The Majlis Research Center has published a report on the structural challenges facing the country’s cement sector and the reasons behind its recent market instability.
The translation of the report is as follows:
Cement industry is one of the oldest in Iran and dates back to 100 years. Iran’s rich resourses of limestone, clay and silica — the raw materials of cement — have resulted in the development of cement production in the country. Cement mills were first purchased from the Soviet Union, Romania, Germany and Czechoslovakia. But later, after acquiring its technology, these mills were fully designed and implemented in the country.
Average investment needed for the construction of a one-million-ton cement factory stands at $150 million. Cement plants were owned by the government until two decades ago; the pricing and distribution of the product were carried out by the government and cooperatives. They underwent major development as they were handed over to the private sector but were still under the shadow of state pricing policy until producers were allowed to offer their product on Iran Mercantile Exchange in the month ending June 21, 2021.
Long-distance cement transportation and exports are not economically viable, therefore cement factories in mineral-rich countries are usually being constructed within a radius of 400 kilometers from local markets.
Cement production includes the production and grinding of clinker; countries that don’t have mineral resources or the needed technology usually import the intermediate clinker product and grind it into cement.
A large number of construction permits for cement factories have been issued, given Iran’s civil development projects of past decades, including dam construction and housing projects as well as the goal of achieving the annual economic growth of 8% in the 2025 Vision Plan.
In doing so, the nominal capacity of Iran’s cement production is expected to reach 100 million tons by March 2026. At present, Iran is the 11th largest producer of cement in the world. China, the US and India are top cement producers around the globe.
Iran no longer issues construction permits for new factories. Cement prices in regional markets hovers around $60-70 per ton whereas the Iranian Industries Ministry’s mandated cement price stands at $10-15 per ton.
One of the biggest challenges of cement industry is the presence of middlemen both in domestic sales and export networks. They purchase cement at government-mandated prices from the factories and supply it to the market after adding their own mark-ups, including transportation costs and profit.
The profit from the gap between the factory price and market price goes into the pockets of middlemen. Their important role lies in the fact that they are financially capable of buying the product in cash; real consumers cannot purchase cement at high volume in cash.
In recent years, due to high costs of transportation and needed materials for cement packaging, intermediaries have maximized their profit by employing unfair means of business. For example, Iranian or foreign traders would buy cement at factory prices in local currency and export them in foreign currency, but export revenues would not return to the country due to the prevalence of single-use commercial ID cards. Following forex reforms carried out by the Central Bank of Iran and the supervision over the procedure of issuing commercial ID cards, this problem has been solved and now producers can export their own products.
Cement Production and Commerce
According to the latest figures by the Ministry of Industries, Mining and Trade, the nominal production of cement in Iran stood at 88 million tons in the fiscal 2020-21.
More than 70 cement factories were operational in Iran and they produced 27 types of cement, according to national standards. Grey Cement Type II and Type V account for the lion’s share of production and consumption of cement in Iran.
The real production of cement last year was 69.3 million tons, of which 15 million tons were exported to Iraq, Afghanistan and some Southeast Asian countries and 64 million tons were used locally.
Exports of clinker have gradually outweighed those of cement in recent years; foreign countries are more inclined toward imports of clinker thanks to their scarce mineral resources.
Domestic Market Instability
Iran’s cement market has been under the intense supervision of the government in recent years. Misguided pricing by Industries Ministry, besides overproduction and supply of subsidized energy to manufacturing enterprises, has resulted in negative competition and dumping among producers and exporters.
Iran’s cement and clinker were being exported to Iraq and Afghanistan at low prices; to counter cement dumping from Iran, the aforementioned countries banned or levied heavy duties on cement imports from Iran. In addition, low profit generated from domestic sales or exports robbed the cement factories of the opportunity to renovate and employ advanced technology, putting them at the risk of closure.
Cement industry is one of the main consumers of electricity and natural gas in Iran. Electricity and fuel consumption to produce 1 ton of clinker is 66 kWh and 830 kcal, respectively. To produce 1 ton of cement, 110 kWh electricity are required. Total consumption of electricity and natural gas by cement industry averages 7 billion kWh and 7 billion cubic meters (bcm), respectively.
