetliners.
The companies' efforts to amass reserves, which hasn't been previously disclosed, began around March as Russia's moves toward annexing the Ukrainian region of Crimea triggered anger from Western governments, according to an industry official familiar with the planning.
Friction has escalated since then over fighting in Eastern Ukraine between Russian-backed separatists and the Ukrainian government, prompting the U.S. and the European Union to impose sanctions on banking and energy businesses in Russia. But sanctions haven't targeted titanium trade.
Still, the tensions between Moscow and Washington have put the U.S. aerospace companies in an uncomfortable position, as both Boeing and United Technologies, in addition to being major contractors for the U.S. military, also have substantial commercial ties to one of Russia's biggest defense conglomerates.
Boeing and United Technologies, as well as Europe's Airbus Group EADSY -0.98% NV, buy a substantial share of their titanium from VSMPO-Avisma Corp. VSMO.MZ +0.90% , the world's largest titanium producer. VSMPO is a called a subsidiary by industrial conglomerate Rostec State Corp., which holds a 25% stake plus one blocking interest in the metals giant. Rostec is a Russian government-owned company that also owns Rosoboronexport, which handles 80% of Russian defense exports.
Four companies provide 90% of the 120 million pounds of titanium used in the aerospace industry each year, with VSMPO accounting for 30% of the total weight, said Kevin Michaels of aerospace consulting firm ICF SH&E. The balance is supplied by three U.S. companies: Allegheny Technologies Inc., ATI -0.82% RTI International Metals Inc. RTI -0.11% and Titanium Metals Corp., a unit of Precision Castparts Corp. PCP +0.46% VSMPO also supplies about 35% of the titanium Boeing uses for commercial jetliners, according to Boeing.
Rival Airbus hasn't taken the same steps as Boeing to ensure a buffer of titanium parts from Russia, despite contributing 60% of its titanium, said another industry official. Airbus Chief Executive Tom Enders said recently, "I do not expect the flow of [titanium] will be cut off short of all-out war."
Strong but lightweight, titanium is used across many industries, but the aerospace and defense sector is the biggest consumer. Newer aircraft from Boeing and Airbus use titanium for landing gear, among other parts. The material is especially important for the 787 Dreamliner, accounting for about 15% of the airframe weight of Boeing's flagship commercial jet.
Boeing and United Technologies have been stockpiling as much as six additional months' supply of highly customized titanium forgings, according to one industry official, on top of regular titanium buying. Such specialized parts are often only supplied by a single provider like VSMPO because of the bespoke tools required to create the custom shapes used in jetliners.
Replacement suppliers can take months to get up to speed producing the same parts with the correct manufacturing certifications, but companies like United Technologies and Boeing could look to other providers for some parts if VSMPO isn't immediately able to meet the temporary increase in demand, said another official.
"Our partners advance-shipped strategic reserves of titanium to us" and "we still have it" as part of the overall stockpile, Shep Hill, president of Boeing International, said in an interview at the Farnborough air show last month. Boeing's Russian partners "accelerated some shipments to us to make sure we had enough reserve to maintain our production lines," he added.
United Technologies, which uses titanium to make landing gear and its Pratt & Whitney jet engines, confirmed it also is building its stockpile. "We are taking all appropriate actions to ensure we have a necessary supply of titanium forgings. This includes increasing inventory and exploring all available sources of supply," a spokeswoman said.
A VSMPO executive said the company has "a lot of long-term capacity, short-term capacity planning and we have a very significant capital expansion program to meet what our customers want." The executive added that "this will be a small one-time change in output, once people put their buffers in place they will have their risk management plans satisfied and it will go back to buying as needed for standard production."
Boeing and other U.S. companies have built extensive commercial ties with Russia since the end of the Cold War. Boeing has furnished Aeroflot-Russian Airlines AFLT.MZ +0.02% OJSC and other Russian airlines with Western-built jetliners, opened an engineering center in Moscow, and in 2007 established a major manufacturing joint venture with VSMPO.
Boeing said in November that it planned a second manufacturing facility in the Urals region and has estimated an investment of $27 billion in the country from 1991 to 2021, including $18 billion on titanium.
A Boeing and Lockheed Martin Corp. joint venture also relies on Russian rocket engines to launch big U.S. military satellites, and the National Aeronautics and Space Administration currently pays Russia some $70 million to take each U.S. astronaut to the international space station.
Mr. Hill said last month that Boeing's partnerships in Russia "helped greatly" to disincline Russia's government from suspending titanium shipments. "When you have relationships that are mutually beneficial, it's hard to cut the cord" to a big customer such as Boeing, he said. "It does mitigate, at some level, the ire" and diplomatic friction between the U.S. and Russia, he said.Mr. Hill added that the crisis hadn't increased the price Boeing pays for titanium parts.
The potential impact of the Ukraine crisis on the titanium supply chain is further complicated by the fact that Ukraine provides almost all of the titanium concentrates needed by VSMPO for raw titanium production. That Ukrainian titanium supply to Russia hasn't been disrupted so far. VSMPO said in June it holds a regular stockpile of Ukrainian titanium concentrates by filling its warehouses.
"There are enough supplies to ensure the continuous operation of the corporation's factories for eight months," said company CEO Mikhail Voevodin in a June statement, who added the company could seek alternatives in Vietnam, Africa or Australia.
Mr. Michaels of ICF SH&E said that "to unwind VSMPO out of the supply chain would be incredibly difficult" should there be a disruption.
Titanium is manufactured through a complex chemical process that strips the metal from raw concentrates by injecting chlorine and magnesium to create titanium sponge that is the building block of ingots that become manufactured parts.
Boeing had previously amassed a more than three-year stockpile of titanium because it kept buying the metal during manufacturing delays on its 787 Dreamliner from 2008 to 2011, said three industry officials. But that buffer is almost used up now, said one of the officials, as Boeing has accelerated production of the 787s.
