Outlook on Raw Materials Presents a Mixed Picture
Pricing is high and supply tight for titanium but stability is predicted for cobalt
It's all about demand. More patients than ever are demanding orthopedic devices and therapies, and manufacturers, in turn, are ramping up their orders for raw materials needed to make devices. Simultaneously, other industries that use the same materials, such as titanium and cobalt-chrome-moly (molybdenum)-particularly aerospace-are experiencing booms as well. The result? A volatile market creating longer lead times to obtain materials and skyrocketing raw material prices. What's a manufacturer to do?
"If you're a purchasing manager ordering raw materials, you need to look out as far as you can to protect your pricing since we've seen continued upward pressure," said Scott Shoppell, product manager, orthopedic products, for Fort Wayne Metals, Inc. in Fort Wayne, IN. While in the past manufacturers may have forecast material needs just months in advance, today it's more common to predict needs six or even 12 months out. Orthopedic Design and Technology recently spoke with procurement experts in titanium, stainless steel, cobalt-chrome-moly, nitinol, PEEK and thermoplastics to learn what may be in store for these raw materials in 2006. Their collective advice: now, more than ever, it's important to meet with raw material suppliers as early in the product development process as possible and lock in supply and current pricing.
A Question of Demand
The orthopedics market has been making double digit gains annually for the past few years, and there's no end in sight. "The increase in business is due to the desire of baby boomers to maintain a healthy, active lifestyle, coupled with developments in the orthopedic industry that have made orthopedic implant surgery safer and easier," noted Steve Smith, president of Edge International in Laguna Niguel, CA.
Baby boomers, with their tendency to embrace both better lifestyles and newer technologies, are expected to continue driving strong growth in the sector. "Today's aging population has transformed the approach to buying new medical devices," said Shoppell. "Years ago, people delayed as long as they could before getting a new hip or knee replacement. The baby boomer generation is more willing to take advantage of new technologies [and today's minimally invasive procedures]. Therefore, the orthopedic industry's future looks bright."
A dimmer view, however, is the outlook on the availability of some raw materials, particularly titanium.
2006 Outlook for Titanium and Steel
"Titanium has become the sexy new alloy in the orthopedic OEM's device portfolio," said Brian Martin, market segment manager, Orthopedic Products Group, Handy & Harman Specialty Tube Co., Inc. in Norristown, PA. Martin noted that in the early 1990s, nearly 80% of all orthopedic products used some variant of stainless steel and cobalt-chrome, and only about 20% incorporated any titanium. In the past two years, titanium and stainless steel/cobalt-chrome split the market almost evenly, and by 2008, titanium is expected to be the metal of choice in 70% of orthopedic products.
"Stainless steel won't ever go away entirely, but titanium is lighter and stronger than stainless steel and has better biocompatibility, greater corrosion resistance and lower modulus-it replicates bone more efficiently-so it will be the alloy of choice," Martin noted.
Shoppell concurred that cobalt-based and titanium materials will continue to soar in orthopedics use, particularly as product engineers' understanding of their capabilities increases. Today, in addition to its use in implantable devices, titanium is being employed in more trauma applications as well as dental implants. Newer capabilities are also fueling additional growth. In the late 1990s, Fort Wayne Metals started offering its popular Precision Ground rod and bar line. Before then, it sold products only .1" and smaller.
Of course, titanium's popularity also means prices have skyrocketed, and raw material is now in limited supply. "The tremendous, out-of-control price increases have been a predominant concern for us," Martin lamented. "At some point, affordability will become an issue for manufacturers at all levels."
Titanium's ingot, sponge and scrap variations all have increased in price, with sponge-titanium's most refined, purest form-costing the most. According to the American Metal Market, in early 2004, titanium ingot sold for about $5/lb. By mid-2005, ingot was selling for $17/lb. Even scrap increased from about $3/lb. in early 2004 to $10/lb. by mid-2005. Sponge prices jumped even more dramatically.
