Viewpoint: US defense restrictions to support tantalum

Recent restrictions placed on the military supply chain have tightened tantalum scrap supply in the US, a trend which sources expect could last well into 2021 and support prices.

Market participants surveyed by Argus forecast tantalum scrap prices to strengthen into early 2021, after new sourcing regulations become formalized.

The exclusion of Chinese material has supported prices as consumers began to make their initial judgments. Vacuum-melted 99.9pc tantalum scrap delivered consumer rose by 3pc to $117-122/lb in the 29 December assessment from its September low of $113-120/lb.

The US Department of Defense implemented the Defense Federal Acquisition Regulation Supplement 252 (DFARS) in September forbidding the use of tantalum metal or alloys from China in military projects. Market participants now expect that further details on the rule's implementation will be provided in the first quarter of 2021 that will cement its efficacy.

Alloys used in the production of aerospace turbine blades account for 85pc of tantalum metal consumption, according to the Tantalum-Niobium International Study Center.

Demand from airlines has declined sharply in 2020 because of Covid-19 restrictions over much of the year. North American passenger revenues are expected to decline by $32bn in 2020 compared to a baseline year, according to the International Civil Aviation Organization.

The sudden decline in demand for commercial air travel rippled down to the commercial aerospace manufacturing sector with some such as Boeing cutting staff and scaling back production throughout the year. Boeing announced in April that it would cut its staff by 10pc and reduced its targeted 787 production rate to 5/month from 14/month.

Reduced production from the aerospace sector led to fewer tantalum imports throughout the year. By the end of October, tantalum scrap imports were down by 4pc to 431t, according to data from the US Commerce Department. Lower imports exacerbated tight supply as it left many alloy and part makers unready to adapt to the sudden removal of China as a supplier of metal and scrap.

China accounted for 41pc or a total of 221t of US wrought and unwrought tantalum imports in 2020. The next largest supplier was Germany who provided 25pc of US volumes.

Although China is also the US' largest supplier of tantalum scrap, the supply chain for scrap is less reliant on those volumes. Over the first ten months of 2020, the US imported 32pc, or 137t, of tantalum scrap from China. Indonesia was the second largest supplier, providing 26pc of the scrap imported by the US and Japan was third by providing 16pc of scrap. As a result of a wider supply base outside of China, sources were less concerned over sourcing scrap than metal.

Lower domestic aerospace production rates also cut into domestic generation of tantalum scrap, elevating the need for alloy producers to offset lower local inventories from offshore sources, as the US Geological survey estimates that recycled tantalum accounts for as much as 30pc of apparent consumption.

US scrap generation was reduced this year in part by the five-month pause from January to May of Boeing 737 MAX production. Boeing expects that it will not reach its target rate of 31 MAX planes a month until the start of 2022.

Commercial air travel in 2021 is expected to recover modestly, even as it remains below 2019 levels. Globally, airlines are expected to carry an additional 1bn passengers in 2021 from 2020, according to data from the International Air Transport Association (IATA). Passenger levels will increase to 2.8bn in 2021, following a 60.5pc decline to 1.8bn in 2020 but still lower than the 4.5bn recorded in 2019, the IATA said.

The exact implementation of the DFARS 252 is still uncertain as the commentary period for the rule closed at the end of November and no decision has come since. Market participants expect the government will announce what it learned from the interim period as well as the final implementation in the first quarter of 2021.

The degree to which the US restricts tantalum metal and scrap from China in 2021 is projected to heavily impact prices, sources said. Rigorous implementation could lead to new factors such as a premium on non-Chinese metal and scrap as well as lower scrap availability through the year.

Still, looser implementation could allow consumers and imports to make up the existing supply deficit in the coming months, weighing on pricing.

By Andrew Saucer