Record fuel cost, currency fluctuations are forcing the industry to opt for new pricing mechanism.
Indian foundry product exporters have embarked on a new market-driven pricing formula by adding variable components, including energy and alloy surcharge, to the base price for contracts under negotiation. This has been due to record fuel cost and currency fluctuations. Earlier, fixed price contract was the norm.
This is significant as exporters with long-term contracts have incurred huge losses because of soaring crude oil prices and the dollar appreciating 10 per cent in the last one year. The greenback has, however, depreciated marginally in the last fortnight, partly compensating the losses.
Nearly 30-40 large foundries export niche products worth $1 billion mainly to European original equipment manufacturers (OEMs).
"Despite fuel oil not contributing significantly to foundry costs, currency fluctuations have surely hampered the profitability as realisations have declined," said A K Anand, director of Indian Institute of Foundrymen (IIF).
Tiny and medium-sized foundries in the country are facing survival problem as Indian OEMs are not keen on upward revision of contracted prices. While medium-sized foundry can survive for some time, tiny ones are surely facing threat as they lack keep inventory for long. These units have to sell products to survive.
Nearly 4,500 foundries exist in India, of which, 70 per cent are small and medium-size units contributing about 30 per cent of the total foundry output, while the remaining 30 per cent large and technologically upgraded units provide 70 per cent output.
Units with a capacity of 200 tonnes per month are categorised as tiny foundry while large units have a capacity of above 3,000 tonnes per month. There are only 35-40 such large units in the country.
Lack of capital is also a major issue for the sector. "The sector needs big investment for upgrading technology. Tiny units, facing survival threat, will have to shut down or change business," said S K Goel, executive director of Rs 300-crore Star Wire India.
The sector is most likely to see consolidation with smaller units merging among themselves or with larger units, Goel added.
The consolidation has already begun with a number of units shifting to edible oil crushing and other such activities. Gurgaon-based Lenco Iron & Steel Co has already shut down its foundry unit and shifted to crushing mustardseed, groundnut etc.
Further, with long-term contracts being full of uncertainty, the industry is inclined to sell products over the counter.
"Coming months are likely to see more scrap, a valuable input for foundry units, being available to the sector as construction work would remain stagnant.
But consumers are unlikely to get any respite due to high scrap prices globally," said V Mahadevan, president, IIF and MD of Hinduja Foundries.