"The limited raw material supply has been very evident since late 2004, and that situation likely will continue for the next few years," Shoppell said. "Before 2004, there was a several-year stretch when titanium was in the doldrums-primarily because the aerospace market was down. Today, the global aerospace market is very strong, and China is consuming lots of stainless steel and titanium as it builds its infrastructure. As a result, prices have gone up significantly. We expect to see continued double-digit growth through 2007 and possibly into 2008. Titanium suppliers are slow to add capacity because they know how cyclical the aerospace market is. History indicates that titanium pricing should stabilize once the aerospace market levels off."
Shoppell warned that some suppliers are now charging customers PIE (price in effect) at time of shipment rather than providing the material at its market price on the day it is ordered. Therefore, savvy buyers should make sure they understand the pricing structure their supplier is using so there are no surprises when they receive the invoice. Smith added that manufacturers must also ensure there are no surprises in their contracts with raw material suppliers. "Some companies adjust prices on a monthly or quarterly basis, depending on raw material price fluctuation," he said, noting that Edge International locks in prices for the full term of a contract, not adjusting prices even when raw material costs rise. "Therefore, it's beneficial to lock into a contract and a fixed price, although obviously it's harder for subcontract manufacturers to do so since they're job shops-they need raw material only for a particular project so they typically don't place long-term contracts."
Meanwhile, lead times to obtain titanium are pushing out to six months or longer. Contract manufacturers in particular are feeling the squeeze because they often don't know what types of materials they need to procure until they get a project. Increasingly, experts say, orthopedic device manufacturers are asking their contract manufacturing partners to obtain raw materials on their behalf, and to do so, manufacturers need increased notice from their customers.
"To obtain titanium, you're looking at 40 to 60 weeks," Martin said, adding that the lower end is for very good procurers, and the upper limit is for companies that haven't yet placed an order.
Stainless steel 316, like titanium, has seen significant price increases.
"The big news in stainless steel is the availability of molybdenum [an alloying agent in making stainless steel]," reported Jim Kiely, sales manager for Cannon-Muskegon Corp. in Muskegon, MI. "A year ago molybdenum was selling at about $4 a pound. Now it's at about $40 a pound."
As a result, lead times now stand at about four weeks, which represents an increase of between 30% and 50%, Martin reported. "We're still seeing a very strong demand for metal," he added. "Prices in general have gone up about 30% to 35%, but we expect that within the next three to five months, prices will stabilize and even decrease, with titanium continuing to make inroads into this market."
Cobalt-Chrome-Moly
Cobalt-chrome-moly, often used in hip and knee replacement systems and fixation devices, is a fairly mature market, and supplies have been more stable during the past three years.
The materials are mined throughout the world, including in some areas that have experienced long-term power outages or political instability that have halted production in the past. Industry experts are hoping that two large mining projects in Australia and Voisey Bay, Labrador, which are currently running behind schedule, will soon come on the market. "When they come online, it will add 25% more cobalt into the market once they're operating at full capacity," Kiely reported.
In the meantime, strong demand from the aerospace and chemicals industries has fueled pricing pressure, and the medical industry has also found new uses, with cobalt-chrome-moly increasingly being incorporated into shoulder, wrist and spinal products.
"Edge International has seen a 40% increase in volume for the first six months in 2005 compared with the same period in 2004," said Smith. "I don't expect the same growth in 2006 due to production constraints at producing mills, but I still anticipate an increase of 15% to 20% over current levels."
Smith pointed out that mill lead times a year ago were around 12 weeks. Today, they span 25 to 40 weeks. Prices, however, haven't risen as much as one would expect.
"A year ago cobalt reached a high of about $25 a pound, and it then slipped to around $13. We're back around $16 to $17 a pound now," Kiely said. "It's so tough to predict where prices will be in 2006, but we're thinking it will stay in the high teens, low 20s."
Cobalt's volatile market and prices mean that Cannon-Muskegon and other suppliers are holding device manufacturers more closely to their supply contracts. "If you make a commitment to purchase material, we need to hold you to it," Kiely said. "It's difficult to buy cobalt out more than a year right now. We can buy nickel farther out than a year because it's on the London Metal Exchange market, but there is no such terminal market for cobalt. Therefore, more people are buying cobalt on a monthly basis to better track the market."
