Market Analysis Casting Production 2025: Will the Recovery be Sustainable?

After the Corona pandemic shook the global economy, the metal industry is trying to recover. But can European foundries keep up with the strong competition from China and the USA? This article is a forecast on the development of the foundry industry up to 2025.

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Please note: This article was created in December 2020. For this reason, some assumptions and forecasts may already lie in the past.

The year 2020 will see the sharpest decline in global economic output to date since the end of the Second World War. Whereas the original outlook for 2020 had anticipated a reasonably normal increase in world trade and global gross domestic product (GDP), the outbreak of the COVID-19 pandemic in China at the beginning of the year had the opposite effect.

Dr. Heinz-Jürgen Büchner, IKB Deutsche Industriebank AG reviews global casting production and forecasts the development of the foundry industry until 2025.

Although China was the first to implement a lockdown, it will also be the only country among the leading economies that will still achieve a small increase in GDP. China reacted immediately to the outbreak of the pandemic with a locally strict shutdown, in some cases of entire regions. This affected not only the automotive industry and its suppliers, but also to a considerable extent the casting and metal industries due to disruptions in the logistics chains. However, there was also a rapid recovery of the economy, so that a so-called "V-shaped course" of GDP is expected here.

Within the EU, the slump in Italy, Spain and France is more severe than in Germany. But in Germany, too, there are only signs of a slow recovery for the time being. Although the high number of short-time workers is an important instrument for securing employment, it also means a significant loss of purchasing power for private households. This has a correspondingly negative impact on private consumption. Overall, the economic environment in the EU is expected to follow a rather "U-shaped course" which will last well into the second half of 2021.

The recovery in Europe in 2021 will be even weaker if the UK leaves the EU without an agreement. From October 2020, the sharp rise in infection figures will also weigh on a number of countries, which is likely to dampen an economic recovery in the fourth quarter of 2020. In the USA, no major lockdown has yet been announced. However, the renewed sharp rise in infection rates means that at best a weak recovery will be possible in the fourth quarter of 2020. The decisive factor will be how the new government responds to the challenges posed by the pandemic and whether there will be a stronger orientation towards the most important global trading partners in the future.

The Automotive Industry is a Burden on Casting Production

In the years between 2013 and 2017, global automotive production expanded strongly; in the two subsequent years 2018 and 2019, however, it fell again. The year 2020 is now dominated by the coronavirus crisis; production is only expected to reach just under 72 million light vehicles (LV) at best, which represents a global slump of around 20 %. Europe and North America have been hit hardest; in China, on the other hand, there have been positive sales reports again since April. No complete catch-up effect is seen for 2021; IKB expects an increase to around 80 million LV worldwide.

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The catch-up process is taking a relatively long time: The production level of 2019 will not be exceeded until 2024, and that of 2018 is not likely to be reached until 2026 at the earliest. This means that this time the road out of the crisis in the automotive industry will be much more protracted than in the economic crisis of 1993 or the financial crisis of 2007/09. The production of medium & heavy vehicles will also record a major slump in 2020: global production of commercial vehicles will collapse by around a quarter. By 2025, the pre-crisis level will not be reached again either.

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However, while Chinese car production is already recovering, the commercial vehicle segment in China is continuing to decline. Towards the end of the period under review, production in China will be at around the same level as in 2016. However, there has also been considerable modernization in the Chinese market in recent years, e.g. of the truck fleet. By contrast, the recovery process in Europe is taking place much faster, and the 2019 level could be reached as early as 2023. The decline in global car and commercial vehicle production is, however, weighing on global castings production in the current year. Slumps in the main customer industry for castings can only be compensated for with great difficulty by other customer industries, especially as production losses are also occurring there.

Mechanical Engineering in Rough Waters

Global demand for engineering products is not expected to pick up slowly until 2021. In the current economic environment with capacity underutilization, companies are naturally holding back on investment. Sales in China will be the first to recover after the decline in the current year, but here too the trade conflict with the USA, which has not yet been resolved, is dampening the willingness to invest. The trade conflicts between the USA and partners including Germany and the EU are also having a negative impact on international demand for engineering products.

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Machinery production is being impacted primarily by lower demand from the auto industry and the geopolitical disputes. The collapse in exports by many other customer sectors and the significant drop in capacity utilization, particularly in the USA and important emerging countries, are slowing investment in new machinery and equipment not only in Germany. In 2019, total construction output in Europe grew by 2.9 %, driven mainly by new construction projects. A significant decline in growth is forecast for 2020 due to the weakening economy. As a result of the shutdown, a number of construction sites in Spain, France and Italy were idle for longer, leading to delays in completion and in some cases having knock-on effects into 2021.

Despite significant declines in growth in 2020 due to the coronavirus pandemic, the construction industry is expected to recover in 2021 and 2022. But the growth rates will be lower than before the pandemic. Growth in residential and commercial construction is expected to fall by 8 % in Western Europe in 2020, but to rise again by around 3 % to 5 % p.a. over the next two years. The expected decline in Eastern Europe - but also in Germany - is significantly lower. However, the implementation of the infrastructure programs announced by the EU and many member states will also be decisive for the recovery of the European construction industry.

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Casting Production Slumps in 2020

Between 2016 and 2018, global production of iron and steel castings increased by 10 % to 90.2 million t. China played a major role in this, producing 41.2 million tons of good cast iron in 2018. By way of comparison, in 2000 the figure was just 9.9 million t, so production has quadrupled since the start of the millennium. China is also likely to experience a setback in production in 2020.

