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Iran has 250 steel factories with production capacities ranging from 30,000 to 6 million tons.
Iran has 250 steel factories with production capacities ranging from 30,000 to 6 million tons.

Go Big or Go Bust

One of Iran’s most ideal locations for merger is the Persian Gulf Special Economic Zone as it presents many advantages for steelmakers, such as its strategic location near high seas, which not only reduces transportation costs and facilitates exports, but

Go Big or Go Bust

The global steel industry is becoming a more challenging arena to operate in by the day.
As the sector grapples with production overcapacity, depressed steel prices and intense market isolation and over-protectionism, only the fittest may survive the grueling competition.
The issue is quite pronounced in Iran. Next to steel giants such as the Mobarakeh Steel Company, a myriad of small- and medium-sized enterprises are operating below economical production capacities.
A worsening industry landscape calls for a change in operational strategy. According to mining industry experts, it’s best for the Iranian steel sector to move toward vertical and horizontal mergers and acquisitions to boost its competitiveness. In fact, the country’s small, cost-inefficient mining companies are left with no choice but to either go big or go bust.
“Considering the nature of the steel industry and its various stages of production, vertical mergers and acquisitions are the most common expansion strategies in the sector for small- and medium-sized enterprises,” Mohammad Reza Daneshgar, an industry expert working with Mobarakeh Steel Company, was quoted as saying by the Persian daily Donya-e-Eqtesad.
Merger and acquisition refers to the consolidation of companies or assets. While there are several types of transactions classified under the notion of M&A, a merger means a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.
“We currently have more than 50 iron ore concentrate production, pellet-making, direct iron reduction and smelter plant projects under construction all over the country. They are mostly located in close proximity but are owned by different companies and holdings,” Daneshgar said.
The expert emphasized that the merger of these upstream plants can have a significant impact on reducing their operational costs and the final prices of products.
Daneshgar maintains that before an SME can embark on a vertical merger, it must firmly establish the supply and demand chain of its current products so that it can allocate adequate capital and human resources to developing the next or the previous state of the production chain.
Furthermore, the company must balance its production capacity with the upstream plant it seeks to absorb so that it can fully utilize the offered raw material.
For bigger players, Daneshgar suggests embarking on horizontal mergers, as they benefit the most from economies of scale and also have the resources at their disposal to operate an enterprise as large as themselves. He added that merging with or purchasing a large production plant is a less costly option than establishing a new one from scratch in the current state of the industry.
A horizontal merger is a business consolidation between firms operating in the same area, as competition tends to be higher and the synergies and potential gains in market share are greater for firms merging in the same industry.

  Path to New Markets
Iran has 250 steel factories with production capacities ranging from 30,000 to 6 million tons. The smaller mills were mostly established during boom years in the last decade as part of the government’s steel expansion plan. But now, lackluster crude and steel product prices, coupled with fluctuating raw material procurement costs, have left them in a slump.
This is while the larger mills are the drivers of domestic steel industry, as they produced 88% of the total 16.1-million-ton output in the last Iranian year (March 2015-16).
According to Hesam Adib, managing director of Patron Group, the industry’s proposed merger plan provides a chance of steering the sector toward higher value-added products and entering markets not yet tapped by China.
Underlining the fact that the Chinese are also mulling steel mergers, Adib believes that the industrial behemoth will be even more competitive in terms of finished prices in the next few years.
Also, China’s still-dwindling consumption of the industrial material necessitates boosting exports.
This is while based on the 20-Year Vision Plan (2005-25), the Iranian steel industry is expected to manufacture 55 million tons of crude steel per annum by 2025, 20 to 25 million tons of which are to be exported amid dwindling domestic demand.
“This means that we have to compete with the Chinese in pricing, while we neither have the required production technology, nor the capacity and infrastructure,” Adib said.
According to Adib, Iran is currently self-sufficient in producing crude and structural steel and expanding production for exports is uneconomical, as China has monopolized the markets. Hence a limited market share remains for competition.
With the capital and risk-taking ability provided by a merger, parent companies can change the production direction of loss-making upstream and downstream plants.  
For instance, many of the country’s mills using electric arc furnaces to produce crude steel are operating at a loss, while producers can use secondary metallurgy technologies and EAFs to manufacture “nearly any high-grade steel product” and earn profit by exporting them, he said.
  PGSEZ Opportunities
One of Iran’s most ideal locations for merger is the Persian Gulf Special Economic Zone. It presents many advantages for steelmakers, such as its strategic location near high seas, which not only reduces transportation costs and facilitates exports, but also helps meet the huge water requirements of the steelmaking industry, according to managing director of Vian Steel Complex, Mojtaba Haji-Shafiei.
Iran’s steel experts have long called for the merger of six companies operating in the PGSEZ, namely Hormozgan Steel Company, Maad Koush Iron Ore Pelletizing Company, Maad Chemie Iron Ore Concentration Plant, Saba Steel Company, South Kaveh Steel Company and Pars Mining Industries Development Company.
Such a merger at PGSEZ means all the companies will share the infrastructure: one railroad, one electricity source and one water treatment plant, which will lead to much lower operational costs.
“The companies can share their production technologies and expert workforce and boost their production quality,” Haji-Shafiei said.
According to Bahram Sobhani, managing director of Mobarakeh Steel Company, the implementation of the proposed plan will be the sign of Iran steel industry’s maturity.

  Together, Stronger
The global steel industry’s giants are pushing to get even bigger. According to Bloomberg, China’s Hebei Iron and Steel Group, the industrial nation’s largest steelmaker, is set to merge with Shougang Group to create the Northern China Steel Group with a combined steel output of 76.3 million tons.
Furthermore, the Chinese government announced back in June that Shanghai Baosteel Group Corp. and Wuhan Iron and Steel Group Corp. will be merged into Southern China Steel Group, boasting a more than 60 million-ton output.
The Chinese steel behemoths are, in fact, moving close to challenging the world’s largest steelmaker, ArcelorMittal, which was also formed in 2006 through the merger of Arcelor and Mittal Steel. The Luxembourg-based company produces over 97 million tons of steel per year.
Another notable instance of successful horizontal mergers in the steel industry is seen in South Korea where close to 70 million tons of steel are produced annually, 90% of which are manufactured only by POSCO, Hyundai and Dongkuk Steel Mill Company–all three formed through either merger or acquisition of other steel companies.

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