Analysis - Specialty alloys take off as plane demand recovers

BANGALORE (Reuters) - A handful of companies supplying specialty alloys to the aerospace industry are seeing resurgent demand as emerging markets help pull planemakers out of a dizzying 2-year downturn.

Airbus (EAD.PA) and Boeing Co (BA.N), as well as second-tier plane manufacturers such as Bombardier (BBDb.TO) and Lockheed Martin Corp (LMT.N), are looking to increase output to meet new orders amid signs of post-recession growth.

And that's good news for Allegheny Technologies Inc (ATI.N), Carpenter Technology Corp (CRS.N) and Titanium Metals Corp (TIE.N), which supply the exotic alloys such as titanium, nickel, cobalt and molybdenum that go into aircraft frames, seat tracks, engine components and landing gear.

Most of these firms, and others such as A.M. Castle & Co (CAS.N), RTI International Metals Inc (RTI.N), and Universal Stainless & Alloy Products Inc (USAP.O), have beaten Wall Street profit estimates this year and are set for healthy growth next year, according to Thomson Reuters StarMine forecasts.

Allegheny, for example, which provided a titanium and nickel superalloy for the Gemini 4 spacecraft in the 1960s, is expected to more than double its earnings in 2011, boosted by the advanced procurement contracts with planemakers for the exotic, niche alloys that are difficult to get hold of at short notice.

"We were expecting a dip (in aircraft production) in 2010 and 2011, but now it looks like 2011 might see some solid growth," said William Chadwick, Director of Research for the Aerospace Industries Association (AIA).

Aviation went into a nosedive after the global financial market meltdown, with airlines declaring bankruptcy and new plane orders dropping sharply -- though this was offset to some extent by a healthy pre-crisis delivery backlog.

"The trend in building bigger planes will likely boost metal usage, including titanium, significantly through 2015," analyst Lloyd O'Carroll of Davenport & Co said.

Airbus, the world's largest civil planemaker, said in late July it would raise production of its A320 narrow-body planes through the first quarter of 2012, reviving a plan from May 2007 for the most ambitious production schedule attempted in civil aviation.

Boeing, which has again delayed delivery of its 787 Dreamliner, has stuck to its agreed supply schedule with parts makers.

"The recovery is better than expected," added AIA's Chadwick. "Everything is very optimistic considering where we were a year or two ago ... we've revised (our forecasts) upwards because the recovery is coming faster and much stronger than we expected."

CARS AND HOUSES: NOT SO BRIGHT

The broader metals industry, however, faces likely oversupply in the steel chain due to a relatively choppy recovery in the autos sector, while construction markets remain under pressure.

"The automotive recovery has been strong, but it's coming off a very low base," said Leo Larkin, an analyst at S&P Equity Research, noting the aerospace industry needs extra engineered, and higher margin, alloys, while materials used in cars are more commoditised.

The projected volume rebound in plane manufacturing should boost titanium mills, forgers, fabricators and distributors, with Allegheny, RTI and Titanium Metals poised for maximum upside, said Davenport's O'Carroll.

Shares of the metals firms catering mainly to the aerosopace sector have fared much better this year than those with a broader portfolio or those that are auto focussed.

Titanium Metals, for example, has risen around 40 percent this year, while shares in AK Steel Holdings Corp (AKS.N) and Insteel Industries (IIIN.O), which supply carbon steel to the autos and building sectors, have shed around half their value.

"From a pure valuation standpoint, they may present a better opportunity, but if you want something more aggressive and a little more growth oriented ... you'd lean a bit more towards the aerospace suppliers," said Larkin.

(Reporting by Antonita Madonna Devotta in Bangalore, Editing by Ian Geoghegan)