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The impact of the Russia-Ukraine conflict on the aerospace supply chain: which are the options to replace Russian Titanium?

Russia is a leading player in Titanium industry for aerospace via its company VSMPO-AVISMA, main supplier of all western OEMs and engines manufacturers.

Although the Russian oil & gas supply chain has been making the news, the country is also an exporter of several other materials used in heavy tech industries and aerospace. In 2020, these materials accounted for 8.5% of total Russian exports (oil & gas accounted for 42%). One of them is titanium: Russia has 13% of the world market share of titanium sponge production, which is the basic form of this metal before it is processed and machined.

Titanium’s strength and durability means that it is an essential metal for the aerospace industry, used for high stress high temperature applications in engines, landing gears, engine pylons and wings.

Russian VSMPO-AVISMA is the world’s largest titanium producer with approximately 25% of global titanium market. The company is present at a number of stages in the Ti supply chain, from sponge production (the smelting process) through to the machining of components. Before the pandemic, VSMPO had planned for 44 kt of sponge production in 2020 (later reduced to 35 kt), which represents more than 90% of the total Russian titanium sponge production capacity and placed it well above all other players, including Japanese Osaka Titanium.

Titanium sponge output capacity 2020

Western aerospace companies are heavily reliant on Russian titanium. Among OEMs, Boeing sources 1/3 of its titanium requirements from Russia, Airbus around 50% and Embraer almost its entire supply. Similarly, the engine suppliers Safran and Rolls Royce respectively source approximately 50% and 20% of their titanium from Russia. Further highlighting this interdependency, VSMPO and Boeing set up a strategic partnership in 2015 for development of titanium alloys and technologies.

VSMPO links with Russian government and military are very tight: the company is owned by 25% by Rostec, a Russian state-owned defense conglomerate founded by Vladimir Putin.

Main metal exported from Russia and its world market share
Main Ti parts in civil aircrafts

Deep dive on titanium supply chain

From mines to aircraft manufacturers

The titanium supply chain is structured in a similar way to that of other metals, apart from its need for highly specialized equipment to deal with the material heating and mechanical characteristics. Russia’s presence is in the central steps of the value chain, from sponge creation to the machining of components, but mines are not present in the Russian territory.

VSMPO’s position is similar to Russia’s. Ore is source primarily from Ukraine and, to a lesser extent, Kazakhstan and Sri Lanka. It then sells primary and secondary fabrication products to western engine manufacturers and aircraft OEMs.

Titanium value chain for aerospace and positioning of main countries involved

In the short term, titanium stocks have been replenished and they should last for 3 to 5 months

Due to the critical nature of titanium parts and the specialized techniques needed to process the metal, sourcing from a new supplier, or investing in new facilities in order to avoid Russian industry is not feasible in the short term:

  • The qualification of new suppliers, or of new Ti parts from existing suppliers, can last more than 1 year due to subsequent technical, work-package and commercial validations
  • Investing in new facilities, in particular for smelting, would require investment of tens of millions of euros and take 2-3 years to become operational

It seems, therefore, that the only way to mitigate the shortage in the medium term is to implement stock optimization initiatives. OEMs and suppliers have built up Ti stock that should allow for production to be continued for the next 3 to 5 months, depending on manufacturing rates.

While stock optimization is relatively simple for large companies, the suppliers of smaller machined parts, which are very common for several specific applications, are unlikely to have the cash needed to finance the working capital requirement, particularly given the high prices of raw materials (Titanium price increased by more than 90% since the beginning of 2022). In some cases, this may mean continuing the new type of financing seen during the pandemic, with significant M&A and PE activity. For instance, the Bt2i group, newly acquired by Ace Capital Partners, is an SME of about 80m euros in revenue, active in aerospace material machining and with a specific offering in titanium.

In the medium term, the titanium supply chain will move to US and Japan. Europe does not currently have the necessary capabilities

Since titanium ores are not located in Russia, a reorganization of the supply chain to avoid Russian processing companies is feasible, given adequate investment.

Today, Japan is particularity well placed to complete the smelting process: the three main Japanese companies active in this domain (Osaka Titanium, Toho Titanium and ATTM) have a total capacity which is approximately twice that of VSMPO in terms of sponge tonnage. The US has strong capabilities in primary and secondary fabrication, with Allegheny Technologies Incorporated and Howmet Aerospace (owner of RTI International Metals). Since Japan and US industrial players can cover the entire Ti supply chain, they are the most logical choice to substitute VSMPO in the medium term. Europe, by contrast, does not have a leading player to capture the Ti value chain movement, which could impact the capability of Airbus and Safran to source efficiently, resulting in costs and delay.

Evidence of this trend is already visible:

  • Boeing stopped all imports from Russia in March
  • Airbus is still dependent on VSMPO and continues to trade with its western subsidiaries. Moreover, it is opposing to additional sanctions to Russia on the grounds that the impact on European aerospace industry will be catastrophic
  • Japanese titanium companies’ stock prices are reaching an all-time high

Since the complete depletion of stock is likely to happen in Q4 of 2022 and the qualification of suppliers and parts could take more than 12 months, there will be a shortage of Ti parts between the end of 2022 and Q1 of 2023. This will limit production ramp-up if the effect of the war continues and the supply from VSMPO is stopped, with a significant impact in particular on Airbus.

Stock price evolution for Toho Titanium, Osaka Titanium and Allegheny Technologies
Alternative suppliers with the industrial capabilities to replace VSMPO

In the longer term, even if Russian trade sanctions are removed, the Ti supply chain will stabilize in alternative countries and Europe will have to develop internal capabilities. A similar reorganization will happen with other critical materials for strategic industries

In the longer term, even if commercial sanctions on Russia are lifted, we envisage that US and Japanese suppliers will significantly increase their market share for Western aerospace and defense industry. VSMPO could potentially turn to China in order to maintain reasonable levels of production.

Europe is currently lacking players with state-of-the-art capabilities in the titanium value chain. Developing capabilities for machining can take place in a relatively short amount of time adapting steel machining tools, while developing smelting capabilities, needs significant investment and can be achieved only by top players who are financially stable or who have significant state aid. The development of such capabilities in Europe will be key for the aerospace, healthcare and power industries, all of which are strategically crucial for the region.

Titanium is one of the first areas in which we are seeing a supply chain reorganization taking place because of a high Russian market share. We envisage that similar reorganizations will take place around other critical materials for strategic industries, driven either by politics or by corporate risk management decisions. These will become additional drivers for the relocation of industrial capabilities in Europe.

The authors

Louis Catala

Louis Catala, Vice President Operations

Federico Pasquali.png

Federico Pasquali, Senior Consultant Operations