The industry accounts for 3.5% of total natural gas consumption and 2.5% of total electricity consumption in Iran. Given the shortage of natural gas in winter and the shortage of electricity in spring and summer, ministries of energy and oil restrict the supply of energy to industries. This comes as, according to Article 25 of the Ease of Business Environment Law of 2015-16, industrial and agriculture enterprises should not be the first to experience restrictions regarding the supply of electricity, gas or telecommunication services.
Whenever the government is forced to limit the supply of electricity, gas or telecommunication services to private-run or cooperatives-owned companies temporarily, it is required to compensate losses incurred by them. Gas supply cut in winter and power outages in summer, therefore, affect supply, demand and prices of cement factories products.
Notably, cement producers and Energy Ministry have reached a compromise regarding the schedule of maintenance period of factories; the maintenance and throughput operations period of factories have been timed with electricity-intensive months, the Energy Ministry has envisioned incentives for factories in this matter as well, but negotiations with the Oil Ministry and the National Iranian Gas Company regarding the management of cement production and gas consumption during the cold season have failed to produce the desired results.
Cement industry faced restrictions of electricity supply by Energy Ministry during the month ending July 22; power outages during the period brought clinker and cement production to a halt and affected cement supply to the market.
The gradual increase in the prices of cement was put on the agenda of Industries Ministry last winter. As a result, the first offering of cement on Iran Mercantile Exchange took place in June; cement companies affiliated to the investment arm of Social Security Organization, also known by its Persian acronym Shasta, were first to offer their product on IME.
Official statistics show that domestic demand for cement stands at 1.2 million tons per week, the amount may change in different season, though. During the final week of Iranian month ending June 21 and the first two weeks of Iranian month Tir (June 22-July 5), i.e., before the power outages of factories, 55% of demand for cement were met via IME on a weekly basis.
Nearly 1,400 cement buyers were listed by IME and the minimum amount of cement to be sold to each buyer was set at 10 tons.
Cement prices reached equilibrium during the three weeks under review, thanks to market supply and demand mechanisms. The trading price of each kilogram of cement ranged from 4,470 rials ($0.017) to 4,750 rials ($0.018). The supply of cement declined due to the power outages during the two weeks leading to July 22 and consequently prices increased to over 5,400 rials ($0.02) per kilogram.
Trade registered during the two weeks leading to July 22 declined due to the drastic fall in the supply of cement by producers. But low supply and the probable hoarding by producers led the market prices to over 15,000 rials ($0.05) per kilogram.
Most cement factories offered their products on IME, but there were a few manufacturers who failed to do so and sold their products to the market at the Industries Ministry’s mandated price.
Conclusions & Recommendations
1. Cooperation between Energy Ministry and Industries Ministry and specialized associations of cement industry to manage electricity consumption through the voluntary shutdown of cement mills during summer, along with measures to prevent the decline of cement supply, by offering incentives for producers is recommended.
2. Reevaluation of plans regarding the supply of electricity and operations of cement factories based on the equipment and machinery they employ in order to require them to operate at a fraction of their demand for electricity (at least 70%).
3. Industries Ministry needs to act as cement market regulator`. It needs to terminate pricing and require all cement producers to offer a specific amount of their product on IME. This will inject transparency to the supply, demand and trade of cement in the country and cut out middlemen. Real consumers and distributers will acquire trading codes to buy cement directly from IME.
4. Activating IME export rings for cement and clinker to offset negative competition and dumping. The measure will make export transparent.
5. Industries Ministry needs to supervise the activities of cement producers and distributers’ warehouses by setting up a comprehensive database to prevent hoarding.
6. Gradual increase of energy prices (electricity and gas) over a five-year period along with setting the real price on IME, i.e. liberalizing prices with the purpose of directing factories toward upgrading their technology, renovation and repair.
7. Given the overcapacity of cement production and the limited number of export markets, it is vital to reevaluate cement projects with less than 40% physical progress, whether to stop or relocate these projects.
8. Policies and plans for cement industry must be made with the consultation of producers and related specialized associations.
9. Cooperatives engaged in the distribution of cement and construction materials must be supported to have the opportunity to buy cement from IME. This will open up the opportunity to facilitate oversight over the product’s distribution.
