Intercast partners for growth: as a partnership of U.S. and Brazilian casting groups, Intercast is expanding its reach from water works components to the global medium and heavy truck, construction and agriculture markets through in-house engineering and strategic alliances.

The intensity of global competition in the metalcasting industry depends upon currency exchange rates, labor costs, government regulation costs, casting quality achieved and the service value a casting supplier can provide. The importance a casting buyer places on any specific factor often relates specifically to how that factor affects the buying firm's bottom line--price.

But whether your metalcasting plant is in the U.S., China, Europe, India or Brazil, the reality is that competition can't be based just on the bottom line. Rarely does a price exist that someone across the street or across the globe isn't willing to undercut to gain the work.

Intercast knows its place in the global casting market. Established in Itauna, Brazil (60 km west of Belo Horizonte; located in the heart of Brazil's iron ore mining region) in 1997 by the Brazilian firm CMM Participacoes and Arkansas-based RKC Properties, Intercast knows that its country's currency value, raw material availability and low-cost labor are the main reasons why U.S. and European casting buyers first become interested in its capabilities. But Intercast also knows that currency values rise and fall, and its future success is tied as much to casting quality and its level of service as it is to global economics.

"We can't just play the price game at Intercast," said the cofounder of Intercast and RKC President Ron Crawford (who also serves as president of Southland Metals Inc., a casting supply firm based in Maumelle, Ark.). "Our customers demand quality, service and added value to our cast components. We are competing against plants in the U.S., Mexico, Europe and China, and we have to deliver quality castings, on-time to meet that competition."

Three-Legged Stool

In 1987, Crawford was looking to develop a global source for casting supply to assist Southland Metals' OEM customers with global sourcing. According to Crawford, his OEM customers were requesting his help and would find the supply with or without him.

CMM Participacoes had been developed by its president, Cassio Machado, to provide technical and logistical support to Brazilian foundries as well as to Southland Metals and its customers. By 1997, Crawford and Machado realized that to expand their business it was essential to develop a greenfield gray and ductile iron casting facility.

"Our belief was that we could merge the two cultures and provide quality castings, on-time delivery and value-added services to our global customers," said Machado. "With my ability to manage a foundry and Ron Crawford's marketing background, the dream came to life with the development of Intercast."

Initially pouring gray iron (today both gray and ductile iron are poured), the plant produced fully-machined castings for pianos for Baldwin Piano and Co. The location in Itauna provided the plant close access to pig iron as well as an educated labor base (as one of the world's leading metalcasting schools rests 20 minutes away).

While the initial casting production and customer base helped the plant find its legs, the plan always was to expand capabilities into more complex components. During the last eight years, the firm has added technology, 2000 metric tons/month of capacity and a third partner in order to expand its product base. The new partner--American Cast Iron Pipe Co. (ACIPCO), Birmingham, Alabama--is the third leg of Intercast's stool.

The addition of ACIPCO, one of the global leaders in the waterworks industry, was key to Intercast's strategic plan for growth. Brazil presents obstacles to firms looking to secure capital and invest in their manufacturing facilities, including high interest rates (15-20%) on loans. As a result, the most cost-efficient method to secure investment capital is from developing long-term supply alliances with foreign partners.

"ACIPCO was searching for a financially stable, long-term supply answer for its waterworks components, and Intercast needed working capital to expand its capabilities with an assurance of sales for production," said Crawford. "Because of the long-term value to both groups, ACIPCO became an equity partner in January 2004."

Investment in Production

In the last eight years, Intercast has invested $20 million (gained from partnerships and a reinvestment of all profits) into the facility to upgrade production. Included in this investment were upgrades to the coreroom, the addition of a new molding line and increased machining capabilities specific to the pattern shop.

A tour of the metalcasting facility begins with its pattern shop. In 2004, Intercast added CNC machining centers to advance its in-house patternmaking capabilities. Using design and manufacturing software, the firm assists its customers with machined metal pattern and corebox development.

"We want to have control over the entire manufacturing process from the pattern development to the delivery of the finished casting to ensure the quality our customers need," said Crawford. "We must be able to react quickly and build patterns for geometrically complex castings. Many global competitors and customers focus on inexpensive tooling, but the result can be poor quality castings if there isn't control. We eliminate that potential."

The facility's core room consists of ten coldbox machines (ranging in core weight from 10-120 kg) and two shell machines (producing cores up to 5 kg). Intercast rebuilt its latest (and largest) coldbox core machine, including installing PLCs, as a means to ensure the machine met its production expectations.

The melt department, which started with two 1.6-ton induction furnaces in 1997, has six today with the addition of four eight-ton furnaces. Intercast pours 90% ductile iron and 10% gray, with inoculation being performed in ladle.

When the plant was first built, molding capacity was limited to a manual cope and drag green sand line to produce piano plates. Within the first few years of production, a 24 x 20 x 8.5 in. semi-automatic tight flask molding line producing 80 molds/hr. for castings up to 75 lbs was added. Within the last two years, Intercast has installed and ramped up a new cope and drag line with a flask size of 33 x 24 x 13 in. (120 molds/hr.) for iron components up to 220 lbs. Before installing the new line, Intercast converted it from a pneumatic system to hydraulic, installed new PLCs, and engineered it to fit its production cycle. In addition, its mold handling system was designed and built in-house.

