Aerospace sector may face supply woes despite warning

A global metal supply chain squeeze in the aftermath of the Covid-19 pandemic could derail the planned comeback of the aerospace sector, which now faces soaring freight and raw material costs after a year of weak demand.

Suppliers noted "out of the blue" demand for high-temperature metals from the superalloys industry in the second quarter, after major end users such as Airbus and Boeing announced their production expectations until 2022-23. But while many aerospace-focused manufacturers have outlined their ramp-up plans to suppliers to avoid a potential supply crunch — such as the semiconductor chip shortage hitting the automotive sector — prolonged logistical constraints could thwart plans and potentially delay the demand recovery.

Container shortages, rising seaborne freight rates and shipping disruptions because of congestion at ports and inland are hitting commodities markets around the world amid rising demand.

There is a minimum two-week delay to shipments of several metals from China to Europe, one buyer said, while another said that China is struggling to export any chromium even to neighbouring Asian countries, with buyers urging suppliers to air freight small quantities to meet immediate requirements.

The aerospace industry is "certainly through the worst" of the Covid-19 upheaval, and is putting out early signals about consumption rates in order to assess the supply chain. But "parts of the supply chain are not there anymore", indicating that labour shortages could also pose a threat for some time, a trader warned.

Just-in-time buying creates bottlenecks

Consumers have increasingly been buying metals on a just-in-time basis, taking only what is needed to meet immediate requirements and waiting for greater clarity about future demand levels.

This pattern of behaviour has added pressure to supply chains, with European and US inventories fairly low and buyers increasingly vulnerable should any delays hamper imports.

Most market participants expect the aerospace industry to undergo a gradual recovery, with demand returning to pre-pandemic levels by 2023. For this to be achieved, aerospace-focused manufacturers would need to "start ordering [metals] now", one supplier said.

But some buyers are particularly cautious due to recent history, with one telling Argus that they "ran into trouble" in previous years after building up high inventories and then seeing spot prices tumble.

For some metals like cobalt, with competing consumer sectors, locking in material through long-term contracts could provide some security of supply.

Lower scrap generation further tightens supply

As aerospace manufacturing declined in 2020, the amount of scrap generated fell in tandem, tightening availability of key metals derived through the recycling route.

And as overall demand for alloying metals weakened last year, many nickel alloy producers sold material to the stainless steel industry to generate cash flow — a move that has removed availability of recycled metals like chromium and rhenium this year.

Market participants estimate that around 10t of rhenium has been lost to the steel industry, which would increase the need for virgin raw materials, potentially at short notice.

This combination of factors has already increased the cost of superalloys to pre-pandemic levels, despite persistent low demand. According to Argus' alloy calculator, the intrinsic value of Inconel 718 nickel-based vacuum melted superalloy climbed above $7/lb in June 2021 after reaching a year-to-date high of $7.36/lb in mid-February, its highest since October 2019 at $7.37/lb, amid the rising cost of components including nickel, molybdenum and chromium.

By Anuradha Ramanathan and Thomas Kavanagh