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KMW Blog Feb 9, 2016: The aerospace industry's need for aluminum-scandium alloy just got urgent


Posted: Feb 9, 2016JK: The aerospace industry's need for aluminum-scandium alloy just got urgent
Published: Feb 9, 2016NYT: U.N. Agency Proposes Limits on Airlines' Carbon Emissions
Jad Mouawad and Coral Davenport of the New York Times reported on February 9, 2016 that the global aviation industry after 6 years of negotiation reached a binding agreement in Montreal on February 8, 2015 to limit carbon dioxide emissions (New ICAO Aircraft CO2 Standard One Step Closer To Final Adoption). The ICAO (International Civil Aviation Organization) is a United Nations agency which works with its 191 member states to establish safety and other standards for the aviation industry. Its 36 council members must vote in June to adopt the proposed rules, after which the ICAO assembly must vote on the rules in October. Each member state must in turn enact legislation or adopt regulations reflecting the proposed rules or more stringent versions of them. One cannot, of course, help wondering what would happen if a certain climate change skeptic who already travels in a beast called Air Force Trump became president of the United States. However, the rules do not apply to existing aircraft, and opposition to them would arise not from ideology but just plain stupidity. According to the NYT under the proposed rules new aircraft must achieve a 4% reduction in fuel consumption by 2028 compared to aircraft delivered in 2015, with a sliding scale of 0% to 11% depending on size for aircraft delivered after 2023. Larger aircraft face tougher standards at the higher end of the range. The airline industry accounts for 2% of global CO2 emssions, though the volume of airline emissions is expected to triple by 2050 based on travel growth projections. If indeed the world gets serious about reducing its carbon dioxide footprint in the areas covered by the Paris Agreement, an unchecked aviation industry would emerge as a substantial contributor to greenhouse gases. The Montreal agreement puts the aviation industry in step with the rest of the world's objectives. Contrary to what one might expect, these mandated fuel efficiency targets will be welcomed by the airlines whose profitability is vulnerable to jet fuel prices that in turn are linked to crude oil prices. Oil is at the lowest price in a decade and expected to be weak for another year, but that is of little consolation to airlines who place orders for aircraft years in advance of delivery.

While the ICAO does promote the adoption of alternative "bio-fuels", the reality is that commercial aircraft will be powered by fossil fuel for many decades because there simply is nothing as effective as traditional oil derived jet fuel. The ICAO expects "fuel efficiency" improvements to be achieved through "CO2 reductions arising from a range of possible technology innovations, whether structural, aerodynamic or propulsion-based". By "structural" it refers to the weight of the aircraft itself, which implies adopting new materials such as the engineered carbon composite of Boeing's Dreamliner, or getting rid of rivets and bulky aluminum skins and struts by substituting "weldable" aluminum-scandium alloy as Airbus is poised to do if "only somebody could guarantee them 300 tonnes of scandium oxide annually for 10 years at a stable price" (hello Scandium International and Clean TeQ, are you listening?). By "aerodynamic" the ICAO refers to plane shape designs that overcome the resistance and drag caused by air, an arena for which it is hard to imagine further improvements given the desire of passengers for a comfortable flight. Airlines are admittedly working very hard at achieving greater fuel efficiency by jamming as much weight as possible onto an aircraft relative to its empty weight. The next "innovation" could even be surcharges based on a scale one needs to step onto before boarding a plane, though that will probably not go over well in a country where consumption of corn-syrup borders on a sacrament with very visible outcomes. By "propulsion based" improvements the ICAO is referring to the jet engine itself. Here the aircraft builders are least likely to have much success because, unlike the car industry which is whispered to have had an unholy alliance with the oil industry that supposedly resulted in many a new fuel efficiency enhancing technology being snapped up and mothballed, the airline and aircraft industry have done what they can to reduce the profit margin robbing cost of jet fuel.

