During an economic crisis it is important to review economic fundamentals that do not change regardless of the circumstances. This article will seek to do that for titanium prices.
Titanium is a metal used globally primarily due to its corrosion resistance and strength-to-density ratio. Roughly half of the total global titanium supply is used by the aerospace industry while the rest is used by a wide range of industries including medical, defense, energy, automotive and general industrial.
As seen in the above chart, titanium’s price volatility is closely tied to macro economic fluctuations which should be expected as the industry mix is heavily weighted toward more cyclical sectors. Given the current challenges in the aerospace and energy industries (over 50% of titanium demand combined) one would expect downward pressure on pricing in the months to come.
Although titanium prices are clearly influenced by macro economic trends, other factors are in play. The below chart shows titanium year-over-year price changes next to primary nonferrous metals (aluminum, copper, zinc, etc.) year-over-year price changes. Although the correlation between the two going back to the 1970s is 0.41 (a 10% increase in nonferrous metals prices on average leads to a 4% increase in titanium prices) the correlation breaks down completely starting in 2010 (-0.14 correlation, effectively no correlation).
Additionally, as both charts show, the price shocks are near economic recessions but generally not during recessions. To further illustrate this point, the below chart shows the correlation between employment in the transportation industry (left axis – aerospace, autos, rail, etc.) and titanium prices (right axis).
What is clear from the charts is that there tends to a delayed reaction to changes in economic trends or titanium prices drop earlier than overall economic declines. There are a number of possible reasons for this dynamic.
First, titanium market prices are at times driven by supply factors as opposed to changes in demand. In other words, prices can go up or down due to excess inventory or supply shortages. Additionally, producer costs are a major driver of pricing. In the short-term, prices tend to remain at or above marginal cash costs and in the long-term prices tend to stay at or above total production costs (non-marginal + marginal costs). Drivers of production costs include labor and transportation expenses.
Second, economic cycles (up or down) are often uneven. In other words, sectors that purchase significant amounts of titanium might either outperform or underperform at any given time. The aerospace industry, for example, did fairly well as the over economy slipped into a recession in 2007-2008.
Apart from the ups and downs driven by various short-term changes in supply and demand it is important to consider the long-term trends. Since 2010, titanium demand has grown by 3-5% CAGR through 2019. The metal’s long-term demand growth could provide support in the current economic environment.
Economic Indicators To Watch Going Forward
The current economic crisis is unfolding very quickly and it will be difficult to discern in the near-term the trends that drive titanium pricing. “High velocity” indicators are the best way to get a less precise but more immediate view into what drives titanium prices. Raw material prices including copper, aluminum and iron ore are good examples of high velocity indicators. However, commodity markets often over or underreact to changes in economic fundamentals in the short-term. Furthermore, like titanium, commodity prices can be influenced more by supply shocks versus changes in demand.
Other high velocity indicators include weekly jobless claims. Weekly claims are released every Thursday and give people an early look at how the labor market is performing. Equity markets and bond spreads also given people a view into the overall health of the global economy.
Lower velocity indicators include the monthly jobs report that is released on the first Friday of every month. The monthly jobs report contains a significant amount of industry level detail that allows economists to evaluate both the extent of job gains/losses but also the source of the change by industry (aerospace, energy and other industry job numbers). Other lower velocity monthly indicators of note that drive raw material pricing include air traffic volume, durable goods orders, housing starts and consumer confidence surveys.
Future posts will go into more depth on this topic in addition to addressing trends that drive stainless steel, aluminum, carbon steel and other metal pricing trends.