Boeing’s Russian Titanium Deals

New planes need titanium. Its exceptional strength and low weight help military aircraft offer better performance, and civilian aircraft offer better operating costs. Unsurprisingly, the use of titanium and composite materials has skyrocketed in new military and civilian aircraft. It’s a big opportunity for aircraft manufacturers, who want civil customers to recapitalize their existing fleets, in exchange for lower operating costs. It’s also a big headache, as they look to firm up key sources of supply, and build their engineering and manufacturing expertise with this difficult metal.

Russia is the world’s largest supplier of titanium, but American military aircraft are restricted by law from using it. On the civil side, however, Boeing can do what it likes. In order to secure its civil supply, build it manufacturing expertise, and break into a modernizing Russian market, Boeing signed deals with Russia’s state firm Rosoboronexport, and established a joint venture. That endeavor could produce up to $4 billion in parts orders from Boeing from 2007-2017; plus up to $18 billion in contracts for Russian titanium products, and $5 billion on Russian engineering services, by 2030. On the plus side, it led to Russian aircraft orders, as well as engineering innovations that could find military uses on both sides of the ocean.

The UBM Partnership

Hammering ’em out

According to Boeing’s August 2006 release, VSMPO-AVISMA will perform rough machining of titanium forgings in Verkhnaya Salda, located near Sverdlovsk. Final machining and processing of the forgings will be completed by Boeing’s Portland, OR fabrication facility and other machining subcontractors, while titanium machine-turnings, or ‘chips,’ from the machining process will be recycled back to VSMPO-AVISMA to create an efficient, closed-loop supply.

Two key Boeing centers are located in Moscow. The Technical Research Center develops projects related to cutting-edge technology, including new materials, prototyping and aerodynamics. The Boeing Design Center supports all major Boeing Commercial Airplanes programs. It employs more than 1,250 engineers, through contracts with leading Russian engineering firms.

Before the deal, VSMPO already supplied 40% of the titanium used in Boeing’s civil aircraft, and the firm has been a major Boeing supplier since 1997. 2007 reports in Russian media outlets vary, noting $1.25 – $2.5 billion in immediate commitments. Either way, this would be larger than the $1 billion supply deal the firm signed with EADS Airbus in May 2006. Boeing forecasts that over the next 30 years it will spend as much as $27 billion on Russian titanium, aerospace design-engineering services, and a variety of other services and materials.

Meanwhile, Russian government maneuverings have ensured that VSPMO-AVISMA has remained under firm state control, via “voluntary” share sales to Rosoboronexport (now Rostechnologii).

Contracts & Key Events

Superjet-100 concept
(click to view larger)

Nov 27/12: Buy-in. Russian Technologies (Rostech, formerly Rosoboronexport) announces that they’re selling 45.42% of VSMPO-Avisma to Nordcom, a Cyprus-based joint venture between VSMPO-Avisma’s management (75% Nordcom + 1 share) and state owned Gazprombank (25% Nordcom – 1 share). Nordcom had bought 4.6% on the stock market, so their $970 million purchase at $187 per share (16.1% premium on 3-month average) gives the combination a 50.1% stake. State-backed Sberbank remains a major financier.

Rostech will keep 25% + 1 share, to give it veto rights in some cases. The remaining 24.98% remains free on the market. So, why the deal?

One reason is supposedly debt. The $790 million loan that funded the majority share purchase was reportedly becoming a problem, though VSPMO says that net profit increased from RUB 173 million in 2009 to RUB 7.1 billion (currently $230 million) in 2012. On the other hand, the firm has been investing heavily in production infrastructure and mining companies, at a reported rate of around $200 million per year. It’s possible that existing debt levels were about to force some hard tradeoffs. Will the buyout improve matters? It’s hard to tell, unless the precise financing terms and structure of the $970 million buy-in are known.

At the same time, note the mechanics of the transfer. The management team now knows that contracts are in place with Boeing, Airbus, Embraer & Rolls-Royce. Titanium production is growing, and VSPMO hopes that by 2015, production will be up 48% over 2007’s output, to 40 thousand tons (compare Nov 7/06 entry). All of a sudden, with things looking up, the state wants to sell a very large chunk of its 70.42% stake. That’s certainly a good way of rewarding supporters, while creating a pool of immediate cash for ready distribution within the state apparatus. If things go badly, the big loser is Sberbank, but they’re a tool of state policy anyway. Who says the shell game is old? VSMPO-Avisma | Interfax | Energy Business Review | Metal Mining Wire | Mining Technology | Reuters UK.

Shift at VSMPO

Oct 30/12: Expansion negotiations. Boeing announces that they’re negotiating with VSMPO-AVISMA’s 70% shareholder Rosetech (State Corporation Russian Technologies) to expand their UBM collaboration in titanium procurement, technology development, and commercial aviation services.

