India’s foundry and forging industries, mostly comprising MSMEs, are facing a crisis as input costs have surged. The production squeeze by these units could result in a tough time for the engineering and automotive sectors in the coming quarters.
While forging companies, especially those in the small and medium segment, are likely to see a 50% drop in production in FY23, the foundry industry is also under stress, with 80 out of 500 units in West Bengal having closed already, according to industry executives.
A hike in commodity prices, especially steel, coupled with a fall in automotive demand is expected to reduce capacity utilisation of the forging industry in FY23. The first quarter is expected to be the most difficult one for most forging companies. The post-pandemic recovery may get pushed back and a revival could now take even two years, industry officials said.
Vikas Bajaj, joint managing director of Microtek Forgings and president of the Association of Indian Forging Industry (AIFI), said the rise in steel prices has been steep. Rising input costs and slowing down of vehicle demand could lead to a fall in capacity utilisation at forging units from the 80-85% pre-pandemic levels to around 50-55%. While steel prices may have been inevitable given the global developments, a more judicious and calibrated approach would have been better for the industry, Bajaj said.
The foundry industry, the key component feeder of metal castings to almost all engineering sectors, has been absorbing the high cost of power — 20% of the manufacturing cost. But the unprecedented rise in the prices of key raw material, including pig iron, refractories, foundry flux and chemicals, has been too hard for the industry to tackle.
The cost push due to this has been between 64% and 237% between January 2021 and April 2022. Non-coking coal prices have gone up 240% to Rs 19,500 per tonne now from the January level; met coke prices have nearly doubled to Rs 54,000 a tonne during the period. Pig iron prices have gone up 63% to Rs 59,000 per tonne too. Then there are other raw materials like ferro silicon, ferro manganese, silico manganese and smelting scraps, whose prices have also gone up steeply. Such cost increases could not be reined by any effort at optimisation, Dinesh Kumar Seksaria, chairman, Indian Foundry Association, and managing director, Govind Steel, said.
Around 95% of India’s foundries are MSMEs and they make value-added metal castings of 12 million tonne per annum. They have combined revenue of $19 billion and exports of $3 billion. In FY22, engineering exports have reached a record $111 billion.
Around 70-80% of the forging industry is dependent on the automotive industry. The sudden slump in the sales of tractors, which consume more forging parts than any other vehicle, has hit the industry. Moreover the country’s two-wheeler segment has not yet recovered.
Steel accounts for 70% of the input costs for the forging industry. Prices of other metals that the industry requires, such a nickel, chromium, molybdenum and titanium, have also been volatile.
Asheet Pasricha, joint managing director of Trinity Engineers, said nickel prices went up from Rs 15,000 a tonne earlier to as high as Rs 100,000 a tonne recently and are now being quoted at around Rs 37,000 per tonne.
The forging industry is sandwiched between the demands of the auto OEMs and steel mills, said Yash Munot, executive director of Varsha Forgings. The industry carries stock of around one month, but in the current situation, maintaining an inventory of 10-15 days is getting tough. A dry spell of a couple of months disrupts cash flow, putting huge pressure on forging units. Around 10% of the SME units had shut shop during the pandemic and there could be more closures this year, Munot said.
OEMs have tried to pass on the cost increase to end consumers, but this has led to dampening of demand, hurting the forging industry further, Pasricha said.
However, there are exceptions in the industry, with companies like Bharat Forge being in a better position to navigate the difficult times due to their higher pricing power, diversified customer base and global footprint. According to industry players, Bharat Forge is not dependent on the automotive segment as it has customers in defence, oil & gas, and infrastructure sectors, where there is higher value addition and better price realisation. Bharat Forge’s export portfolio and a global scale in manufacturing has de-risked their business. The Kalyani Group also has its own steel mill, which is seen as a huge advantage.
With demand not picking up, hike in fuel prices, and the semiconductor shortage, the automotive OEMs have limited room to pass on more hikes, and the forging industry expects a difficult year ahead. Diversifying into non-automotive sectors such as defence, railway and metro rail is an option, but not everyone would be able to make this shift.
The AIFI is asking the government to reduce the 28% GST levied on the industry.
According to the association, the Indian forging industry has an installed capacity of 38.5 lakh MT. Around 80% of the forging units are small and very small units and around 9% are medium size units. The units are clustered in the western region, with around 147 units in Pune, Mumbai, Rajkot and Vadodara. There are 129 units in the northern region in Ludhiana, Faridabad, Ghaziabad and Gurgaon. The south cluster comprising Chennai, Coimbatore, Bengaluru and Hyderabad has 75 companies, while there are 27 forging companies in the east in Kolkata and Jamshedpur.
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