Titanium Metals (NYSE:TIE) is a U.S. based producer of raw and processed titanium products. Historically, titanium, a corrosion-resistant, light, strong, and relatively expensive metal, has been used in aerospace products such as airplane wing supports and jet engines, as well as in armor plating, chemical plants, and pollution control. TIE produces three categories of products: titanium sponge (spongy-looking pure metal used as a raw material), melted titanium and titanium alloys (slabs of metal), and mill titanium (the final processed product). It is also the largest U.S. producer of titanium sponge. The company earned $750 million in net sales and $161 million in net income in 2009.
The company is highly dependent on the aerospace industry. TIE's long-term agreements with aerospace customers, including Boeing Company (BA), Rolls-Royce, and their parts suppliers account for 55% of revenue. Airlines will replace their aging fleets in the next few years, and Boeing expects to sell over 1000 of its new 787 Dreamliner model within the next 5 years. While TIE's long term contracts lick in future revenue they also increase the company's exposure to fluctuations in titanium prices. The nature of their contracts prevents the company from fully passing through increases in the costs of raw materials. TIE’s price for melted titanium has increased in each of the last two years due to demand outstripping supply.
Titanium production is a global business and over the last decade, TIE has faced increasing competition from foreign manufacturers. VSMPO-Avisma, one of TIE's major competitors, is based in Russia and benefits from lower production costs due to its larger economies of scale and lower wage costs. TIE's competitive disadvantage has been partly offset by its lower transportation costs --it is the only titanium producer with major production in the United States-- and its exemption from the 15% tariff levied on imported titanium. Both the U.S. and Japan seem to favor the repeal of this trade policy, however.
TIE is a vertically integrated company and controls its production process from ore extraction to the distribution of its processed titanium products. Melted (ingots and slabs) and mill (bars, plates, and sheets) titanium comprise roughly 90% of its revenue. Its main customers are in the commercial aerospace, military, and industrial sectors, comprising all but a few percent of total revenue.
TIE competes with domestic and international titanium producers on the basis of price and variety of products offered to its customers, and also with producers of metals such as steel and aluminum alloys that could be used as substitutes for titanium. More processed goods command higher prices, and the quality of titanium demanded is fairly inflexible in the aerospace market, the largest market for titanium. TIE’s main competitors for business from commercial aerospace companies are RTI International Metals (RTI), Allegheny Technologies (ATI), and Russia-based VSMPO-Avisma, the largest titanium supplier worldwide. All four companies have secured contracts with Boeing and will be supplying titanium for the production of the 787 Dreamliner. TIE's competitors also produce steel, aluminum, and other alloys in addition to titanium products.
The amount of competition that TIE faces from foreign companies, in particular from VSMPO-Avisma, will depend on the outcome of a tariff negotiation. The U.S. and Japanese governments both favor the elimination of titanium tariffs, which TIE opposes. If these tariffs were repealed, TIE would be exposed to increased competition of scale from VSMPO-Avisma even within the U.S., where it has its largest manufacturing facilities.