Foundries teetering on the brink

The domestic foundry sector, reeling under high input costs and low margins, has urged the automobile industry to accept higher casting prices.

The sector has warned that low margins would lead to many small foundries closing down and denting the automobile industry.

The prices of many raw materials, including, pig iron, aluminium, copper, lead, zinc and sponge iron, have shot up dramatically in the last one year.

Base metals prices in the country were moving independently till recently. But, they are now following the trends on the London Metal Exchange (LME). Hence, the impact of higher prices comes faster than that of the lower ones, said industry sources.

"The auto industry is our major client with most of their casting requirements done in the foundries. The auto industry is a strong lobby, enjoying a lot of incentives from the government. However, they have refused to accept higher casting prices despite mounting input prices," said K S Satyanarayana, president, The Institute of Indian Foundrymen.

A similar squeeze on the margins in the past had led to many small foundries closing down by about 10 days. If the trend continues, the past may repeat and lead to a shortage of casting services, hitting the auto sector, warned Satyanarayana.

The Rs 20,000 crore domestic foundry sector, with an output of 6 million tonne and exports of Rs 3,500 crore, is highly fragmented with a majority of the foundries in the unorganised sector. The Indian Institute of Foundrymen, a body representing about 3,300 members, is trying to scale up pressure to protect the interests of the foundries.

The automobile sector is growing by 30 to 32 per cent, with exports rising by 30 per cent. How will it be viable for the foundry sector to grow at a meagre rate of 8 per cent, Satyanarayan asked.

Citing international trends, he pointed out that companies, such as Rio Tinto, revisit the prices every three months. But, in India, there is no price rotation. The impact is felt immediately in case of price declines, but it takes years to impact when prices goes up, Satyanarayana added.

Global automobile manufacturers have now started sourcing their requirements from the Indian foundries.

All medium and large foundries are working at about 80 per cent capacity utilisation. But, small foundries are facing the threat of closure, owing to steep and frequent price increases of raw materials "" especially of pig iron and scrap iron.

The automobile industry's insistence on long-term supply contracts without any escalation clause and shortage of working capital are also playing havoc with the small foundries.