Since fuel is the biggest single operating cost center for the airline industry, reducing fuel consumption is a primary objective regardless of the climate change debate. Energy efficiency is a goal that is apolitical; in the case of aircraft one must be sorely lacking in functioning brain cells to oppose the ICAO standards. In the case of the United States the Obama administration "issued a legal finding that aviation emissions are a threat to human health because of their contribution to global warming", which triggered "a requirement under the Clean Air Act that the government release new regulations to curb airplane emissions". However, Obama has held off in favor of awaiting the ICAO proposals, which may be just as well because the Supreme Court has at least temporarily blocked his efforts to regulate coal-fired power plant emissions (NYT - Feb 10, 2016: Supreme Court Deals Blow to Obama's Efforts to Regulate Coal Emissions). The NYT states, "according to a report by the Center on Biological Diversity, the United States accounts for half of all carbon-dioxide emissions from airplanes around the world". Translated into monetary terms, this means that American travelers will be the primary beneficiary of the higher fuel efficiency standards proposed by the ICAO (assuming the airlines pass on at least some of the savings, though if they don't American pension plans should benefit from higher stock prices in the airline sector), so it is hard to imagine the United States rejecting the proposed rules.

The ICAO proposals have already come under attack from environmental lobbies who complain that the rules merely prevent the aircraft industry from backsliding away from trends they have already adopted. The environmentalists want tougher standards, especially given that the aircraft industry has never been subject to any energy efficiency standards. That is so unlike the automotive industry which faces tough fuel efficiency targets by 2025 that no president regardless of ideological stripe is going to soften. When you consider that American oil consumption is lower today than it was in 1978 when OPEC took its boots to America, it is hard to argue against the strategic value of fuel efficiency targets. One could, of course, argue that the aircraft industry is naturally inclined to pursue fuel efficiency wherever possible and does not need any government cattle prods to help it along. However, when fuel costs drop sharply in an environment where the airline industry has managed to acquire "competitive discipline" that is filling its flights with passengers and enabling the airlines to maintain high prices even as operating costs decline, it is easy to imagine a diminishment in the vigour with which the aircraft industry pursues fuel efficiency gains that could be tough to achieve from the 2015 benchmarks (Boeing's Dreamliner will need to make further gains!). The carbon dioxide linked efficiency standards over-ride whatever other logic guides aircraft design decision-making, and that is a big deal for the future of scandium demand.

With regard to higher fuel efficiency targets the aircraft industry has an ace in the hole called aluminum-scandium alloy, with Airbus holding a patent on an aluminum-scandium-magnesium powder that lends itself to 3D printing (additive layer manufacturing). But that ace in the hole cannot be played because there has never been a primary, scalable supply of scandium except for the Zhovti Vody Mine in the Ukraine that the Soviets operated at whatever it cost to equip its Mig fighter jets with Al-Sc alloy. That "whatever it costs" proved prohibitive at the mine's 100 ppm grade after the Soviet Union collapsed. So until the recent discovery of substantially higher grade laterite deposits in New South Wales the potential for wide-scale adoption of Al-Sc alloy as an energy efficiency booster has been merely theoretical. The juniors attempting to demonstrate that their deposits do represent a primary, scalable supply solution have encountered resistance from a resource sector audience which tends to approach each mine with the question, "how will the new supply from your mine affect the price of the metal in view of existing demand?" The mining industry operates by projecting the existing trend, which is problematic when the trend and its underlying drivers undergo a reversal as has happened in the commodity sector since 2011. The big miners were forward selling copper until early 2006 because the copper trend was flat for two decades and they did not understand or take seriously that China's growth trajectory hit a tipping point on the upside in 2003. Once they got their heads around the super-cycle theme they went all out to mobilize new supply, a process that sets in motion developments with multi-year timelines that cannot be disrupted until it has become obvious that the demand growth trajectory is no longer what the industry imagined and was collectively serving. The ensuing supply glut in the context of lower demand growth has created the usual price bust. The resource sector audience in turn has adopted as its new analytical spectacles a preoccupation with how new supply will mesh with existing demand trends. Because scandium supply-demand is a trendless sideways affair, which requires an understanding of innovation to see as otherwise which these new spectacles are not designed to do, the market has failed to assign a market value to SCY and CLQ that reflects the intrinsic value indicated by their scoping studies.

