How To Collectively Make Foundries Profitable Business

Introduction

The world dynamics is changing very fast. Very successful Indian companies of yesteryears like Premier Automobiles Limited (makers of Premier Padmini cars), Hindustan Motors (makers of Ambassador cars), Kodak India (makers of photo and X-ray films), Kinetic Engineering Limited (makers of Luna moped), etc. vanished into thin air and now we only have their sweet memory. The main reason for disappearance of these companies was technological obsolescence and practically no investment by their respective managements into technological upgradation. This process of technological obsolescence started slowly and these companies never bothered to have a look at technology upgradation. This resulted in dwindling their sales which resulted in lesser and lesser profit margins, eventually they had to shut the operations as their operations were not economically viable.

Today’s foundries are going through similar turmoil. On one hand the price of raw material such as various scraps, ferro-alloys, pure metal which are used as raw materials in foundries are out of control of average Foundrymen and hence are increasing indiscriminately, the energy costs are increasing globally and it has its impact on Foundrymen in India as well. On the other hand the clients are not ready to increase the prices of finished castings on the contrary they want to reduce the prices annually under the garb of improving the productivity! The result, foundry business is struggling for survival. How to cope with these issues and come up collectively winner is a moot question. Let’s discuss this issue in details to make foundries profitable business as the very survival of the foundry business is at stake.

Cost Break Up Of Foundry Operations:

As part of the exercise, we first collected the financial results of the foundries which are listed on various stock exchanges in India and whose financial figures are available in public domain. We found total 14 such foundries in India¹. The combined net sales figure from main operation of all these 14 foundries in financial year 2017-18 was Rs. 12,188 Crores! Among these foundries are ferrous foundries (Grey Iron, SG Iron, Alloy Steel, etc.), non-ferrous foundries (aluminium) as well as investment castings foundries. While analysing the financial results, we did not consider “other income” as stated in the financial results of these companies as the other income are not from foundry operations. Also we considered only “stand alone results” and not the “consolidated results” as consolidated results could be for non-foundry operations.

When we tried to carry out first level of analysis of these 14 foundries, we got following pie chart giving cost break of their operations (due to the software limitations which we used, 2% loss has been added to the costs, which should not have been the case. This has resulted in lesser percentage of the respective figures, so to overcome this, for major items we also have given the figures in Rs. Crores):

 

Figure 1 – Foundry Operations cost Break-up

(All Figure, except % in Rs. Lakhs)

Sr. No.	Company	Paid up Equity Capital	Total Assets	Net Sales Income	Material Costs	Employee Cost	Depre.	Other Expenses	Finance Cost	Excise Duty	Profit / Loss	Total Costs
1	AIA Engineering	188.41	320,627	209,573	100,035	8,205	6,439	60,262	657	1,543	32,433	177,141
				100%	47.73%	3.92%	3.07%	28.75%	0.31%	0.74%	15.48%	83.79%
2	Mahindra CIE	37,840	429,420	193,630	103,950	24,250	7,590	48,340	990	10,320	-1,810	195,440
				100%	53.68%	12.52%	3.92%	24.97%	0.51%	5.33%	-0.93%	95.61%
3	Alicon Castallo	668.28	74,270	95,295	46,817	13,112	2,990	22,632	2,880	2,432	4,432	90,864
				100%	49.13%	13.76%	3.14%	23.75%	3.02%	2.55%	4.65%	92.80%
4	Electrosteel	3,570	562,182	194,366	95,083	18,881	5,922	57,882	20,232	0	-3,633	197,999
				100%	48.92%	9.71%	3.05%	29.78%	10.41%	0.00%	-1.87%	101.87%
5	Nelcast	1,740	63,675	76,007	34,976	4,615	1,593	27,707	292	1,553	5,271	70,735
				100%	46.02%	6.07%	2.10%	36.45%	0.38%	2.04%	6.94%	91.02%
6	Jayaswal Neco	63,863	676,528	357,767	186,761	19,830	27,300	110,396	65,818	10,027	-62,365	420,132
				100%	52.20%	5.54%	7.63%	30.86%	18.40%	2.80%	-17.43%	114.63%
7	Steelcast	1,012	11,572	23,339	4,230	2,013	1,482	12,577	1,097	215	1,726	21,614
				100%	18.12%	8.63%	6.35%	53.89%	4.70%	0.92%	7.39%	91.68%
8	Invest and Prec	500	13,019	10,553	3,079	816	514	4,784	410	0	950	9,603
				100%	29.17%	7.74%	4.87%	45.33%	3.89%	0.00%	9.01%	90.99%
9	National Fitting	832	4795	6,195	3,333	411	129	1,312	92.71	0	917	5,278
				100%	53.80%	6.63%	2.08%	21.18%	1.50%	0.00%	14.80%	85.20%
10	Simplex Castings	598	29764	22,442	12,867	1,727	1,245	5,008	1,163	249	182	22,259
				100%	57.33%	7.70%	5.55%	22.32%	5.18%	1.11%	0.81%	98.08%
11	Magna Electro	458	8220	9,424	3,199	951	454	3,923	31.56	117	749	8,675
				100%	33.95%	10.09%	4.82%	41.62%	0.33%	1.24%	7.94%	90.82%
12	Nitin Castings	257	7,008	5,946	4,254	644	386	580	70	0	10	5,936
				100%	71.55%	10.84%	6.49%	9.76%	1.19%	0.00%	0.17%	99.83%
13	Bhagwati Auto	288	5,239	9,235	3,945	1,121	211	3,454	94	284	125	9,110
				100%	42.72%	12.13%	2.29%	37.41%	1.02%	3.08%	1.35%	95.57%
14	Carnation Ind	346	,6944	5,011	3,885	1,001	121	621	403	0	-1,019	6,031
				100%	77.52%	19.97%	2.42%	12.39%	8.04%	0.00%	-20.34%	120.34%
	Total	112,161	2,213,263	1,218,784	606,413	97,578	56,376	359,478	94,232	26,740	(22,032)	1,240,816
				100%	49.76%	8.01%	4.63%	29.49%	7.73%	2.19%	-1.81%	99.61%

