Forging a Dream on the Dreamliner

To accomplish great things, a Fool must dare to dream. For titanium investors vying to share in the dream of Boeing's (NYSE: BA  ) supersized 787 Dreamliner program, this extended slumber is beginning to look like a nightmare.

The stakes are sky-high for RTI International Metals (NYSE: RTI  ) , since elevated titanium inventories throughout the aerospace supply chain are not likely to normalize until Boeing's 787 production line finally kicks into high gear. The supplier logged another net loss for the fourth quarter, surrendering $1.45 million and eroding the company's full-year 2010 gain to just $3.4 million.

A steady decline in titanium prices has been hammering away at RTI's bottom line. During a period that has seen dramatic climbs in the price of most industrial metals, RTI's realized titanium price has fallen 16% from an average price of $22.23 realized during the second quarter of 2009. It may appear simplistic to attribute so much of this price weakness to a single aircraft, but when the world's largest commercial airliner is awash in production delays of such magnitude that suppliers like Spirit AeroSystems (NYSE: SPR  ) start maneuvering for compensation, you're witnessing a condition in which market-damaging inventories can easily build up.

With Boeing now pledging to deliver its first 787 aircraft during the third quarter of 2011, let's check in with industry players to see where their outlooks stand with respect to titanium demand. RTI characterized the near-term outlook as "muted," citing looming defense budget cutbacks in addition to the aforementioned oversupply in commercial aerospace. With anticipated sales to Airbus and Lockheed Martin (NYSE: LMT  ) extending RTI's runway into a softer landing, the company called its longer-term prospects "robust."

Rival Titanium Metals (NYSE: TIE  ) provided some encouragement last November, stating: "The long-term demand trend for titanium products and our business remains favorable as the development and production of the next generation of more fuel-efficient aircraft continues throughout the aerospace supply chain."

Since I underscored the uncertain future of titanium in August, shares of both RTI International and Titanium Metals have leveled off substantially following a steep climb to cruising altitude. Competitor Allegheny Technologies (NYSE: ATI  ) has performed far better -- bolstered by a fourth-quarter profit of $15.1 million -- but Allegheny produces a suite of specialty alloys that render the company less of a titanium pure play. I would like to see upward momentum restored in titanium prices before reversing my cautious outlook on the sector, but for the long-term focused Fool, all three of these producers possess well-padded balance sheets capable of seeing them through to the resurgent titanium demand that they see approaching on the horizon.

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