Overview of the Italian Foundry Industry
Published with the kind permission of Mr Paolo PONZINI, General Director of ASSOFOND

> 1. The Production Structure
> 2. The production
> 3. Market Evolution.
> 4. Performance Indicators>
> 5. Strong and Weak Points of the Sector

See also >
Presentation of ASSOFOND, the Italian Foundry Association

The Italian Foundry industry is fighting back foreign competition by investing in technlogy and innovation. Despite the competitive pressure from Far East manufacturers as well as cyclical difficulties in some client markets, some sectors of the foundry industry are showing good results and positive trends while others are struggling hard

1 The Production Structure

Over the last twenty years ferrous metal foundry has been subjected to a re-organisation process that has led to a substantial reduction of the production base.
Specifically, the overall number of enterprises dropped between 1980 and 2002 from 694 to the current 281, with a reduction rate of 59% (-413 units).

The re-organisation process was more pronounced in the first decade (between 1980 and 1990), over which period 282 enterprises discontinued their activity.
The data referred to recent years indicate that this trend is accelerating once again, with reference to the cyclical crisis of the sector, which has accentuated the difficult situation experienced by a substantial proportion of the production system.

The main difficulties have affected, so far, enterprises specialised in types of production for which there is no longer any demand on the market or which are covered at lower costs in other countries (ingot moulds, castings for valves, counterweights, etc.), obsolete enterprises or those situated inside urban areas, for which the entrepreneurs did not have the resources required to move them to more suitable industrial areas.
Alongside these problems, which still exist for some production units, there is a loss of the ability to compete against foreign competitors, determined also by the size gap as compared with other European competitors.

Although the average size of ferrous-metal foundries has grown from 58 jobs in 1990 to 74 in 2002, it is still below both the average thresholds and the levels of France (152 jobs), Germany (155 ) and Great Britain (88).
In the field of non-ferrous metals foundries, fragmentation is even greater. Specifically, at the end of 2002 the average size in Italy was 21 jobs per foundry, in France 59 jobs and in Germany 83 jobs.
Again with reference to non-ferrous metal foundries, another significant feature is the difference between foundries operating as independent divisions of vertically integrated enterprises, or "captive foundries", and "pure foundries" that are the only or core production base of an enterprise.

The problems encountered by the former differ from those of the latter, and are caused by their size in terms of production and employment, and by their different types of production. In the foundry divisions of large enterprises or groups, the production is frequently large-scale series production using specialised systems suitable only for that specific type of production, while pure Foundries were forced to specialise in the production of smaller series of castings and to adopt more flexible equipment to cover products for several markets. The great majority of Italian non-ferrous metal foundries (but also of ferrous-metal foundries), consists of foundries of the second type, belonging to the category of small and very small enterprises.

Another peculiarity of the offer structure originates from the geographical location of the production. The manufacturers are concentrated mainly in some areas of Northern Italy, particularly in Lombardy, Emilia Romagna and Veneto, where their customer businesses are based. In this sector too, closeness to customers is a decisive factor for the enterprise's ability to compete.

Within the twenty regions of Italy, there are areas in which the presence of plants for the production of ferrous and non-ferrous castings appears to be more concentrated than in others. The causes of this are originated partly by the fact that the areas with high concentrations of plants are those were many sectors that use castings are situated, first and foremost industries manufacturing means of transport.

It should be kept in mind that the availability of a production technology in a given area, especially if this gives rise to favourable results, induces the establishment of other enterprises, perhaps started up by former employees. If the process is also contributed to by suppliers, development would appear to be even easier. A typical case in the framework of non-ferrous metal foundries is that of the province of Brescia, where there are over 300 non-ferrous metal foundries that use the die-casting technique.
Although the new technology makes contacts easier, several Customers prefer direct and permanent contact with their Suppliers, also with a view to meeting delivery requirements. The closeness of foundries to the industries they work for appears to be a strong point.

2. The production

A comparison with other European countries confirms that in spite of some recovery recorded over the last 20 years, the average production of Italian ferrous-metal enterprises is still lower than that of its main foreign competitors. Italy (almost 5,000 tonns per enterprise) is far behind France and Germany (over 13,000 tonnes per enterprise) although its position is comparable with those of Great Britain and Spain (about 4,500 tonnes per enterprise).
The production data per person highlight that France and Germany differ considerably from the remaining European countries with levels in the region of 80 tonnes/year, and that Italy again occupies an intermediate position, better than those of Spain and Great Britain, which are farther behind.

Care is needed, however, when making these assessments, since a low value may be due to a higher concentration of more complex production types, of high quality. The comparison should be made on the sales figures, but this information is not available for all countries.

3. Market Evolution.

Evolution of the market in latter years has shown significant changes in consumption in the user sectors.

The production of cast-iron castings for industries manufacturing means of transport has been conditioned by the automotive crisis in addition to preferences for non-ferrous alloys. In quantitative terms production has dropped by about 23% since the highest peak reached in 1997 and in 2002 it accounted for 32% of the total production of cast-iron castings.
Supplies to the mechanical industry, on the other hand, reached a new record level precisely in 2002, with 586,290 tonnes, which result confirms the considerations expressed earlier. The mechanical industry is thus the leading customer of Italian cast-iron foundries and absorbs 42% of their production.