The cleaning and finishing operation at Intercast is the area of the facility that is now receiving the most attention. Today, labor is the answer as castings are processed one by one as they come off of shakeout. Similar to their U.S. counterparts, medium-volume production levels make automation a tough sell, especially with the lower labor rates and the high cost of capital in Brazil.

Both Crawford and Machado state that the plant's capabilities (beyond shakeout) have come a long way, and the reputation of its ownership group is helping the firm make a name for itself in the global landscape. The question is how can the firm continue future expansion in the face of Brazil's economic obstacles.

"When the currency exchange rates are in balance, Intercast is competitive on raw casting quality and price with any other country on the globe," said Crawford. "The difficulty for Brazil is the cost of capital investment, which makes the cost of machining equipment and machined casting costs high and less competitive in the global market. Intercast's growth through alliance helps overcome that obstacle."

Growth Forecast

As part of its growth forecast, Intercast is searching for a new strategic alliance with a casting buyer.

"While this wouldn't be a partnership for ownership of the firm, we are looking for a long-term supply alliance that would allow us to further invest in the facility and secure production quantities for the future without securing debt," said Crawford.

Intercast has begun an expansion of its customer base into the medium and heavy truck, construction and agriculture markets. By diversifying itself, Intercast is becoming less dependent on exports (100% of its castings were exported in 1997). Today, the firm is exporting 60% with a goal of reaching 50% by 2007.

Intercast's future expansion plans are contingent upon finding that supply alliance. In these expansion plans, the plant would add:

* increased melt capacity by adding furnaces capable of utilizing molten pig iron from blast furances;

* increased core capacity;

* the already pruchased 120 mold/hr. cope and drag green sand line for castings up to 440 lbs;

* shot blast and finishing stations;

* quality control equipment.

In some cases, this equipment already is purchased but remains in storage until the working capital becomes available or a new alliance is reached. Thus, the expansion to capacity levels of 6,500 tons/month by 2009 is not a question of if as much as when. When Intercast finishes this expansion, it will move from the top 20 in casting tonnage production in Brazil to the top five.

Intercast's strategy of growth through partnership and alliance falls in line with its strategy for filling up production capacity at the plant.

"We don't believe in lead-times because we don't believe in selling more capacity than we have. If it takes us four weeks from casting design acceptance to casting delivery today, it will take us that same amount of time four years from now."

Key to this philosophy is the firm's yearly and quarterly forecasting. As part of this forecasting, Intercast sees the swing in casting production coming back from China to the U.S., Mexico and Brazil. The firm believes that China's domestic engineered casting capacity is shrinking due to its own internal needs. As a result, customers are left looking for new options. This is where Intercast hopes it can step in.

"We are building a niche in the marketplace," said Crawford. "Customer alliances and investment capital are critical. When that is established, the future is promising."

Brazil's Casting Industry Growth

The Brazilian metalcasting industry is in a growth phase. From 2002-04, industry shipments grew from 1.97 million metric tons (ninth in the world) to 2.82 million metric tons (sixth in the world), according to MODERN CASTING's 2005 World Census of Casting Production.

Currently, the industry is comprised of 1,315 facilities with an installed capacity of 3.4 million metric tons. The industry employs 55,000 people and had sales of $4.2 billion (U.S.) in 2004 (Fig 1).

[FIGURE 1 OMITTED]

In terms of production, the tonnage shipped is broken out by 84.5% iron, 8.5% nonferrous and 7% steel. From a sales perspective, the break down is 57% iron, 30% nonferrous and 13% steel. The $4.2 billion in sales in 2004 is almost double 2002's sales level of $2.2 billion (Fig. 2).

[FIGURE 2 OMITTED]

The end-use markets for Brazilian-made castings (Fig. 3) are dominated by automotive (56.3%), capital goods (14.1%) and exports (16.1%).

The export of castings from Brazil has grown from a value of $77 million (U.S.) in 1980 to $852.3 million today. This is an annual growth rate of 10.5%. During this time period, Brazilian casting productivity (on average) has grown from 20 tons/man year in the 1980s to 53.4 tons/man year in 2004. This increase in efficiency can be attributed to the heavy investment (domestic and foreign) into the industry, including $387 million in 2004-05.

The forecasts for casting production in Brazil show steady growth through 2009. With production levels forecast to reach 3.6 million metric tons industry experts estimate that an additional investment of $986 million (U.S.) to upgrade capacity will be required to meet this forecast.

Intercast S/A

Itauna, Minas Gerais, Brazil

Metals Cast: Gray and ductile iron.

Mold Process: Cope and drag green sand.

Core Process: Coldbox and shell,

Size: 18,000 sq. m.

Markets Served: Waterworks, medium and heavy truck, construction and agriculture.

Value-Added: In-house patternmaking, machining, fusion-bonded epoxy coating, and primer and finished painting.

Exported Production vs. Domestic: 60% for export; 40% domestic (50/50 by 2007).

Employees: 225.

2005 Production: 19,200 metric tons.

Fig. 3 Shown are the major end-use markets for Brazilian-manufactured
metal castings based on sales.

Casting End-Use Markets

Automotive        56.3%
Infrastructure     3.2%
Exports           16.1%
Other              5.2%
Capital Goods     14.1%
Steel Mills        5.1%

Note: Table made from pie chart.