Lockout could hurt parent RTI if orders mushroom

Analysts agree that a titanium sales boom is coming, but how soon?
WEATHERSFIELD -- The lockout of 340 workers at RMI Titanium might have saved its parent company some money over the past year, but it could become a liability if it isn't resolved soon.
That's the take of Longbow Research analyst Chris Olin on the controversial lockout that will mark its one-year anniversary Oct. 26.
Olin, based in the Cleveland suburb of Independence, believes the nation's titanium industry is on the brink of a recovery. RTI International Metals, parent company of RMI and one of just three major titanium producers in the United States, should benefit.
"I upgraded RTI's stock to a "buy" about two weeks ago," he said. "I think RTI is a company well-positioned to benefit from improvements in the outlook for the industry."
RTI's share price has topped $20 this week for the first time in more than five years, and Olin believes it could go to $27 over the next 12 months -- if the lockout is settled.
Orders have been slow, so the lockout has worked as a cost reduction for RTI so far, he said. The company is paying its salaried workers and employees from other RTI facilities to run the Weathersfield Township mill, but it's saving money by not paying salaries or health benefits for the locked-out workers.
Olin theorized that the company could see a downside to the lockout if orders pick up and the influx is too much for its replacement workers in the mill to handle.
That could happen, he said, because Boeing and Airbus have both announced plans to increase their commercial aircraft production in 2006 and 2007. He theorized that production of titanium for those planes would have to begin as early as 2005.
RTI president Tim Rupert said the replacement workers have managed well so far and have made volume and quality improvements since they began running the plant.
Another lockout-related problem Olin foresees relates to the stock price. Olin argued that RMI's labor problems are likely holding RTI's stock price down by creating uncertainty. "Uncertainty makes investors nervous," he said.
Rupert countered that concern, as well. He said 80 percent of RTI's stock is held by institutional investors who want to see the cost of manufacturing reduced.
"As sharply as our stock has risen, we can say for sure that we're keeping our investors happy," he said.
Metals market analyst Brian Jacobs of Fort Pitt Financial Group in Pittsburgh agrees that titanium producers are headed for an upswing, but he thinks it's still two or three years down the road.
Several new commercial and military aircraft models with high percentages of titanium are on the books, he said, but the projects aren't expected to ramp up to significant production levels until mid-2007 or later.
"I don't see this massive boom within the next 12 to 18 months," he said. "What may happen is a meaningful uptick, but no gushing to the glory days, not in the next year and a half."
Jacobs said he considers RTI a well-run company financially with a clean balance sheet, meaning it has plenty of cash and little debt.
He doesn't think the RMI lockout has hurt the company, mainly because the aerospace industry has been sluggish since the Sept. 11, 2001, terrorist attacks. Titanium is used in aircraft production because it combines strength and light weight.
What RTI must do if it wants to emerge from the union dispute unscathed, Jacobs said, is to settle the issue before titanium orders start to peak. With that increase two to three years off, in his view, Jacobs thinks there is plenty of time.
The Pittsburgh analyst said he's not worried about titanium order volume exceeding the capabilities of the replacement workers running the mill. "I don't think that's happened, and I don't think it's going to happen anytime soon," he said.
Comparing the local stock with that of its largest titanium-producing competitor, Denver-based TIMET, Jacobs said RTI has performed much better for its shareholders over the past five years, even though TIMET's stock price is higher now. TIMET lost 90 percent of its value at one point, he said.
Domestic titanium production peaked at 65 million pounds in 1997, according to the U.S. Geological Survey, which tracks all domestic metal production.
If production for the second half of 2004 equals the first half, 20.6 million pounds, this year's total will top 41 million pounds, up from 34.6 million pounds in 2003.

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