Raw Mater­ial and Energy Prices: Exist­en­tial threat to the European Foundry Industry — Call for Bilat­eral Agreements

Prices for raw mater­i­als, energy and logist­ics have soared on a broad front while an increas­ing num­ber of input factors is prone to run out of European stocks within the next weeks. For­ward­ing these unavoid­able cost increases is how­ever not taken for granted.

Key input mater­i­als such as scrap, pig iron, alu­minium, cop­per, coke, alloys and chem­ic­als, as well as wooden pal­lets and mesh boxes, are just some of the mater­i­als that have increased in price by up to 250% over the past 12 months. Latest con­cerns focus on the dra­matic global short­age of mag­nesium, a metal that is pre­dom­in­antly mined in China. European stocks will be exhausted as early as Novem­ber, caus­ing an explo­sion in the mag­nesium price from USD 2 000 to USD 12 000 recently. This is put­ting addi­tional pres­sure on liquid­ity in foundries. Mag­nesium is not only poured in its pure ele­ment but mainly applied as crit­ical alloy for iron and alu­minium applic­a­tions. In other words: It rep­res­ents the baker’s yeast in foundries. These cast­ings are vir­tu­ally needed – though in small quant­it­ies – every­where, from auto­mot­ive and avi­ation, over energy pro­duc­tion, to med­ical devices.

Another ser­i­ous issue is that energy pro­viders have star­ted to ter­min­ate con­tracts of their often long-stand­ing and reli­able cus­tom­ers and rather pay the fine instead of con­tinu­ing deliv­ery. Clos­ing new con­tracts res­ults in sig­ni­fic­antly higher costs for foundries. Par­tic­u­larly prob­lem­atic for the small and medium-sized (SME) foundry land­scape is that these heav­ily increas­ing prices have not been able to be anti­cip­ated within the cal­cu­la­tion scheme, as they were not fore­see­able at all. If that is not yet enough, cus­tom­ers broadly keep on demand­ing solid­ar­ity agree­ments, in other words cost shar­ing des­pite already bur­den­some cost sav­ing expect­a­tions. This must be fur­ther under­stood at the back­ground that the profit mar­gin of foundries often lies between 2–3 percent.

In short: Many foundries face a ser­i­ous sur­vival threat and might even­tu­ally shut down pro­duc­tion, fuel­ling the exist­ing fric­tions of the already dis­tressed European value chain. Since most foundries are deeply embed­ded in a regional con­text, their dis­ap­pear­ance would coamp­lify the already dif­fi­cult employ­ment and eco­nomic situ­ation of these regions hav­ing suffered from industry trans­form­a­tion already for sev­eral decades.

Foundries have so far always been reli­able part­ners in cus­tomer rela­tions. Now cus­tom­ers should be open to bilat­eral dis­cus­sions with their sup­pli­ers in order to take adap­ted meas­ures in this tense situ­ation and a new way of fair­ness. Among oth­ers this includes an adjust­ment of the cal­cu­la­tion to the dynamic raw mater­ial situ­ation, a prompt pay­ment of sup­plier invoices or the intro­duc­tion of advance pay­ments. How­ever, reli­able and reg­u­lar demand reports from cus­tom­ers to sup­pli­ers would at least con­trib­ute to bet­ter plan­ning of the raw mater­i­als to be pro­cured. How­ever, this alone would not calm the price situ­ation. In the long term, we are urged to develop strong bonds along the entire value chain with a large European footprint.

Pre­serving employ­ment and suc­ceed­ing in the pur­suit of the EU Green Deal demands not only gov­ern­mental sup­port but also a mutual under­stand­ing between sup­pli­ers and customers!

Down­load the press release here

CAEF Con­tact:

Fynn-Willem Lohe
phone: +49 211 68 71 — 277
fynn.lohe@caef.eu