The scandium skeptics want to see an offtake agreement from the aerospace or automotive industry before they believe that SCY and CLQ can find ready markets at $1,500-$2,000 per kg scandium oxide when they together add 70-80 tonnes to the existing 10-15 tonnes of annual by-product supply. But until these juniors demonstrate that they can indeed deliver primary, scalable scandium supply from their Nyngan and Syerston deposits, no decisions will be made to incorporate aluminum-scandium alloys into the product lines of these big industries. The initial supply will be soaked up by a myriad of specialized applications whose purchasers will be disinclined to talk about it, either because their end-users do not want to alert the competition, or because the end-user is a defence department that is not necessarily American. However, if it is indeed the case that using aluminum-scandium alloy could reduce the weight of a large aircraft by 10%-15%, it is virtually a no-brainer that Airbus and Boeing will adopt Al-Sc alloys as soon as they can make a case to their shareholders about reliability of supply.

The importance of the ICAO news is that the aircraft industry now has a timeline for coming up with fuel efficiency boosting solutions, as well as a 2015 based benchmark for demonstrating compliance. The importance of the latter cannot be stressed too much! The aerospace industry has known for years that at some point carbon dioxide emission based standards will be imposed on it, so it has had some incentive to drag its feet about fuel efficiency improvements. That situation has now changed. Because using Al-Sc alloy is such a comparatively easy way to meet the ICAO fuel efficiency standards, the aerospace industry now has new incentive to help potential scandium producers fulfill their objectives. Unlike Bloom Energy whose Silicon Valley arrogance compels it to treat potential scandium producers with a disdain that hints at a serious lack of confidence in its own business model, the aircraft builders have been somewhat more encouraging. Airbus has already given Clean TeQ moral though toothless support with regard to the goal of putting Syerston into production, though it has unproductively strung Clean TeQ management along with its encouragement that Clean TeQ deliver a 99.9% purity product which may be necessary for Bloom Energy's "electronic" needs, but is not needed to produce an aluminum-scandium master alloy that fabricators can turn into any form or shape their customers require. Scandium International has formed an alliance with ALCERECO, a Canadian melt shop that specializes in prototyping and manufacturing specialized aluminum alloy based components, which for those in the know signals SCY will have no difficulties finding "anonymous" buyers for its scandium output. The "generic" ALCERECO deal, however, lacks the glamour of a branded offtake agreement.

What the market needs as a wakeup kick in its backside is for the aerospace industry to step up and make a token offtake agreement for a certain amount of scandium oxide it can utilize for aircraft components that are not subject to the safety certification procedures of ICAO. For example, in one of its presentations Clean TeQ uses an example of a seat-belt buckle which is 55% lighter than the standard metallic one every passenger is familiar with. On an Airbus A380 (853 seats) this translates into a weight reduction of 72.5 kg which, according to Clean TeQ, equates to 3.3 million litres of fuel over the life of the aircraft (worth AUD $3.1 million in October 2015). All the Al-Sc belt buckles would weigh 59.3 kg which at a 0.2% scandium content would translate into 0.12 kg of scandium or 0.18 kg of scandium oxide which at $2,000 per kg would represent an additional cost of USD $360. So at an extra cost of $360 for the scandium content Airbus could offer the airline an AUD $3.1 million fuel saving over the life of the aircraft plus incrementally work towards its overall fuel efficiency improvement target. How much brain power does an Airbus executive need to demand Al-Sc seatbelt buckles for all its aircraft? But as one cynic pointed out to me, that buckle looks like it is made of titanium, implying this frontier has already been captured by Airbus through another cheaper metal. That may be true - this is Clean TeQ's example, not mine - but what the cynic is not taking into account is the fabrication cost of this intricate titanium based design, which may be a lot more than the "all-in" cost of a simpler Al-Sc alloy based belt buckle of equal weight and functionality.

