High Temperature Alloy Application Market Analysis III

(iii) Why to oligopoly: the balance between performance and cost determines that a single process is not a winner-take-all

Different types of high-temperature alloys have different properties, and their respective temperatures and components are also different. Aero-engine turbine disk has higher requirements on mechanical properties, so it mainly uses deformed high-temperature alloys and powder metallurgical high-temperature alloys (including oxide dispersion reinforced high-temperature alloys) with higher strength after machining and molding; turbine blade has a complex structure such as cavities and higher requirements on temperature, so it mainly uses cast high-temperature alloys and intermetallic high-temperature alloys with higher temperature-supporting capacity that are easier to form and process; guide has higher temperature-supporting requirements and mainly uses cast high-temperature alloys and intermetallic high-temperature alloys. The guides have higher requirements for temperature bearing and mainly use cast high temperature alloy and intermetallic compound high temperature alloy; the combustion chamber mainly uses deformed high temperature alloy and powder metallurgy high temperature alloy.

There may be differences in the maturity of different high-temperature alloy technologies and processes. From the development history of high temperature alloys in the world and the appearance of corresponding high temperature alloy grades in China, the early appearance of deformed high temperature alloys is the molding method of forging and pressing. Afterwards, due to the emergence of hollow cooling complex structure of aero-engine blades, the original deformation of high temperature alloy is difficult to meet the requirements of forming processing, casting high temperature alloy has become the new high temperature alloy for blades, and gradually expand the application of other complex structural parts. Powder metallurgy high temperature alloy research began in the 1970s, its powder extrusion molding and deformation of high-temperature alloy forging molding is different, molding effect is better than the deformation of high-temperature alloys, so in the turbine disk has to replace some of the deformation of high-temperature alloys tendency.

Intermetallic compound high temperature alloy is a high temperature alloy that appeared later, and its pressure deformation processing is more difficult, so it mainly adopts casting molding method; intermetallic compound high temperature alloy is lighter in weight (according to the official website of Steel Research Gao Na, the weight can be reduced by 30%~40%), and stronger, so it is also gradually promoted in the structure of blades and other structures, and the mainstream intermetallic compound high temperature alloy can be categorized as casting high temperature alloys after the upgrading of raw materials. Alloys.

Due to performance and cost differences, even in the same structure, the scope of use of high temperature alloys is quite different. Take turbine components as an example, the working conditions of turbine components are very harsh, and its main parts not only bear greater mechanical loads than the parts of the compressor, but also bear greater thermal loads and gas corrosion. As the temperature of the gas in front of the turbine continues to rise, so do the demands on the materials, despite the availability of advanced cooling technologies.

For casting high temperature alloys, vacuum induction melting is generally applicable at present. Therefore, in the ingot melting process, for casting high temperature alloy, the main equipments required include vacuum induction melting furnace, mold releasing equipment, etc. For the deformed high temperature alloy made by positive triple process, the main equipments required include vacuum induction melting furnace, electroslag remelting furnace, vacuum self-consumption furnace and hoisting equipment. But for high-temperature alloy, the core content of manufacturing is the designation of internal control standards, and equipment to make the internal control standards on the ground, that is, advanced equipment is not the only element that determines the quality of the product, the preparation process and the design of the material itself is also crucial to the quality of the product.

Differences in work processes lead to differences in equipment, and differences in equipment lead to differences in capital expenditures, and high capital expenditures themselves are one of the barriers to entry in the industry. Take Lunda shares as an example, according to the prospectus of Lunda shares, (1) the company invested in the construction of casting high-temperature alloy master alloy production line in 2015, and completed the installation and debugging at the end of 2016, and put into production in 2017. Among them, the core production and testing equipment mainly includes vacuum melting furnace customized by Konsak and glow discharge mass spectrometer by Thermo Fisher. (2) The company invested in the construction of a deformed high-temperature alloy production line in 2018 and put it into trial production in 2020. Among them, the core equipment mainly includes 8T vacuum induction melting furnace, 8T vacuum self-consumption melting furnace and 8T protective atmosphere electroslag remelting furnace customized by Konzac, as well as customized 45MN/50MN fast forging machine, introduced heating furnace and heat treatment furnace.

2. Performance and cost requirements to pull high-temperature alloys and related forging and casting parts of large-scale development, even if the same process route, the size of the span also needs to be supported by large-scale capital expenditure. According to the prospectus of Lunda, (1) process difficulty, because the gas turbine turbine disc is usually more than three times the size of aero-engine turbine discs, it is necessary to use large-size deformation of high-temperature alloys, which puts forward high requirements for the control of alloy purity and niobium segregation control. (2) Cost, the use of large ingot type melting can effectively improve production efficiency and reduce production costs, and at the same time for the downstream customers to increase the production volume of forgings in a single furnace, reducing the cost of customers (each furnace needs to dissect a turbine disk or other forgings), and improve efficiency.