However, IKB still expects output of at least 35 million t, which could be much higher if the infrastructure investments decided upon are implemented quickly. Worldwide, they assume production of around 76 million t of iron castings. This represents a drop in production of around 16 % compared with 2018. The decline is therefore somewhat smaller compared with overall light vehicle production, as other customer industries - such as construction-related casting applications - have been much more stable. The sharpest decline in 2020 will be in Western Europe, where we expect production to fall by up to a quarter. This is where the longest lockdowns occurred, and the recovery of the automotive industry also got off to a sluggish start. By contrast, production in NAFTA, Eastern Europe and the rest of the world will fall by only 14 to 15 % in each case.

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The decline in iron, steel and malleable cast iron production varies greatly across Europe. We see the sharpest drop in cast iron output in Italy. The focus of the first pandemic wave hit the industrial heart of Italy, with the regions of Lombardy, Piedmont and Veneto, particularly hard. This is not only home to the automotive industry, mechanical engineering and large parts of the metal processing sector, but also to many foundries with an international reputation and at least Europe-wide supply chains.

However, German foundries were also suffering a significant drop in sales in 2020. In addition to lower call-offs from the automotive industry, the temporary disruptions in the supply chain of other industries also caused a dampening of demand. Eastern European foundries are coming through the crisis somewhat better due to pent-up demand, particularly in Russia and Ukraine, but also due to weaker lockdown measures - even in Turkey these have largely failed to materialize.

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Overall, however, we see a recovery process in the production of iron castings in Europe in 2021 and 2022. Nevertheless, the pre-crisis level will only be reached for a short time at best. Between 2022 and 2025, the tonnage produced is expected to decline again. One of the main reasons for this is the trend towards lightweight design and the further advance of e-mobility in passenger car production. If a classic combustion engine including peripherals is replaced by a complete battery, the total weight of the light vehicle increases. This even applies to a battery housing made of cast aluminum. However, weight must then be removed from the vehicle in other areas. This can be done in the area of structural components, for example, but also in other cast components.

The effect of making existing castings lighter - whether engine block, oil sump or other castings - alone will result in significant tonnages being lost over the next five years. Added to this is the material substitution by aluminum for a number of parts. The fact that castings production in Spain remains comparatively stable in this forecast is partly due to wind turbine castings. The expansion of offshore wind power generation desired as a result of corresponding regulations is benefiting the foundries there. The Eastern European foundries are benefiting from the need to invest in infrastructure in Russia and Ukraine, among other things, and also from good growth prospects in Turkey.

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IKB also expects to see an increased relocation of castings production from Western Europe to Eastern Europe. This is despite the fact that labor costs are also rising in many Eastern European countries. At the same time, post-processing in particular can be carried out much more cost-effectively there. In addition, proximity to OEMs who are expanding production capacities there is often a decisive location factor. In terms of iron castings, we see further relative market share gains for nodular graphite cast iron and vermicular graphite cast iron at the expense of gray iron.

Recovery Potential for Aluminum Castings

Global production of aluminum castings will also suffer a setback in the current year: At 16.8 million t, total production is likely to be a good 10 % lower than in 2018. China had set another production record in 2018 with 7.2 million t. Compared to 2000, this was nine times the tonnage at that time. For 2020, we expect Chinese aluminum castings production to decline only slightly to around 7 million tpy. The declines in the NAFTA region, Western Europe and the rest of Asia will each be between 15 % and 18 %.

The lower castings output in the rest of Asia is mainly due to falling production in India and declines in Japan and South Korea. The latter two countries will lose production capacity to China in the longer term. In addition, countries such as Vietnam and Indonesia will have to be given greater attention in the medium term. Here, new capacities are being built up. By contrast, IKB forecasts a drop in production of only around 10 % for Eastern Europe. In particular, the construction of new sites by international foundry groups will have a positive impact on tonnage produced. In terms of the recovery process, IKB sees a new production record in 2022. However, this assumes that there are no renewed major production disruptions in the global auto industry and mechanical engineering in 2021 and 2022.

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China is expected to increase its annual aluminum casting production toward 8 million t. However, substitution successes can also be expected in Western Europe and NAFTA, both at the expense of other materials and other production technologies. The structural components segment in particular still offers major opportunities. Tesla, for example, wants to manufacture complete large parts for its e-vehicles using aluminum casting and has invested accordingly in new casting machines. For example, the rear floor panel of its new Model Y is to be made from just four components instead of 70. In a further step, this floor panel will then be made entirely from one casting.

Other OEMs are considering similar projects. However, this will also require casting machines with clamping forces in the region of 6,000 t. Within Western Europe, Germany will be able to maintain its position as the leading aluminum castings producer. Italy is also expected to show a more rapid recovery. Eastern Europe including Turkey will show the strongest overall growth. In addition to Slovakia, Hungary and Romania, some smaller countries such as Croatia are also expected to improve. Turkey has so far benefited from high foreign investment, but has recently suffered a massive loss of reputation - due to interventions in the independence of the central bank combined with a sharp fall in the exchange rate and political irritations.

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Industry Ahead of Consolidation

The production slump in 2020 will not least accelerate the consolidation process. In addition to some insolvencies - which will not always be accompanied by capacity reductions - there will be an increase in takeovers and joint ventures. Many smaller groups of companies will no longer be able to cope alone with the future investment requirements, for example in aluminum casting. However, larger corporate units also improve the negotiating position vis-à-vis the usually much larger customer groups.

In the wake of the COVID-19 pandemic, a stronger sense of proportion is called for. Additional savings would bring many foundries to the edge of their existence. The German automotive industry has so far benefited from the technological capabilities and development expertise of its casting partners. This must be preserved.

* Dr. Heinz-Jürgen Büchner, IKB Deutsche Industriebank AG, is Managing Director Industrials & Automotive, responsible for the metals sector and for the bank's commodity analyses.

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