The arrival of a new enterprise manufacturing pipes for water mains has led to a recovery for castings for the building industry. Indeed, the increase caused by this new production of pipes has to a great extent been offset by the drops in other components of the market of castings for the building industry and particularly radiators and boilers for heating systems.
Nodular cast-iron for the mechanical and transport industry has to be mentioned, having reached a new record in 2002 (443,840 tonnes), even though the proportion with the total production is still lower than that recorded in the most important European countries.
In the steel castings sector, production in recent years has featured two trends: a drop in the production of castings for valves, in which field Italian foundries had specialised in the early nineties and the growth of supplies to the crushing industry, with a strong presence on foreign markets.

The drop in the demand for castings for valves was determined partly by Italian customer industries which, having become multinational companies, turned for procurement of castings for valves to cheaper markets, without specific reference to the quality level.
The expansion of the production of non-ferrous metal castings is continuing, although the growth rate of the last few years appears to have slowed down by comparison with the past.
This growth has affected aluminium castings in particular and, only in more recent times, magnesium, while the opposite trend characterised bronze castings and those made of other copper alloys which have dropped by 16.6% as compared with 2001, brass -1.3% and zinc -8.2%.

4. Performance Indicators

An analysis of the main economic variables and profitability indicators shows that the field of ferrous-metal foundries has experienced structural difficulties during the last few years.
Specifically, the trend was even more negative not only than the national average for the manufacturing sector but also than sectors featuring similar market characteristics or that are functionally linked to it since they are the outlet sectors of foundry products (means of transport and mechanical instruments).

The trend of economic results in 2001 (more recent data are not available as yet) indicates that, in spite of the presence of a phase in the economic cycle that was not negative affecting some outlet sectors, Italian ferrous-metal foundries still recorded a drop in their turnovers by about 10% over the last 4 years.
This trend can be attributed to two factors: on the one hand, as already pointed out above, foundries are suffering from a process of sector-based competition originating in the first place from the higher demand on the market for alternative products, which are gradually excluding these enterprises from some traditional outlet market segments. On the other hand, there is a tendency towards containing the prices of products, which tends to depress economic results.
On the average, in 2001 corporate performance levels in the foundry sector were far lower than the one of their customers.

The ROI(Return On Investments), ROE (Return On Equity) and ROS (Return Of Sales) are at levels of around 3% as compared with 4% in metallurgy and far higher levels for means of transport and mechanical instruments, thus highlighting the difficulties that foundries are encountering in remunerating the invested capital as required and wished.
Deterioration of profitability can be attributed at least partly to the sharp drop in gross operating margins, that in the period considered fell by over 30%.

5. Strong and Weak Points of the Sector

Traditionally, the foundries sector has played an important part in the Italian production system, since some of the main fields of specialisation of the Italian industrial system - such as the mechanical and automotive industries, household appliances and buildings - are functionally linked to it.
Development of the Foundry Industry, which enabled Italy to occupy significant positions in the European scenario, was facilitated by a series of factors that are still the main strong points of this sector:

- the high level of integration of the foundries system with strategic sectors of our production system. The development of the mechanical industry and other sectors was able to count on the presence of a sector that ensured a constant supply of semi-finished customized products. The strong concentration in some areas of the country of companies belonging to the same production sector enabled a system of relations to become consolidated, and these are still one of the strong points of the Italian industrial system;

- the presence of a highly dynamic segment in this sector, albeit not including a very high number of enterprises, and which in recent years has invested heavily in technological innovation, reaching competitive levels comparable with those of the main European partners.
This segment of enterprises enables our country to maintain a positive trade balance, thanks in particular to European markets (65% of the total exports), where the factors of competition are the quality and innovation of products;

- specialising in several particularly favourable market niches in which our enterprises have reached positions of leadership on international markets.

In spite of the presence of these strength factors, the prospects for development of the system of Italian ferrous-metal foundries are now threatened by the appearance of signs of difficulty, which have been revealed in the worsening of some performance indicators in the sector and meant a crisis for many production facilities.
What is more, trends on the domestic market have been penalised over the last decade by the increasingly visible presence of foreign competitors able to count on labour costs lower than those which Italian manufacturers face.

The pressure exercised by Far East manufacturers has increased considerably in recent times. They pour onto the Italian market products that are basically standard, sold from their catalogues, the prices of which are sometimes extremely low in spite of the higher transport costs.

It is a well-known fact that competition on the part of those countries is based above all on cost advantages (low labour costs plus practically non-existent environmental costs).
It is difficult, objectively, for Italian enterprises to compete from this point of view due to the high level of production costs, which it is not easy to keep down.
The greatest critical factor penalising Italian foundries consists of the cost of power and of scrap metal.

These are problems that affect Italian industry as a whole, but which take on greater importance in sectors such as the foundry sector, in which the cost of raw materials has a decisive impact on the end price of products.
The estimates have highlighted that Italian enterprises are penalised by a cost differential in production inputs of about 10% as compared with the main European competitors.
This situation leads to a loss of the ability to compete on a market that is becoming more and more open and competitive.

Yet another critical factor consists of the increased constraints of an environmental nature. Starting in the nineties, the adoption of new standards for limiting the emissions from industrial facilities led to the need, on the part of Italian foundries to initiate processes of adaptation of their plants, the cost of which has made their products less competitive even on the Italian market.