Table 1:- The data source for above Pie Chart (Based on FY results of 2017-18)

From the above, we can see that:

1. The raw material costs (Rs. 6,064 Crores) are almost 50% (considering the 2% loss) of the net sales figures. So the net value addition by the foundries including their profits (or losses) is about 50%.
2. The other expenses (Rs. 3,595 Crores) shown above which are quite high (@ 30 % of net sales value considering 2% loss). These other expenses include energy costs, stores consumables, tooling costs, etc. and also other manufacturing and marketing expenses.
3. The employee costs (Rs. 976 Crores) which is the third highest cost element is about 8% of the net sales value. This includes employee salary as well as benefits extended to all the employees.
4. Finance cost (Rs. 942 Crores) is 7% of the net sales value. Considering the average interest rates of about 14% per annum, it means that on an average these 14 foundries have a loan of about Rs. 6,730 Crores.
5. Depreciation is 4% (Rs. 564 Crores) of net sales.
6. The total assets of all these 14 foundries put together are Rs. 22,133 Crores, which is almost 1.82 times their net annual sales.

If we consider simultaneously above point no. 4, 5 and 6, then we can safely say that as on 31^st March 2018, the average loan on all the 14 foundries put together is less than the total cost of fixed assets held by them, which is a good sign of solvency for these foundries.

From the above point no. 6, we can also conclude that the foundry business needs huge investments in terms of acquisition of land and building, plant and machinery compared to the net sales derived from these assets. Considering this high barrier, if a new foundry comes into the business, it would not have economically viable operations from day 1 and may soon become defunct. So we have huge scope to make foundries profitable business. Whereas the foundries which are currently in the business are somehow pulling on only because they acquired most of their assets when the casting business was making decent profits and they are piggy-backing on their past performance.

Raw Material Price Change in FY 2017-18

To have a look at the current foundry business from another angle, we also collected the data circulated by IIF² in its weekly bulletin to its members for 5 major raw materials (Pig Iron, Melting Steel Scrap, CRCA Scrap, Aluminium and Copper Ingots). This data is collected from 23^rd June 2017 till 30^th March 2018 and based on it, we made charts which are reproduced below.

Figure 2 – Chart showing price rise in 3 main raw materials over one year

Figure 3 – Chart showing movement of Aluminum Ingot price movement

Figure 4 – Chart showing Copper Ingot Price Movement

Notes:–

1. We could have collected data from other sources as well, but they were not very trustworthy as IIF’s own circulated data.
2. The data from 1^st April 2017 till 23-Jun-2017 was unavailable to us.
3. The above graphs are not continuous and few “gaps” can be seen, the reason being we could not locate the IIF data circulation emails for those dates.