Smith noted that in the past few years improved technology has enabled superalloy manufacturers to develop new alloys such as high-carbon cobalt-chrome-moly (ASTM F-1537 Alloy 2), a harder-to-work-with alloy that exhibits increased wear resistance and is particularly useful in weight-bearing surfaces for hip and knee replacements. This newer alloy is providing additional applications for the rapidly expanding medical device market.
Nitinol Garners Greater Attention
If prototypes are a harbinger of the future, nitinol's outlook is bright. Jim Binch, CEO of Memry Corpin in Bethel, CT, reported that his company has seen an increase in new projects of between 150% and 200% in the last 12 months over levels experienced in the prior 36 months. "We're seeing enormous growth," he said, adding that this is largely due to the many new applications in the vascular and noninvasive surgery markets that are being found to be well suited to nitinol's superelastic, shape-memory qualities.
"When the drug-eluting stent came out a few years ago, companies all moved their resources from the peripheral vascular domain to drug elution systems in the coronary market," Binch said. "Now that market is more settled, and corporate decision makers are back to untapped opportunities in the peripheral vascular domain, which happens to be in the sweet spot of nitinol. Nitinol is able to self-expand for stent applications, and it experiences no bending as happens with stainless steel or cobalt-chrome-moly, so the market conditions favor continued growth."
Binch noted that prices have increased by about 5% over the past year, but improved technology has allowed more companies to draw nitinol into a wire form, making the material much more affordable for the medical industry than it was a few years ago.
Memry supplies the great majority of its products directly to medical device manufacturers, and in some cases it supplies components to contract manufacturers. Few companies work with nitinol, which requires highly skilled, specialized labor.
Lead times have extended by about a week over 2004 levels to 10 weeks today. "We work with our customers and their markets to understand the competitive environment," Binch explained. "We know what's going on in hospitals and with physicians, so we can be better prepared to help our customers determine their forecasts. There is a lot of volatility in this market due to innovations, so we require customers to provide a rolling 12-month forecast, and they must procure 100% of the material committed to in the contract's first 90 days, 80% for the next 90 days, and so on."
Polyetheretherketone Thermoplastics
PEEK-OPTIMA polymer-thermoplastics have also experienced strong growth in the orthopedic marketplace. Invibio, Inc. in Greenville, SC sells PEEK-OPTIMA and PEEK-CLASSIX polymers, which are used extensively in the spinal fusion market but have recently found opportunities in craniomaxillofacial, cardiovascular, dental, arthroscopy, pharmaceutical and drug delivery markets also. The company is currently conducting extensive wear studies on PEEK-OPTIMA polymer and plans to release initial results late this year.
PEEK-OPTIMA polymer, which is designed for long-term implants, is sold only to medical device manufacturers, whereas PEEK-CLASSIX polymer is available directly through Invibio or through several of its partners.
The company has seen more metallic-based implants converting to PEEK-OPTIMA polymer in recent years as metal markets have become more volatile, and manufacturers have become more aware of the product's physical properties and biocompatibility.
"Maintaining supply with increasing demand is addressed since we control the raw materials back to basic commodities," said Michael Callahan, president of Invibio. "Also, since medical device manufacturers often incur long and costly development cycles for clinical evaluations and regulatory approvals for their implants, Invibio offers 'no-change' agreements, which guarantee the specification of, and production methods for, the biomaterial over an extended period of time. Capacity control is proactively managed and not a constraint."
In comparing PEEK-OPTIMA polymer's performance with metals, he noted, "The modulus of PEEK-OPTIMA polymer is an advantage because it is similar to that of cortical bone. Our polymers also are more compatible with imaging techniques, be they X-rays, CT scans or MRIs. Some of these technologies can't be used with metals since they produce a poor image due to scattering, so surgeons are showing a great interest in our materials. We can incorporate varying degrees of radiopacity into our polymers. We can tailor the formulation to range from completely radiolucent or radiopaque or anywhere in between."
While PEEK-OPTIMA polymer prices and lead times have remained stable over the past year, the underlying issue remains quality of the raw material, Callahan said. "It comes down not just to the physical properties of the polymer," he noted, "but also repeatability is essential so that every shipment, every year going forward, is of the same quality and meets customer requirements."
