VSMPO Restructures Finances To Tap Rising Demand For Titanium

Farnborough Air Show » 2012
July 9, 2012, 12:20 AM

The intake of titanium by the global aviation industry is predicted to rise dramatically over this decade with the production of next-generation commercial jets made of advanced construction materials gearing up. Today, this industry consumes 40 percent of the world’s titanium supply. According to an independent analysis, demand for titanium in commercial aviation will increase from 42,000 metric tons in 2011 to more than 49,000 tons this year and then rise to 72,000 tons in 2016.

These statistics explain the recent financial success of Russia’s VSMPO-AVISMA (VSMPO), a specialist manufacturer of products made of titanium and aluminum alloys, steel and nickel. The company has two main sites, at Verkhnyaya Salda in the Sverdlovsk region and at Bereznyaki in the Perm region.

In February, shareholders were told that they were to share 2011 dividends worth 305 million rubles ($9.3 million) out of the group’s net profit of 3.1 billion rubles ($93.9 million). Last year’s profits represented an impressive fivefold increase on its 588 million rubles ($17.8 million) surplus in 2010, which was a hearty increase on the 173 million rubles ($5.2 million) profit recorded in 2009.

In part, the major boost to VSMPO’s balance sheet was the outcome of a new financial strategy aimed at decreasing the group’s borrowing and cutting its interest-rate exposure. This saw group debt slashed from 21.6 billion rubles ($655 million) in early 2009 to 15.6 billion rubles ($473 million) by early 2011. With it. interest rates payable tumbled from 14 percent to 5 percent as the company was able to switch to long-term credits in hard currencies (as opposed to short-term credits in rubles).

No less eye-catching in the last set of company accounts was the declaration that VSMPO’s worldwide payroll had increased by 25 percent from 20,000 worldwide to 25,000. It now has a sales and distribution network that spans the U.S., the UK, Germany and China.

Ultimately, what accounts for all this growth is nothing short of a revolution that has seen VSMPO escape from a situation in which it was largely dependent on business from Russian aircraft manufacturers to one in which it became a major exporter of advanced metallic products for aerospace.

New Deals

In April, Boeing extended an existing contract for titanium mill products for a three-year term that will run through the end of 2018. Additionally, the Russian group will continue to provide the U.S. airframer with closed-die titanium forgings and its partners for all in-production commercial aircraft, with the exception of the 747. Under this deal, Ural Boeing Manufacturing, a Russian joint venture between VSMPO and Boeing, will machine large numbers of these forgings for the new 787 widebody at its facility in Verkhnaya Salda. This operation delivers the forgings for final treatment at Boeing’s factory in Portland, Oregon, and last October it also started producing main landing gear struts for the 737NG narrowbody.

In March, VSMPO confirmed that it is set to triple the amount of titanium forgings it makes for the 787 to a total of 73 tons per month. This increase followed a visit to the company by officials from Boeing and 787 landing gear provider Messier-Dowty.

According to Sergei Kravchenko, Boeing’s president for Russia and the CIS countries, each 787 includes about 22 tons of Russian titanium. Indeed, out of the $27 billion that Boeing plans to invest in Russia about $18 billion is to be spent on titanium products and the development of new metals technologies for aerospace.

Large Customer Base

In addition to its relationship with Boeing, which is entering a third decade, VSMPO has a customer base extending to more than 300 firms in 48 countries. General manager Mikhail Voevodin said he is negotiating contract extensions with other leading Western aircraft and engine manufacturers, including Airbus, Embraer, Goodrich, Messier Dowty, Eurocopter, Liebherr, Rolls-Royce, Safran and Pratt & Whitney Canada.

To ramp up for the anticipated growth in output of titanium products, VSMPO is investing in modern smelting equipment, the ability to make greater use of recyclable metallic waste, new presses, vacuum-arm furnaces and cold-hearth furnaces, expansion of its metal-forming integrated complex and advanced tools for machining die forgings. VSMPO has been investing up to around $8 million annually in technology programs, while boosting spending on manufacturing equipment and sites to $300 million last year.

A recent change in the company’s strategy has been to focus more on higher-value products requiring a greater degree of machining processing, such as engine disks and rings, and also landing gear struts. At the same time, VSMPO makes more than 400 die-forged products for export and over 1,000 for Russian manufacturers, such as Irkut, which is using these for its new MC-21 airliner. Today, VSMPO is exporting more semi-machined parts made using advanced machine tools and is expanding the scope of international cooperation for the development of modern alloys and technologies aimed at the increased use of titanium parts in new aircraft and engines.

Russia now accounts for 40 percent of the titanium used by Boeing and 60 percent of that used by its European rival Airbus. Last summer the latter signed an agreement under which VSMPO will make die forgings for the A350XWB-1000 main landing gear struts. Since the A350-1000 is heavier than earlier -800 and -900 versions, its struts need to be stronger and, therefore, made of VST5552-1 titanium super alloy. The use of this proprietary material allowed Goodrich to win the contract to supply the struts.

Also last year, Airbus and VSMPO signed a memorandum of understanding to expand the supply of titanium raw materials, die forgings and other metallic products for Airbus programs. This will include the development of new alloys exclusively for the use of Airbus and its parent group, EADS. It will also see the creation of an integrated supply chain between the two companies covering the whole process, from supplying raw materials to providing products for Airbus vendors.

Chinese Cooperation

Meanwhile, the 10th anniversary of VSMPO’s cooperation with Chinese aerospace firms was marked by the formation of a new joint venture with airframers Avic and Comac, covering parts for their respective new ARJ21 and C919 airliners. Also in Asia, VSMPO is closely cooperating with India’s Hindustan Aeronautics Ltd. and various South Korean manufacturers. In 2011, Brazil’s Embraer extended its supply contract for VSMPO’s titanium semi-machined parts and die forgings through 2020.

In the aero-engine making, VSMPO is supplying France’s Safran group under a $300 million contract signed in 2008, Pratt & Whitney Canada is buying at least a quarter of its titanium forgings from the company and Rolls-Royce has three long-term agreements covering about $250 million worth of titanium products through 2015.

In addition to sharing the fruits of its success with shareholders, VSMPO has agreed to increase the wages of factory workers this month by an unspecified amount; they started this year earning an average of 24,000 rubles. During 2011, VSMPO’s share price increased by 47 percent from 3,585 to 5,280 rubles.

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