As can be seen from the above data, the raw material prices of 5 basic raw materials which are used in almost all the foundries have increased as follows:

Sr. No.	Raw Material	Price Rise from 23-Jun-17 to 30-Mar-18	Pro-rated annual price rise for 2017-18	% Price Spread from 23-Jun-17 to 30-Mar-18
1.	Pig Iron	14.52 %	18.92 %	23.37 %
2.	Melting Steel Scrap	16.98 %	22.14 %	32.74 %
3.	CRCA Scrap	6.67 %	8.69 %	14.93 %
4.	Aluminium Ingots	4.08%	5.32%	17.08 %
5.	Copper Ingots	20.40%	26.59%	22.00 %

Table 2:- Annual Price increase in different raw materials

Note:-

1. For the above raw materials, even if individual foundry has it’s own negotiated prices which could be lower / higher than the above mentioned price, they would be facings similar trends in price increase and percentage spikes. So the above data can be applicable for them as well as we are considering the trend and spikes pattern
2. Percentage Price spread is arrived at by taking difference in maximum and minimum prices and dividing this difference by the average of all the prices for that raw material. This is to consider the “spikes” in prices even though the average trend is straight line.

So from the above table, we can say that:

1. Compared to the annual price rise, the spread of price (the different between maximum price and minimum price) is quite high and hence the percentage of price spread is much higher than the percentage of price rise.
2. The average price increase in the major raw material costs is about say 15% per annum. This average can vary from foundry to foundry depending upon their usage of various raw materials used by them to produce the finished castings.
3. Even if the clients agree to give the annual price rise in a year, the Foundrymen have to shell out their own money to take of the price variations in the raw material costs / spread throughout the year.

If we correlate the Figure 1 (first pie chart) having about 50% raw material costs and then average annual rise of 15% in raw material costs, then we would be getting a figure of 7.5% cost increase compared to the net sales value of the castings. (50 % x 15% = 7.5%).

The annual inflation rate based WPI Index³ in last financial year (as per Office Of The Economic Adviser, Ministry Of Commerce & Industry, Government Of India) was 2.47%. This overall increase in WPI increased the other expenses (29% x 2.47% = 0.72%)

The CPI inflation rate⁴ was 4.28%. This would have impact on the employee cost. So together it’s overall impact compared to the net sales figure would be (8% X 4.28% =  0.34%).

If we combine all the above 3 major price rise factors in 2017-18, then their total would be 8.56%. While calculating these figures, we have not considered the increase in the interest rates, etc.

So 8.56% should be the minimum price increase any foundry customer on an average should give to the foundries. I am sure that during / after the last year, only very few liberal foundry customers could have given 8.56% or above price rise to the Foundrymen. I think none of the clients would have considered this spread or fluctuations in the prices or ‘spikes’ in the prices and the Foundrymen absorbed these fluctuations themselves without passing the price variations due to these ‘spikes’ or ‘spread’.

If we do not get the price increase it means that we have to absorb that input cost rise into our profit margins and slowly we as a complete industry are turning into a loss making industry. There could be few foundries who would be making profits but if you see the overall picture, we in the foundry business are making losses.

How to reduce the costs and increase the profit

From the above discussions, the fellow Foundrymen would have understood the gravity of the situation and our unenviable position! We are at the position wherein on one side we have a valley of slow extinction and on the other side we have a deep well of stopping the business immediately as it a non-profitable venture and we have to use our ingenuity to cross this valley (not the well) and come out as a winner.

From the above, we saw that the major element which impacts the cost of the castings is the raw material (about 50% cost is that of raw materials). So if we save say 10% of the raw material cost, then it’s overall impact would be 5% (10% of 50% = 5%) whereas if we consider any other cost items as shown in figure 1, then we may not get cost savings in similar proportions. The more we save in the raw material costs, the smoother we make the raw material price curve (by removing the spread), the more beneficial it would be for all the Foundrymen.

The question is how to control the raw material costs. Let’s discuss this point. For the simplicity, let us categorise the points which are in the control of individual Foundrymen and which are not.

Points which are under control of Individual Foundrymen:

1. Find out more efficient way of making the charge
2. Find out alternative materials

Points which are not under the control of Individual Foundrymen but IIF collectively can find a solution:

1. Reduce the spread in the raw material prices
2. Reduce the raw material prices by collective bargaining

Let’s discuss the points which can be controlled by individual Foundrymen first.