Demand for Thermoplastics on the Rise
Extruded and compression-molded high-performance thermoplastics posted better than 10% gains in increased demand in the orthopedics market in 2005, reported Michael Kell, director of sales and marketing of medical products for Westlake Plastics Co. in Lenni, PA, which offers a complete line of medical-grade thermoplastics from inventory. The company stocks rod, bar and sheet thermoplastics and has found hip and knee replacements its largest market sector, although spine and trauma applications have been increasing.
While prices rose dramatically in 2004, they have remained stable for most of this year. Kell said he expected prices to increase by a few percentage points this fall.
Lead times haven't changed dramatically over the past year either. It takes about three to four weeks to acquire resins, and up to another four weeks lead time for processing, Kell said, adding that orthopedic clients are demanding different performance characteristics.
"What they'd like to see for both implant and non-implant purposes are cleaner materials-as clean as they can possibly get," Kell explained. "Thermoplastics, by nature, are not pure materials and then we add pigments. Unfortunately, orthopedics is a small fraction of processors' market. Our requests to improve an entire reactor or pigment system at the cost of several million dollars to purify materials for our market fall on deaf ears. The orthopedic market buys only a few hundred thousand pounds of some resins, but reactors are processing millions of pounds for other sectors. Therefore, they're not willing to make significant investments for us.
"With any particular pigmented resin, you ask, 'Is it contamination? No. Is it an inclusion that can become undesirable to medical manufacturers?' Yes. But is there an answer to this problem?" Kell continued. "It's difficult to say. Some private groups will purify a resin for you, but the cost is astronomical. An acetal copolymer normally costs approximately $2 a pound. A private group could purify it, and it then would cost $24 a pound. Is it worth it? Only an orthopedic manufacturer can make that call."
The Signs of the Times
Experts say several key trends are emerging in the raw material market:
• Quality and traceability rule. Adherence to quality and traceability continue to be critical because many orthopedic devices go into the human body. In addition, "there is considerable emphasis and focus placed on improving the inherent melting capabilities of what the production community is able to produce," Binch said. "For example, nitinol's uniformity, consistency and purity are much better today than they were even three or four years ago. Material used 15 years ago would be flat out rejected today."
• Some companies are seeking more simplicity. It's rare to find one company that offers expertise in procuring and/or processing a wide gamut of raw materials. "One of our strengths is the breadth of our offerings-we're a full-service alloy provider," noted Shoppell of Fort Wayne Metals, which offers titanium, stainless steel, nitinol and cobalt-based alloy. "We've found over the past few years that large medical device manufacturers in particular want to put into place yearly raw materials contracts that bundle a number of products and materials."
• Companies are protecting current customers. Because of the tight titanium supply, Fort Wayne Metals has had to limit its pursuit of new business. "It's been very difficult to be aggressive in the titanium market because of supply. We have to protect our current customers and their increasing needs rather than going after other, possibly larger accounts," said Shoppell. "I think 2006 will be somewhat easier for us with more robust supply agreements in place."
• Manufacturers are seeking earlier involvement from suppliers. More orthopedic device manufacturers are approaching raw materials suppliers early in the product development process. "A lot of the time we're now involved 18 months to three years out," noted Martin. "We can provide metallurgical solutions and help the manufacturer better understand the parameters and constraints for that product based on the material they've selected."
• Materials are ordered at smaller volumes. "We're seeing more requests for us to be involved at the prototype stage, which means supplying very small quantities of a material," Smith reported. "The demand for far less than mill quantities from our stock-for supplying one bar of cobalt-chrome-moly-have gone up dramatically."
• Customers are becoming more sophisticated. Orthopedic device manufacturers have become more knowledgeable and involved in what's happening in the metals markets and have ratcheted up the sophistication of their project planning, according to Kiely. "They're doing more supply chain management, and their forecasts are getting more accurate," he noted. "That helps their product flow and ours."
While both demand and prices for raw materials in the orthopedic market continue their march onward and upward, manufacturers, contractors and suppliers are continuing to work together to streamline costs and acquisition of materials. As is the case in most areas of medical product development today, early involvement and long-term planning will allow for projects to progress most cost efficiently and effectively.