Foundry Sector Profitability: Margins in Free Fall in 2024

2024 proved to be a year of significant challenges for the Italian foundry industry, marked by a significantly deteriorated economic environment compared to the previous year. The balance sheet analysis conducted by the Assofond Research Center on an aggregate sample of 183 companies highlights significantly worsened economic results, dominated by a profound erosion of the foundry sector's operating and overall profitability.

Foundry Sector Profitability at All-Time Lows

Market demand recorded a significant decline, down 11% compared to 2023, exacerbating the loss already recorded the previous year. Larger foundries (-11.2%) and SMEs (-10.8%) experienced similar dynamics. This contraction had a direct impact on the ability to generate profits.

Overall profitability (ROE – Return on Equity) collapsed to 1.6%, the lowest level in the last six years, marking a drop of almost 80% compared to 7.8% in 2023. Profitability from core operations alone (ROI – Return on Investment) was not sufficient to support ROE, also settling at a six-year low of 2.8%. ROI recorded a loss of -58.9% compared to 2023.

Margins under Pressure: The Impact of Fixed Costs on Foundry Cost Management

The heart of the crisis lies in operating profitability, which has been significantly compressed. Operating profit margin (ROS) declined to 2.3%, down 55.0% from the previous year, and is just below return on investment (ROI) (2.8%). Operating profit (ROS) was higher in small and medium-sized foundries (2.7%) than in larger ones (1.9%).

Operating income for foundries declined significantly, down 59.9% from the previous year. Although companies in the sector managed to recover raw material costs, increasing added value to 30.6% of revenues, the impact was clearly evident in EBITDA dynamics. The latter is sharply declining compared to 2023 (-20.7%) and falling to 8.8% of revenues, marking a new all-time low in the last six years.

The loss of margins is primarily attributable to the difficulty in absorbing semi-fixed or fixed costs, such as personnel costs and depreciation. The impact of personnel costs on revenues has increased significantly, reaching 21.8% (+14.1%). This trend highlights how critical cost management in foundries has become in a context of declining demand.

Sector Comparison: Ferrous Metal Foundries in Severe Distress

The analysis by sector shows highly diverse trends in terms of margins and revenues.

Cast iron foundries recorded the greatest decline in revenues, down 20.8% compared to 2023. At the aggregate level, profits were negative (-€16 million), driving ROE to a negative 1.9%. Return on equity (ROS and ROI) were zero (0.0%). Large cast iron foundries were hit hardest, recording a ROE of -3.9% and a negative ROI (-0.3%).

Steel foundries also suffered a sharp decline in revenues (-12.4%). Overall profitability (ROE) halved to 2.6%. A clear size difference is evident in this sector: large companies recorded negative ROE and ROI (-0.6% and -0.7%, respectively), while SMEs maintained stronger operating profitability (ROI of 4.1%).

In the aluminum foundry sector, the decline in revenue was more limited (-5.1%). However, overall profitability (ROE) fell to 3.6%. Although profitability before interest and taxes (ROI of 4.6%) was higher than ROE, the EBITDA to revenue ratio reached a six-year low (10.7%).

Zinc foundries performed significantly better, with a ROS of 9.2% and a ROE of 13.0%. Those producing superalloy castings, despite recording high absolute EBITDA values ​​(33.2%), nevertheless showed negative operating income, with a ROS of -0.5% and a ROE of -2.6%.

Financial situation and balance sheet strength: the picture remains positive, but for how long?

Despite margin compression, foundries have successfully defended their liquidity and maintained a more than solid financial position. Overall financial risk has diminished, with the Debt/Equity (D/E) ratio at 1.05 points, indicating near parity between debt and equity capital. The net financial position (NFP) has consolidated on the back of a credit position (0.59 points) that had existed since the previous year.

Foundries have successfully managed their net working capital, reducing indebtedness to suppliers and, in some sectors such as cast iron, accelerating collections and slowing payments (the average financial surplus is 9.4 days).

However, an alarm signal comes from the increase in financial charges. The cost of debt (ROD) for Italian foundries rose to 1.9%, and financial expenses as a percentage of EBITDA jumped to 12.9% in 2024 (from 4.0% in 2021). This increase is due to higher interbank rates and tight profit margins. The cast iron (19.9%) and superalloy (16.9%) foundry sectors are most exposed to this impact.

The most striking aspect concerns capital strength, which continues to strengthen. The capitalization ratio (a measure of risk capital coverage of total invested capital) reached a new six-year high of 48.7%. SMEs in particular strengthened significantly, reaching 49.2%. This strengthening is partly driven by a general increase in reserves (72% of foundries are making new provisions), but this is not necessarily a positive development: in many cases, these are involuntary provisions to cover losses (80% of foundries have reduced retained earnings).

The steel foundry sector remains the most capitalized in the industry, with a rate of 54.9% (with SMEs reaching a whopping 60.8%). Despite the negative demand environment, which led to a decline in trade receivables (-13.8%), the sector has continued to invest: capital expenditure increased by 1.9% compared to 2023.

In conclusion, with operating margins so crushed by declining revenues and the failure to absorb fixed costs—a phenomenon that has made cast iron the most critical sector with zero ROI—the sector's structural resilience and strong capitalization risk no longer being sufficient to weather adverse economic cycles like the current one. The profitability of the foundry sector and the margins of Italian foundries are under pressure like never before, making systemic intervention on foundry cost management and competitive market conditions urgent.

Source: In Fonderia – Il magazine dell'industria fusoria italiana