Find out more efficient way of making the charge

Almost all the foundries have their recipe fixed based on certain parameters and those parameters are entered in MS Excel sheet. This Excel sheet has been designed by some experts who worked in that specific foundry for many years and put their collective experience in those MS Excel sheets. These Excel sheets are specific for that foundry and they continue using these excel sheets for ages with or without any modifications (some foundries still use manual page and pencil method for calculations). Based on these fixed recipes these foundries work. So naturally if one raw material price increases, they input that cost into the MS Excel sheet and based on the Excel sheet results, they arrive at some charge mix, which is more or less fixed recipe. When I am saying “Fixed” recipe, I mean to say the number of raw materials used in this recipe (which are fixed) and the range percentage for usage of these various raw materials is also fixed. This does not change with respect change variations in raw material prices or shortage of raw materials. The raw material recipe changes in such fixed recipe are changing of percentages of various raw materials within the specified min-max range of the raw materials specified.

We also tried to use a software⁵ which considers a various constraints imposed by the Foundrymen in such a way that we get an optimal solution for the given set of constraints. We tried to model our issues in this software and tried to make side-by-side comparison, to see if we can get any benefits if we think out of the box and adopt pragmatic ways.

Suppose we want to make 260 grade grey iron. Following is typical chemistry of this finished casting:

Elements ->		C	Si	Mn	Cr	P	S	Fe
Initial Chemistry		0.000%	0.000%	0.000%	0.000%	0.000%	0.000%	0.000%
Final Chemistry	MIN	3.200%	1.750%	0.700%	0.300%	0.000%	0.000%	94.050%
	MAX	3.300%	1.950%	0.800%	0.350%	0.015%	0.080%	93.505%

Table 3 :– Typical chemistry of 260 grade grey iron

MATERIAL	% Recovery	Min %	Max %	Pur. Price on 5-Jan-2018	Fixed Recipe		Software*		Difference
					Quantity	Cost	Quantity	Cost	Amount	Cost
Pig Iron ( Steel Grade)	98%	20	30	32.00	250	8000	320	10,226	70	2,226
CRCA Scrap	95%	0	10	28.50	50	1425	249	7,099	199	5,674
M.S. Scrap	98%	20	30	29.00	250	7250	0	0	-250	-7,250
Churi (Turning) CI	70%	10	20	31.00	150	4,650		0	-150	-4,650
R. R. (C. I.)	98%	20	40	31.00	300	9,300	389	12,056	89	2,756
Ferro Silicon	100%			110.00	5	550	3	288	-2	-262
Fe-Mn	100%			62.00	0	0	3	162	3	162
Fe-Cr	100%			95.00	0	0	3	271	3	271
Fe Si Mg	For Mg, 45%			165.00	0	0		0	0	0
Graphite Granules	67%			64.00	9	576	7	423	-2	-153
Total		70	130		1,014	31,751	972	30,525	-42	-1,226

Table 4: – “Fixed” recipe for making 260 grade Grey Iron.

Date	Charge Metal Qty in Kgs	Fixed Recipe	Software*	Cost Savings	% Savings
05-Jan-2018	943.08	31,751	30,525	1,225.78	3.86%
02-Feb-2018	943.08	32,526	31,291	1,234.52	3.80%
02-Mar-2018	943.08	32,901	31,699	1,201.76	3.65%
06-Apr-2018	943.08	33,201	31,982	1,219.18	3.67%
04-May-2018	943.08	33,126	31,754	1,372.02	4.14%
08-Jun-2018	943.08	33,351	31,956	1,394.62	4.18%
TOTAL		196,856	189,208.13	7,647.87	3.89%
Average Savings in Rs. Per Kg				1.35

Table 4: – “Fixed” recipe for making 260 grade Grey Iron On Monthly basis 6 months.

Note:-

1. * – Quantity and Material found out using some off-the-shelf program⁵ available in the market. The program was given ‘free hand’ to certain extent to choose particular combination.
2. The software considered the recovery of individual raw material and hence even though we see that the raw material quantity chosen by the software is less, the molten bath weight of the “Fixed Recipe” and “Software” recipe is equal.

