“Foundry and automotive mutually affect each other”
CEO of Iran Tractor Foundry Company:

“Foundry and automotive mutually affect each other”

Due to the depreciation of the rial, the foundry industry, especially cast iron, has become a great venue for production and exports. At the same time, many producers of cast iron parts believe that while lower imports have given them an opportunity to expand their share in the domestic market, other problems such as higher raw materials prices and reduced liquidity have affected producers’ capability, especially in small- and medium-sized companies. Due to the importance of these matters, we have interviewed Abdolrahman Arshadi, CEO of Iran Tractor Foundry Company, a leading producer of cast parts in Iran.

How do you evaluate the global casting industry?

According to global data, about 113 million tonnes of parts were produced in 2018, up 6% year on year. China accounted for 47-50% of global output. About 70% of cast parts were cast iron, with steel and other metals covering the remaining.

Where does Iran stand in terms of production?

Total domestic capacity is about one million tonnes, but actual output is about 500 thousand tonnes. Iran’s output directly depends on the automotive industry. The casting and foundry industry is based on demand, so when automotive output goes up, so does the production of cast parts.

Is it true that the automotive industry is the largest consumer is the largest consumer of cast iron parts?

The automotive industry is definitely the largest consumer of cast iron parts, but there are some differences between Iran’s automotive industry and the global industry. On a global scale, about 30% of cast parts are used in the automotive industry and other industries take up the rest; in Iran, it is actually the other way round. This is mainly due to the technological level and the development of other industries around the world. Other industries in the world such as petroleum are so advanced that they can boost the casting industry.

How has the sluggish output in the automotive industry in Iran affected the production of cast parts?

Given the recession in the automotive industry over the past couple of years, production and demand have also declined. As a result, our output has dropped to a third of what it used to be. When, in the best years, auto output reached two million tonnes in Iran, global output was 100 million units; now Iran’s output accounts for less than 1% of the global output.

How has Iran performed in cast parts exports?

As a matter of fact, there are very few companies capable of exporting; total exports amount to less than 20 thousand tonnes, about 40% of which is cast auto parts from our company. Iran Tractor Foundry Company was recently elected the top exporter, with exports accounting for 30-34% of the company’s revenues.

Many casting companies complain about raw materials availability and prices; do you share their concerns?

Foundries and casting companies have always dealt with these problems. During the production of cars, some scrap is produced that can be used as raw materials for foundries.

As auto output has declined, sourcing scrap has become harder and more costly. Moreover, as steel exports struggle and production declines, the price of scrap goes up and its supply tightens. Scrap prices are already up by a factor of four compared to 1396, leading to lower margins and higher production costs.

Why are the effects of price hikes so much more pronounced in the foundry industry?

The main reason why the foundry industry reacts so quickly to the pressures of price hikes is that raw materials are usually bought in cash, while their products are paid for on credit. So most of these plants are suffering from stagflation.

Major consumers, that is the automotive companies, are the main reason for the financial problems of small parts manufacturers. Automotive companies pre-sell their products, but they postpone paying for their parts for as long as 200 days.

Moreover, as the raw materials and consumables prices for the foundry industry have increased, more liquidity is needed to resupply raw materials; that would have not been a problem if the prices of our products had also increased. But raw materials prices are usually ahead of the prices of our products. We still hope to make up for part of the decline next year as inflation rates and production come to a balance.

How can the government and related organizations help the foundry industry?

The easiest and most convenient option for them is to support major consumers such as the automotive companies so that they can make their payments on time; that way, parts producers will have enough liquidity to keep their operations running. Another idea is to encourage and facilitate exports, because owing to the exchange rate fluctuations, exports will be very profitable.

Iran Tractor Foundry Company, one of the major exporters of parts in Iran, has relied on exports to keep its operations running; otherwise, the sluggish domestic demand and the overdue payments would have led to disasters. The best thing the government can do is to seriously support exports and also find a solution to the overdue payments of government companies to parts producers.

Some participants in the foundry industry believe that the sanctions have helped the industry to grow, while others hold the opinion that they are hurting the industry; where do you stand on that matter?

The sanctions are like a double-edged sword; under specific conditions, they can be exploited to gain some benefits. The depreciation of the rial has supported exports and hurt imports and some countries try to keep their currencies weak against the dollar in order to boost exports; but for that to happen, there are some requirements and conditions.

Firstly, industry participants looking to benefit from the situation should have export capability, and secondly they should have already imported what they need.

Only producers who can secure their raw materials from domestic sources can benefit from the current situation and ramp up exports. The sanctions and the depreciation of the rial have made Iranian products more attractive in the world. But if producers cannot export, they will struggle to keep their operations running and cannot expect profitability.

What is your output volume currently?

Our capacity is based on demand; we can produced up to 80,000 tonnes, but we are not really interested in volumes and would rather take valuable orders so that we can have favorable margins with limited volumes. We compare our output volume with the valuable portfolio of our products and we are currently producing about 50,000 tonnes.

Please tell our readers about the variety of your products.

Iran Tractor Foundry Company is the leading producer in Iran in terms of product variety; beyond that, the company has performed brilliantly in exports and is among the top 10 exporters. We produce all types of parts weighing from 300 gr to 300 kg. All our products have been justified for production; they can be justified with the right volume, profits, and order continuity. About 25% of our output volume is exported, accounting for 30-34% of our profits.

What makes your products more attractive to foreign buyers?

Quality, price, and prompt delivery are the most important advantages of our products. Even 4,000 km away, our company is still the top choice for some consumers. The quality of cast parts made in Iran has always been favorable to buyers; the shorter distance from European countries compared to Chinese and Indian producers has also made these products more attractive. Beyond that, lower prices due to the depreciation of the rial is an opportunity for Iranian producers.

Do you have any plans to start steel casting?

The company has always been known as a producer of cast iron parts and we don’t consider it necessary to start steel casting. We do have the capability to produce cast steel parts, but we only use it for our own internal needs.

What do you think is the biggest problem in the foundry industry?

Liquidity is without a doubt the biggest problem for producers, itself a result of major challenges to production.

Total domestic liquidity is about two quadrillion tomans, but about 70% of it is bank interest and cannot be used to boost production. Rather than supporting production, liquidity is being deposited in banks for 15% interest rates. Every hour, about 49 billion tomans of liquidity is added, but producers are still struggling with liquidity shortage.

How can that problem be solved?

Apparently, upstream organizations should devise a policy to direct liquidity towards production, not bank deposits. This requires a very practical solution; talking will lead nowhere. The policies of successful countries show that the domestic market should follow the rules of supply and demand. Any forced interference will hurt the economy. The result of official pricing can be witnessed in the raw materials market, where trade is done for profits without any actual production. This has led to rent in the market. If there should be any rent in the market, it should be for real producers so that they are encouraged to boost production, eventually creating more jobs and bringing more profits to the country.

How do you see the outlook for the global iron casting industry?

Looking at the industry’s history over the past 50 years, it has always been expanding. Owing to its structural properties, iron has replaced steel; the opposite has never happened. For instance, the crankshaft is a forged steel part, but we have produced it using cast iron and it has now replaced the steel crankshaft. The properties of cast iron cannot be found in any other alternatives and it seems unlikely to have rivals any time soon. So the industry can be expected to continue growing and developing over the coming years without any particular concerns of market stagnation.

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