Equipment development is pulling equipment inputs into large-scale, further strengthening the capital expenditure barrier. According to Fushun Special Steel's August 2015 announcement, “Fushun Special Steel Non-public Offering Proposal (Revised)”, one of the characteristics of China's equipment development is the development of large-scale trend, high-temperature alloys and ultra-high-strength steel materials, size specifications continue to increase, and the mechanical properties of the requirements are gradually improved. Among them, 300M ultra-high-strength steel bar with a diameter of 800mm is selected for the landing gear material of the airplane; and GH4169 alloy bar with a diameter of 750mm is selected for the magazine of the engine. The above two materials are used in vacuum induction furnace and vacuum self-consumption furnace process melting, from the point of view of increasing the forging ratio, improve the performance of the point of view, all need 30 tons of vacuum induction furnace, 30 tons of vacuum self-consumption furnace and 80MN fast forging machine. Such as ultra-high-strength steel C300, for example, Fushun Special Steel double-vacuum process before the existing conditions for the 12-ton vacuum induction furnace, due to the forging ratio is small, can not meet the technical standards. Expanding the ingot type is the main effective way to increase the forging ratio, so it is necessary to support large-scale special metallurgical electric furnace to solve the problem of uneven high-temperature alloy grains and unqualified ultrasonic flaws caused by insufficient forging ratio.

At the same time, high capital expenditure barriers are also reflected in the manufacturing process of large and small bars. Avoid repeated upsetting and pulling process of upsetting deformation of the metal flow unevenness of the impact of its high technical specifications, usually need large tonnage forging equipment and strict process parameters support, the defence industry supporting new materials to large size and high performance trend, in addition to the need for 30 tons of vacuum induction furnace and vacuum self-consumption furnace, but also need to supplement the forging capacity of the 80MN fast forging machine.

3, in the large amount of capital expenditure caused by high depreciation and amortisation pressure, from the process, with cross-business to achieve part of the equipment shared enterprises, its resistance to high temperature alloy industry short-term demand volatility is relatively stronger.

For example, special steel and high-temperature alloy equipment can be shared to reduce high depreciation and amortisation pressure. According to Fushun Special Steel's August 2015 announcement ‘Fushun Special Steel Non-public Offering Proposal (Revised)’ cited above, the 300M ultra-high strength steel selected for aircraft landing gear materials and the GH4169 alloy selected for engine magazines are all smelted using vacuum induction furnace and vacuum self-consumption furnace processes. Therefore, considering the high capital expenditure barrier of large-scale melting equipment, enterprises with both high-strength steel and deformation of high-temperature alloy production process, compared with only the production of deformation of high-temperature alloy enterprises, depreciation and amortisation pressure can be dispersed in other categories, reducing the short-term fluctuations in demand for a single product on the erosion of profit pressure.

At the same time, the large-scale capital expenditure and special steel and other business equipment base accumulated in the early stage, is conducive to better play the high-temperature alloy product economies of scale, while in the price compared to other new entrants have more advantages. For example, for fushun special steel, 2021 high temperature alloy business operating costs in the amount of depreciation of about 917.80 million yuan, support the company in the same year high temperature alloy products revenue of 1.304 billion yuan; For ronda shares, due to its deformation of high temperature alloy production line in 2020 at the end of the landing, in 2021 from 1 to 6 months of depreciation of 6,041,400 yuan, but during the same period of the product to achieve revenue 509.33 million yuan, the current economy of scale performance is relatively weak.

Again, high-end titanium alloy and high-temperature alloy part of the equipment can be shared, but also conducive to reducing the pressure of high depreciation amortisation. According to the western superconductor on 29 October 2021 announcement ‘on the western superconductor materials science and technology limited company to the specific object to issue shares application documents of the audit inquiry letter reply (2021 three quarterly financial data update version)’, titanium alloy, high temperature alloy use including vacuum self-consumption melting, forging, rolling, machining and various performance testing equipment completely common, auxiliary production equipment such as Auxiliary production equipment such as cranes, warehouses and power supply can be used universally.

Fourth, overseas companies earnings drivers: supply and demand and capital expenditure cycle double whammy

(A) Review of the key high-temperature alloy companies in the United States, the earnings and stock price of 2003 to 2007, a period of high growth

The three key U.S. high-temperature alloy companies, ATI, CRS and HAYN, experienced a period of high earnings and stock price growth from 2003 to 2007.

From the stock price performance, ATI, CRS in 2002/12/31~2007/12/31 period of stock price rose 1422.10%, 2711.08%, HAYN in 2004/9/21 to the end of 2007, the stock price rose 414.81%, while the same period of the S&P 500 rose only 66.97%, the U.S. high-temperature alloy enterprises during the period of the stock price Yield is much higher than the S&P 500.

From the financial performance, ATI and CRS in 2003~2007 earnings scale and profitability compared to the previous have greatly improved and enhanced.