Instead suppose, we use some mechanism, wherein we consider:

1. Latest / Average purchase price of each raw material. If the specific heat of each raw material is different, then considering this specific heat we can add the energy costs for each raw material into the above latest / average price to arrive at the effective rate of each raw material including the energy consumption cost.
2. Physical availability / stock of each raw material
3. Recovery / Melting loss of each raw material or each element in the raw materials (separate melting losses for say carbon, ferrous, etc. say in pig iron or separate melting losses for Ferrous, Silicon and Magnesium in FeSiMg)
4. Required output chemistry range
5. Required various formulae range of the finished castings such as:
   1. Minimum and Maximum Carbon Equivalent
   2. Jominy Number,
   3. DI Value, etc.

Then it would be a very complex program, but it may lead us to combination of various raw materials which can meet all the above criteria and also has the least cost. Such programs are readily available in the market. Rather than going into the technicality of the software program, let us understand this concept in more details.

The above recipe mentioned in the Table 4, would not drastically change over a period irrespective of change in prices of different raw materials, their availability, ‘spikes in prices’, etc. But we already have a program, which cover all the above 5 points, then this program would change the combination of various available raw materials to meet the applicable output requirements such as carbon equivalent, Jominy number, min / max limits of individual element in the chemistry at the least possible prices. While making this calculations, we can consider the variations in the raw material chemistry (we know that the scraps do not have consistent chemistry). By using the program, we can see average cost savings of about 3.89%, which could not have been possible otherwise. This 3.89% cost savings can add to our profit margins and we Foundrymen can get better returns of our investments.

Find out alternative materials

In India, there is no correlation between the prices of raw materials (read scrap) and the chemistry of those raw materials and that is the reason, we saw the above chart in Figure 2 moving irrationally. That is the reason Melting Scrap which contains many impurities is sometimes coming equal to that of the CRCA scrap. To beat such kind of issues, if we think further out of the box, then to further reduce the costs, we can start searching in the market about the costs of different possible raw materials, their recovery rates, their specific heats, their chemistry, etc. and from all those raw materials select the one which can give us least cost charge. This can also save us costs compared to us using only same set of raw materials as per the above fixed raw materials recipes. In the above example, since Pig Iron and CRCA scrap price are increasing at higher rates (Figure 2) than MS Scrap, we may think of using MS Scrap. Further to this, if we think that DRI is cheaper and viable option, then we can take couple of sample heats using DRI and may be finalize on adding certain percentage of DRI which could be cheaper than say Pig Iron and CRCA scrap.

So if we change our mind set and our style of operations, we can definitely reduce the costs of raw materials by finding alternate raw materials, alternate sources of raw materials. If we do not succeed in reducing the charge costs, at least we can keep them same and beat the inflation and improve upon our profit margins. Since there was no credible price inputs for the same period for DRI or some other equivalent raw materials, the modelling of this option has not been carried out.

Other Avenues to Improve Profit Margins

The way raw material suppliers / scrap dealers have formed an association, IIF can take lead and start negotiating prices of scrap on all India / Regional / City levels based on the consumption patterns in those areas. Also IIF can develop formula for increasing the costs of the finished goods based on the price rise in the raw material costs. But since these are all India initiatives and need very deep thinking at all India level, they are not discussed in detail in this article.

Conclusion:

In the developing economy like Indian Economy to create demand, inflation would always be there. Also there would be global demand supply relationships and those relationships may impact us locally. There would be local elements such as local scrap dealers which would not be working in transparent manner with their clients or Foundrymen. To overcome all these odds, we have to think out of the box and come up with pragmatic ways, then we not only beat the inflation, but reduce the charge costs and increase our profit margins or getting better returns of the capital deployed. Also the above financial results were for very big foundries in size, for medium and smaller foundries the raw material costs would be still higher and any change in it would impact them very severely.

References:

1. Websites https://www.nseindia.com/, https://www.bseindia.com/, https://www.moneycontrol.com/, https://economictimes.indiatimes.com/ , etc. to get the financial results of top 14 foundries in India
2. Foundry News Bulletin published weekly by the Delhi office of “The Institute Of Indian Foundrymen” to get the raw material prices
3. http://eaindustry.nic.in/ to get the data on WPI
4. http://www.mospi.gov.in/ to get the data on CPI
5. We used AMV Soluciones’ ALEA Linear Programming based charge management software to model the charge, charge cost, etc.

About Author:

C. S. Joshi – B. E. (Mech.), P. G. D. S. T., M. I. E., Chartered Engineer, PMP