demand for titanium may rise 13% p.a. for 3 years

Toho, Sumitomo Titanium Shares Gain on Lighter Planes
April 13 (Bloomberg) --

Shares of Toho Titanium Co. and Sumitomo Titanium Corp. are heading for record highs as Airbus SAS and Boeing Co. use more of the lightweight metal to make engines and frames for planes.

Demand for titanium may rise 13 percent a year for the next three years and outstrip supply, said Michael Newman, head of Japanese equity sales at HSBC Holdings Plc in Tokyo. The shortfall may worsen because of a plan by Russia's government to take over VSMPO-Avisma Corp., the world's biggest titanium producer, to divert supply to production of fighter planes.

Shares of Toho, the best performer of the 244-member Bloomberg World Basic Material Index in the past year, have surged five-fold in the past 12 months and have risen every year since 2000. Annual contract prices of titanium metal may rise another 30 percent by 2008 as near-record oil prices prompt Boeing and Airbus to build lighter, more fuel-efficient aircraft.

``Demand for titanium at the beginning of last year was strong, and we see more strength in the future from aircraft production,'' said Wolfgang Mayr, manager of Hauck & Aufhaeuser Investment's VCH natural resources fund in Munich, which owns Toho and Sumitomo shares. ``We still see the titanium market conditions as favorable.''

Shares of Hyogo, Japan-based Sumitomo Titanium, the top performer in the 1,691-member Topix index in the past 12 months, have more than quadrupled.

Mayr also owns shares in Titanium Metals Corp., a Denver- based company that provides the metal to aircraft makers. The stock has gained almost six-fold during the past year. He said he doesn't plan to sell or buy more of the three companies' stocks.

Oligopoly

There are few companies that can turn raw minerals into titanium sponge, the semi-processed material that is refined to make high-grade metal. Toho, based in Kanagawa, Japan, and Sumitomo supplied about 43 percent of the 90,000 tons of sponge produced worldwide last year, HSBC's Newman said on April 6.

Titanium sponge producers are ``basically in an oligopolistic situation: They set the prices,'' said Mayr. The run-up in the companies' shares largely reflected the favorable market conditions, he said on April 7.

Titanium is favored by aircraft-engine makers because it has a melting point of 1,668 degrees Celsius, more than twice that of aluminum, and resists corrosion. The metal is also used in golf clubs, artificial hips and parts used in nuclear plants.

The U.S. Defense Advanced Research Projects Agency is working to cut the cost of refining titanium.

``The risk is in three to four years' time, when these new technologies come on stream,'' said Newman. ``Then the price of titanium might go through the floor.''

Boeing, Airbus

Meantime, aircraft makers rely on companies such as Toho for supply. The A350 jet made by Airbus, the world's largest commercial planemaker, and Boeing's rival 787 include 36.3 tons of titanium each, said Yasushi Mizoue, a senior analyst at Mizuho Securities Co. in Tokyo.

Boeing, the second-biggest, said 15 percent of the frame of its 787 jetliner is titanium. The Chicago-based company has 345 orders for the 787, the company said on its Web site. Airbus, which launched the A350 in October, has 100 firm orders.

Mizoue has a ``strong buy'' on shares of Toho, estimating they may rise to a record 10,300 yen in the next six to 12 months. That's 26 percent higher than its closing price of 8,150 yen yesterday. Toho Titanium rose 40 yen, or 0.5 percent, to 8,190 as of 10:43 a.m. local time on the Tokyo Stock Exchange.

Mizoue also has a ``strong buy'' on Sumitomo and forecasts the stock to rise to a record 30,000 yen in the next six to 12 months, he said on March 22. The stock rose as much as 210 yen to 20,260 today, and traded at 20,120 yen at 10.44 a.m.

Russia's Needs

China and India are Russia's largest defense clients, spending more than $5 billion annually in the past three years, mostly on warships and MiG Corp. and OAO Sukhoi Holding Co. fighter jets.

``Russia is trying to get a lot more of the exports of fighter planes such as the MiGs and the Sukhois,'' HSBC's Newman said. ``They need to make sure they can secure lots of titanium to make it profitable.''

Getting India to buy Russian-made planes was one of the two items on Russian Prime Minister Mikhail Fradkov's agenda during his March 16-17 visit to India. Fradkov was accompanied by Mikhail Pogasyan, chief executive of Moscow-based Sukhoi.

Rosoboronexport, Russia's state-owned arms export agency, may seek to acquire a 50 percent stake in VSMPO-Avisma, Russian billionaire Viktor Vekselberg said on March 22. Vekselberg's ZAO Renova company ha s sought to regain a 13 percent stake in VSMPO through courts in London and New York.

Supply-Demand Balance

``The titanium situation in Russia remains a concern and Boeing continues to monitor the situation very closely,'' the aircraft maker said in an e-mailed statement on March 16. Airbus, based in Toulouse, France, didn't reply to questions e-mailed on March 14.

``If those concerns about Avisma didn't exist, it's quite likely that the demand-supply balance will be sorted out by 2007,'' Judith Chegwidden, managing director of London-based Roskill Information Services, said by phone on March 14.

Titanium sponge for immediate delivery traded between $24,000 and $29,000 a metric ton as of March 31, according to London-based Metal Bulletin Plc. In late 2003, prices were a third of those, according to Chegwidden.

``Most titanium sponge spot prices have been going through the roof,'' she said.