The point is that Airbus can probably find similar non-mission critical applications for Al-Sc alloy based components in its aircraft for which there are ready substitutes if SCY and CLQ fail to deliver as promised by their feasibility studies (though why not toss out that titanium buckle in favour of an Al-Sc alloy one?). Doing an offtake deal on such an inconsequential component would be free of risk, but would send a serious "field of dreams" signal to the market that if Nyngan and Syerston come on stream as promised, Airbus will end up "all-in" with Al-Sc alloy for those parts of its aircraft that certification and security of supply do matter. It is irrelevant with which junior Airbus does such a deal, because for Airbus the security that comes from diversity of supply is far more valuable than the pennies it gains by chiseling Robert Friedland down to a price of $1,000 per kg which feeds his vainglorious winner-take-all-and-end-up-with-not-so-much mentality, a price level where Syerston will squeak a profit and Nyngan will break even. It won't actually come to such a price, at least not until many years of production have delivered processing optimization rewards. And even then, Airbus would likely end up empty-handed, because at that price automotive industry demand kicks in with a vengeance, along with other unexpected end-users such as beverage cans which do not have CO2 footprint reduction mandates. For the annual supply potential from each of Nyngan and Syerston has a physical limit in the 150-300 tonnes scandium oxide range in a market that will over a decade exceed 1,000 tonnes annually worth $2 billion plus of which these two juniors will pioneer the initial 30%-50%. This does not even take into consideration potential demand competition from Russia, the inventor of Al-Sc alloy applications, and China, the world's greatest potential beneficiary of abundant Al-Sc alloy. Furthermore, Airbus has to keep in mind that Boeing, although it is committed to carbon composite for its aircraft skins, has no compunction about using a sturdy metallic alloy for structural components of its aircraft. The ICAO agreement offers many reasons for the aircraft producers to help out the scandium juniors!

The ICAO announcement is a big deal for the scandium juniors because it creates pressure on the aerospace industry to come up with fuel efficiency solutions, the easiest of which is adoption of aluminum-scandium alloy material. But making scandium available on a primary, scalable supply basis from these new high grade laterite deposits in Australia's New South Wales lies in the hands of juniors who must overcome the market's "chicken and the egg" skepticism about future scandium demand. Somebody within the aerospace industry is going to make an offtake "gesture", and when that happens, CapEx funding for Nyngan and Syerston will materialize at much higher valuations than the market is currently assigning to SCY and CLQ. The big offtake agreements that enable SCY and CLQ to expand production beyond their initial "pilot plant study" scales of 35-40 tpa Sc2O3 will not materialize until after Nyngan and Syerston have delivered scandium as promised by their feasibility studies. Assuming Nyngan and Syerston start construction in 2017 and production in 2018, the "proof of concept" needed by the aerospace industry will not be in place until 2019 which is ideal for its "new design" 2020 deadline. But because aluminum-scandium alloy has applications in so many other fields (automotive, rail, military, consumer goods such as smartphone cases), the aerospace industry will have to insert itself into the queue a lot earlier. The ICAO agreement is a very big deal for SCY and CLQ because a big potential offtake gorilla sector can no longer afford to sit on the sidelines as a curious spectator. The traditional resource sector audience which is still reeling from the commodity bust and grasping at gold as a lifeline that may end up being attached to nothing will probably miss the boat on this one, because the scandium story now has the potential to lurch onto the radar of of a different audience attuned to innovation which is starting to wonder if the technology boom has run its course. The scandium juniors bridge the gulf between a beaten up resource sector and an innovation driven transformational story whose upside potential is visible to anybody with a basic capacity to do arithmetic.

 
 

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