Items under discussion include production increases for the Next-Generation 737, beyond the 4 new advanced-technology machines for machining 737 landing gear beams, which are scheduled for installation in 2013. Boeing and VSMPO-AVISMA also are working to continue joint support of their Titanium Innovation Center, which has already developed a new high-strength titanium alloy, and a technology for super-plastic forming of notoriously unaccommodating titanium sheets. They’ll continue looking for ways to reduce the cost of titanium parts in commercial airplane manufacturing.

For commercial aviation services, Boeing and Rostech are interested in a component management service to support Russian airline customers, and further development of in-country repair and overhaul capability for Western aircraft components. Russia’s own new Sukhoi Superjet 100, which uses a number of western-built components, would also benefit. Boeing.

April 9/12: 787 order. Boeing announces a $744 million order for 4 of its 787-8 Dreamliners, from Transaero Airlines of Russia recently signed an order for four 787-8 Dreamliners. Transaero, established in 1991, was the 1st private airline in Russia, and the 1st to order a Boeing plane. Boeing adds that:

“Russia played an important role in creating this revolutionary airplane. Engineers from the Moscow Boeing Design Center participated in designing a number of key sections of the 787. Russian manufacturer VSMPO-AVISMA supplies titanium parts for the 787 Dreamliner.”

June 21/11: 777 order. Aeroflot is ordering another 8 777-300ER jetliners, price undisclosed. Boeing.

March 9/11: 777 order. Boeing confirms that Aeroflot is the customer who ordered 6 Boeing 777-300ER and 2 Boeing 777-200ER planes. Price is not disclosed. Boeing adds that:

“VSMPO, subsidiary of Rostechnologii State Corporation, manufactures large titanium forgings for landing gears, wings and pylon of the 777 jetliner. Russian engineers at the Moscow Boeing Design Center and IT experts from Russian software companies actively participated in designing the 777-300ER airplanes.”

By this point, Aeroflot has retired all of its Tupolev passenger jets, leaving just 6 widebody IL-96-300 planes as its Russian fleet. Russian presence will be restored when its new narrowbody Irkut MS-21 and Sukhoi Superjet 100 planes arrive.

Dec 27/07: Contract. VSMPO-AVISMA Corporation signs a $1+ billion contract with Boeing to supply titanium mill products for the 787 Dreamliner from 2011-2015.

Earlier in 2007, VSMPO-AVISMA and Boeing set up Ural Boeing Manufacturing (UBM), a 50/50 equity joint venture in Verkhnya Salda, to produce titanium parts for the Boeing 787 Dreamliner passenger jet. High precision processing US-made production equipment has been already purchased by the partners, and preparation for its commissioning is underway as of December 2007. The Russians expect that the range of products produced by UBM will expand. Rosoboronexport release.

UBM parts contract

Sept 5/07: 787 order. Boeing and Aeroflot finalize a $3.6 billion order for 22 Boeing 787-8s. The order was contingent upon Aeroflot shareholder approval, which was granted on Sept 4/05. 787 pre-orders have now passed 700 aircraft, but the plane isn’t even in flight testing yet.

Aeroflot already operates Boeing 737s and 767s in passenger roles, and MD-11s in the cargo role, after signing contracts in the late 1990s. They aren’t an exclusive Boeing customer, with more aggregate Airbus A319-321 family orders than 737s, and more A330s and A350s ordered than Boeing 767s and 777s. A handful of Russian Ilyushin IL-96 and Tupolev TU-134/154 passenger jets round out their fleet. Boeing | Boeing blog.

June 9/07: 787 picked. Aeroflot selects the Boeing 787 over buying more Airbus’ A350s. Boeing “looks forward to working with Aeroflot to finalize the order.” Boeing release.

June 9/07: Superjet. Boeing’s role as an adviser to Sukhoi et. al. in the Russian regional jet program (Sukhoi’s 78-95 passenger Superjet 100) previously covered areas of program management, engineering, marketing, product development, certification, supplier management, and customer support. Now Boeing announces an agreement under which it will “explore opportunities” to add flight and maintenance crew training, spare parts management and supply, and guidance on producing flight and maintenance manuals that meet international standards. Boeing release.

Analysts note that in order to be successful beyond Russia, Sukhoi/UAC will need to build or partner for top-tier spare parts, training, supply chain, and customer service capabilities with international reach. UBM is part of that architecture.

June 9/07: Expansion negotiations. Boeing and Russia’s recently-merged United Aircraft Corporation (UAC) sign an agreement “to identify opportunities to expand collaboration on commercial aviation activities,” via a joint working group. They’ll investigate opportunities that include:

• R&D in commercial-airplanes structures, including finished titanium parts and structures.
  
• Opportunities to reduce cost and weight in airplanes
  
• Opportunities to make UAC’s Komsomolsk-on-Amur Aircraft Production Associations (KnAAPO) a qualified supplier of finished titanium parts and components
  
• The potential for a longer-term strategic agreement among the Boeing Design Center in Moscow, the UAC, and Russian private engineering services companies
  
• Sharing of airplane market trends information in Russia, the CIS and worldwide.