(1) In terms of profitability, CRS recorded the highest revenue and net profit since 1981 in 2007~2008, and in terms of growth rate, the company's revenue and net profit growth rate was negative in 2002/2003 after the aviation industry recession in 2001, and then achieved four consecutive growth rates in revenue in the four fiscal years of 2004~2007, and four consecutive growth rates in net profit in the four fiscal years of 2005~2008. ATI's performance is close to that of CRS, with revenue growing rapidly from a low of US$1.908 billion in 2002 to US$5.310 billion in 2008, and net profit lagging one year behind, from a low of US$315 million in 2003 to a high of US$574 million in 2006 and US$566 million in 2008. 566 million U.S. dollars in 2008, revenue and net profit scale are new highs since 1995.

(2) In terms of profitability, CRS gross profit margin improved significantly during the period, with the gross profit margin of its main business increasing continuously from a low of 16.67% in 2002 to 27.81% in 2006, and 23.25% and 23.40% in 2007/2008 respectively, still maintaining a high level; the net profit margin also continued to increase from a low of 12.11% in 2002 to a high of 14.22% in 2008; and the net profit margin increased to a high of 14.22% in 2008, up from a low of -315 million USD. ATI's performance was close to that of CRS, with gross profit margin increasing from a low of 3.29% in 2003 to 21.69% in 2008, and net profit margin increasing from a low of -12.11% in 2002 to 14.22% in 2008. Net margin increased from a low of -12.11 per cent in 2002 to 14.22 per cent in 2008.

(ii) Capturing the main contradiction in earnings expansion: demand cycle dominated by supply and capital expenditure

The main contradiction of the earnings expansion during 2003~2007 lies in the double hit of the demand cycle and supply cycle.

Take ATI as an example, ATI is one of the main suppliers of high-performance speciality metals, such as titanium alloys, nickel alloys, etc. ATI has three major businesses, high-performance metals, flat products and engineered products, of which high-performance metals mainly sells raw materials of titanium alloys, nickel-based alloys and speciality alloys.Between 2001~2008, revenues from high-performance metals business accounted for 30%~40% of the business revenues of ATI. Between 2001 and 2008, revenue from the Performance Metals business accounted for 30% to 40% of ATI's business revenue. During this period, revenue from titanium alloys, nickel-based alloys and special alloys accounted for 40% and 38%, respectively, of the revenue from the high-performance metals business. It is worth noting that flat products and engineering products are also mostly composed of titanium alloy and high-temperature alloy processed parts.

On the demand side, changes in the global aircraft demand cycle are one of the main drivers of the volume and price increase of titanium alloy products. ATI's titanium alloys, nickel-based and special alloys have overlapping applications, with a large portion of sales going to commercial and defence aerospace customers, and commercial aerospace products have historically been somewhat cyclical.

Considering the elasticity of volume and price, we analyse the rapid expansion of the U.S. producer price index for titanium alloys, with a focus on titanium alloys, between 2003 and 2006, with changes in the demand cycle as one of the main drivers. The industrial titanium market bottomed out near 2001, before aerospace demand bottomed out in 2003. (2) Commercial aircraft orders increased dramatically in 2005-2006, with Boeing and Airbus orders reaching record highs in 2005-2006, which, coupled with low aircraft production rates prior to 2003, led to a severe shortage of aerospace titanium recycling scrap. (3) The level of titanium content per aircraft has risen significantly for new models of commercial aeroplanes in the 21st century. (4) Increased production of military aircraft, such as the F-22, which began full production after 2003, and which contains more than 40% titanium.

Aerospace titanium alloy supply side contraction further aggravate the supply and demand tension. According to ‘Titanium, Industrial Base, Price Trends, and Technology Initiatives’ (Somi Seong et al., RAND, 2009), the stock of titanium sponge, which is one of the main raw materials for titanium alloy production, has been decreasing from 1997 to 2005 in the US Defense Logistics Agency. One of the major raw materials for titanium alloy production, titanium sponge production capacity was almost non-existent by 2005. At the same time, titanium metal suppliers failed to respond in a timely manner to expand production capacity and alleviate supply constraints, and expanding titanium sponge production capacity would have required an investment of nearly $300-400 million over a period of about three years. Moreover, some U.S. titanium alloy producers had been on the verge of bankruptcy during the previous downturn before the 2003 demand surge.

The front-loading of capital expenditures is a leveraged amplifier of the earnings elasticity of high-temperature alloy companies during periods of rising demand. For example, ATI's revenue grew rapidly from 2003 to 2007, from a low of $1.908 billion in 2002 to $5.310 billion in 2008, and during this period, as a result of the previous industry downturn, ATI's revenue grew rapidly from $1.908 billion to $5.310 billion. During this period, ATI's capacity utilisation was relatively low due to the previous industry downturn. During the period of industry demand expansion, ATI's economies of scale were evident, with depreciation expense/net revenue declining from 4% in 2002 to 2% near 2008, while total depreciation expense continued to decline during this period.