Foundry industry melting down as steep iron ore prices take a toll

The Indian foundry industry is not able to utilise increased order enquiries due to a 30-40 per cent rise in the cost of iron ore in the last few months. This comes at a time when the industry is trying to recover from the effects of  demonetisation and the Goods and Services Tax.
 
India’s foundry industry is the third largest in the world with a production capacity of 10 million tonnes in 2015-16 after China (40 million tonnes) and the US (11 million tonnes). It caters to the automobile, railway, machine tools, defence, aerospace and electrical industries.
 
Brijesh Dudhagara, Secretary, Rajkot Engineering Association, said suppliers and miners were raising iron ore prices every fortnight. Six months ago, the price of iron ore was ~22 a kg and today it is ~32 a kg. Prices are expected to rise further. Rajkot is a hub for foundries.

 

Dudhagara said most contracts were signed six months ago and customers were not ready for the revisions. “We are not able to understand why prices are going up so sharply since iron ore demand is dropping in the domestic market,” he said. He claimed production was down 30-40 per cent and if the trend continued for eight months, at least half the units would shut down.
 
Almost 70 per cent of foundry production catered to the automobile industry and it was expected that the automobile manufacturers would pass on the increase in raw material costs to customers, said Nithyanandan Devaraaj, honorary secretary of the Institute of Indian Foundrymen.

 
In industries like automobiles, where foundries have a margin of 7-8 per cent, passing over the increase in cost is the only option available.
 
In the space of a year, prices of other raw materials have risen owing to tightened environment laws in China affecting production there. Coal is another major raw material for foundries.           
 
The foundry industry is around $16-17 billion in size with 6,500-7,000 units across the country. Almost 70 per cent of the production is from the top 30 per cent of the units. Production is expected to be 11 million tonnes by the end of 2017-18.

 
Sajjan Jindal, Chairman and Managing Director, JSW Group, could not be reached for comments, but he recently tweeted the recent increase in iron ore prices by NMDC was forcing steel companies to pass on the increased cost of production. Higher prices of other raw materials like coal, refractory and electrodes are leaving steel makers with no option.
 
An executive with another steel company said big steel makers like the JSW Group could pass on the increase to customers, but smaller firms could not. He added the price increases were happening at a time when most steel companies were facing a working capital squeeze.