Boeing is still negotiating with Aeroflot re: 787 pricing, import duties, etc. The agreement also enhances Boeing’s role on the Sukhoi Superjet Program, and Boeing currently works with leading Russian aerospace companies on 2 ambitious programs: 1) the International Space Station, and 2) Sea Launch, a heavy-lift commercial satellite-launch service. Boeing release.

Shareholders of VSMPO-Avisma elected at an extraordinary meeting on November 7 four representatives of Rosoboronexport to the board of directors, the company said in a press release. The board is made up of seven members and Rosoboronexport representatives have received the majority on the board.

Sept 17/06: Rosoboronexport. Russia’s state arms trader Rosoboronexport has acquired a 41% stake in VSMPO-Avisma. They’ve bought out the western investors from Renaissance Capital Group, and VSMPO co-owner Vyacheslav Bresht. Rosoboronexport is allegedly aiming to acquire another 25% from VSMPO-Avisma General Director and co-owner Vladislav Tetyukhin.

As is usual in these sorts of strong-arm “deals,” terms aren’t disclosed, but are probably significantly below market value. The United States announced August 4 sanctions against Russian state export agency Rosoboronexport and state-owned aircraft maker Sukhoi over their alleged arms deals with Iran and violations of non-proliferation commitments. But titanium supplies to Boeing will be unaffected by the sanctions because they apply to purchases by US government agencies rather than by private companies. New Europe News | Sevanco.

Aug 11/06: UBM agreement. Boeing and VSMPO-AVISMA announce a 50/50 joint-venture agreement to machine titanium forgings for use in Boeing commercial airplanes.

The joint venture will produce titanium parts for the Boeing 787 Dreamliner. VSMPO-AVISMA will perform rough machining of titanium forgings in Verkhnaya Salda, Russia. Final machining and processing of the forgings will be completed by Boeing’s Portland, OR fabrication facility, and other machining subcontractors. Boeing.

July 19/06: Rosoboronexport barges in. Rosoboronexport chief Sergey Chemezov is quoted at Farnborough International Airshow 2006. “Rosoboronexport will soon own more than majority in VSMPO-Avisma.”

VSMPO-Avisma General Director Vladislav Tetyukhin and Chairman of the Board Vyacheslav Bresht own about 30% of the company each. Preliminary estimates show the corporation’s 2005 earnings were $746 million, with a net profit totaling $228 million. Kommersant.

April 13/06: UBM MoU. Boeing and VSMPO-AVISMA announce the signing of a Memorandum of Understanding, which they hope will lead to to the formation of a joint venture. Source.

Nov 17/04: Boeing and the Russian Ministry for Industry sign a memorandum on cooperation, as Russia contemplates buying Boeing jets, and Boeing contemplates ways to secure its titanium supply base. According to the MoU, Boeing will place $2.5 billion worth of orders in Russia. Pravda reports:

“Experts believe that Russia will gain only 40-50 percent of the money, taking into consideration possible investments in the construction of new enterprises… Russia’s Verkhnesaldinskoe Metallurgical Industrial Association (known for the Russian initials as VCMPO) is the key supplier of titanium for the Western aviation industry. This company presently provides 75 percent of titanium products for Europe’s Airbus. Furthermore, the Russian company plans to become the central supplier of titanium for Boeing… This intention can be seen in the contracts, which stipulate a considerable increase of deliveries… According to the Vremya Novostei newspaper, the US Department of Defense has already fined Boeing [$7.4 million] for the use of the Russian titanium in battle planes of the US Air Force… Spokespeople for the company VCMPO said that the sum of the new contract might reach the record of $1.3 billion. It is noteworthy that Boeing’s contracts with other Russian enterprises do not exceed several million dollars a year.”

Pravda’s op-ed also expresses concern concerned about Boeing’s potential involvement with the Russian Central Aerohydrodynamic Institute (CAHI) and the Russian Institute of Aviation Materials (RIAM). They see such cooperation as low-cost poaching of Russian specialists, due to low wages at CAHI in particular. Their communist-era background is showing, here. How, exactly, do they think that situation is ever going to be fixed, except by finding customers who will finance their activities?

Additional Readings

N.B. Russia is not Boeing’s sole supplier of titanium, by any means. On the American side, Boeing has inked titanium supply agreements with ATI, Timet, and RTI. ATI built a $400 million greenfield Titanium sponge plant in the USA in support of their agreement, the first such plant in over 30 years. This titanium will be used for all of Boeing’s military projects, and is used in its civilian production as well.

• US DoD Advanced Materials and Processes Technology Information Analysis Center (Vol. 6, #2) – Lowering the Cost of Titanium [within this PDF file].

• Sevanco (2006) – Rosoboronexport controls titanium in Russia

• DID – Russia’s Military Spending is Jumping – But Can Its Industry? Titanium production is more of a feeder to that industry, but improving industrial capabilities with the metal is also strategically important to Russia.