Fake titanium scandal alerts investors to issues with sanctions and supply chains
Fake Titanium Scandal Affects Supply Chain
Economic sanctions are a frequently-used tool in foreign policy designed to target certain individuals, groups and countries. The goal of these sanctions is to pressure governments into changing bad behavior, hopefully without affecting the overall population.
The biggest problem with targeted economic sanctions, however, is that sometimes there are unintended consequences. As investors, it is important to pay attention when sanctions are implemented and to determine if any of these unintended consequences affect your investments.
Unintended consequences
A good example of unexpected consequences occurred recently when it was discovered that counterfeit titanium was sold to Boeing and Airbus using fake documents. Commercially-pure titanium is an alloy that is used by the aerospace industry in engines, wings, the fuselage, undercarriage and landing gears. Titanium is a unique alloy that can withstand high temperatures, one of the reasons that it is highly desirable, especially in the aerospace industry.
Previously, the most dominant player in the titanium market was Russia, which is now the third-largest producer after China and Japan. Before economic sanctions went into effect against Russia, it was the second-largest producer.
As a result of the sanctions, many countries around the world have scrambled to find titanium to meet a growing demand for this alloy.
Fake titanium
The fake titanium was first discovered by Spirit AeroSystems, which noticed small holes in the titanium from corrosion. After a thorough investigation, they realized that the bogus titanium was used in Boeing’s 737 Max and 787 Dreamliner jets, and the Airbus A220. Spirit AeroSystems reported their findings to Boeing and Airbus.
Boeing BA - $184.31 1.11 (0.599%)
and Airbus EADSY - 1.27 (3.588%) voluntarily disclosed to the FAA that one of their foreign distributors “falsified or provided incorrect records.” In response, the FAA issued a bulletin to airplane suppliers to be on the lookout for any potentially falsified records. The FAA is also conducting their own investigation. They are also looking for ways to “prevent unauthorized parts from entering the supply chain.” Jetstar via Wikimedia
Boeing claimed that the titanium was linked to a small group of suppliers. They conducted tests on the metal and in a statement said, “We are removing any affected parts on airplanes prior to delivery.” Boeing also cut ties with any supplier connected to the fake titanium documents.
Airbus replied in a statement, “Numerous tests have been performed on parts coming from the same source of supply. They show that A220’s airworthiness remains intact.”
Boeing and Airbus are cooperating with the FAA investigation, which includes doing internal investigations of their supply chains to find how this happened. Boeing and Airbus are also searching for other legitimate sources for titanium, all of which takes time and costs money.
How sanctions can backfire
Although a necessary tool to control rogue nations and bad actors, the use of sanctions can sometimes backfire, as may have happened with titanium. Sanctions have adversely affected the airline industry both in Russia, Europe and the United States.
After Russia invaded Ukraine on Feb. 24, 2022, the European Union, United States, and Canada implemented sanctions against Russia, including excluding Russian aircraft from their airspace. They also halted the supply of parts, technical support and maintenance to Russia.
Unfortunately for Europe, their decades-long titanium arrangement with Russia was disrupted when the sanctions began. Boeing and Airbus have also been searching for non-Russian titanium suppliers. Unless the U.S., Canada, or Europe can increase domestic production of titanium (and that won’t happen quickly), the supply chain problems will continue.
A 2023 article in the “Journal of Travel Research” found that that “the negative consequences of sanctions spill over much more into airlines than other publicly traded aviation-related companies, with differential effects on each examined region and a greater impact on larger firms than small firms.”
As a result of the sanctions, Russia tried to minimize the effects of the sanctions by importing engines and spare parts from other countries including Singapore, Turkey and Central Asia. This was not only economically costly to Russia but is also a safety hazard.
What investors should do
It’s important to recognize that supply chain management is a key facet of ESG investing. Alert portfolio managers will be looking at these issues and find ways to avoid getting caught on the wrong side of an economic sanction’s blowback.
It is up to the authorities to create strong rules to prevent fake parts or metals from entering the supply chain. It is up to mutual fund managers, however, to be cautious about investing in companies that are experiencing turbulence as a result of the sanctions.
As investors, you may want to find out if your mutual fund manager is talking about supply chain issues and what they are doing to address it. Some managers may resist buying airline stocks that have been adversely affected by supply chain issues. Others may see it as a buying opportunity. Most important, it’s an issue that needs to discussed.
Although Boeing and Airbus are working hard to solve the fake titanium scandal, it would not be surprising to see other cracks in the supply chain. Because there is an increased need for airplanes, and an inability to get the necessary parts, bad actors may take advantage as they did with the falsified titanium documents.
Because of the disruption in the supply chain, Boeing may be unable to produce and deliver as many Dreamliner jets as they anticipated. Obviously, this will directly affect their stock price, and not in a good way.
Bottom line: It is essential for fund managers to understand how multinational companies manage their supply chains. If they don’t, supply chain incidents like this may keep popping up, playing havoc with not only consumer safety, but a company’s stock price.