Outlook for Aluminum-Lithium Applications

Last week’s announcement that Alcoa Inc. (NYSE:AA) launched the construction of its aluminum-lithium facility in Indiana hints at growing demand for lightweight aluminum alloys. Although the $90 million, 115,000 square foot expansion is not particularly large given the global footprint of Alcoa, it is expected to produce more than 20,000 tonnes of aluminum-lithium per year. 

Alcoa has an aerospace alloy portfolio that will allow aerospace engineers to build lighter and lower-cost airplanes compared with composite alternatives. This product suite features newly-patented aluminum-lithium alloys that were developed last year and provide improved tensile strength and corrosion resistance. The advanced alloys and third-generation aluminum-lithium alloys result in up to seven percent lower density in major structural applications. Alcoa’s most recent aluminum-lithium alloys supply large commercial aircraft and are being used on planes about to enter the marketplace.

Constituents

The aerospace and defense industries are responsible for demand for commercial aircraft and military weapons and systems designed to operate in the air, land, and sea. A relatively smaller source of demand is the production of business aircraft and space vehicles, usually satellites, for both commercial and military applications.

The US military represents by far the largest market in the world for defense equipment, systems, and services and is also the world’s largest employer. Companies in the defense industry that supply to the US military are often the suppliers contracted by strategic partners and allies.

Cyclical demand

Historically, the market for commercial aircraft has been relatively cyclical, with demand expanding for years only to sharply decline as airlines cancel or suspend orders. Often these shifts are intensified by airlines’ leverage and breakeven operating capacity.

The military and defense market has its own cycle, with wars, geopolitical tensions, administrative policy shifts, and public perceptions impacting expenditures on procurement contracts. Competing demand for economic stimulus also increases during times of economic distress, while tax receipts directly impact defense spending priorities.

Lithium and aluminum potential beyond aerospace applications

A recent study from Ducker Worldwide indicates that demand for aluminum alloys with stronger and lighter industrial properties may extend beyond aerospace engineering. The growth of aluminum per automobile manufactured in Europe virtually tripled between 1990 and 2012. While lithium has not been adopted for this application yet, savings in weight resulting from increased proportions of aluminum-lithium alloys would impact fuel consumption. Although the economic practicality of this application is not currently evident, it could provide a second market for the aluminum-lithium alloy, increasing demand and investment interest in lithium producers and junior exploration companies.

 

Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.