Economy, Business And Markets

Gov’t Development Plans or Bad Global Market?

Gov’t Development Plans or Bad Global Market?
Gov’t Development Plans or Bad Global Market?

AAccording to official statistics released by Iran Customs Administration (IRICA), Iran’s iron ore exports have decreased substantially, reaching around 0.02 million metric tons in January from 1.44 million tons in March last year.

The sharp decline in global prices is seen as the main reason behind the dramatic reduction of exports. While every ton of iron ore was sold at $92.63 in August last year, the price fell by 27.2% to reach $67.39 in January this year.

The unprecedented decline in iron ore exports started in October when global prices fell below $80. The decrease in prices made the raw material’s export uneconomical for Iran, as the transportations costs exceeded the selling price, said deputy chairman of the Iron Ore Producers and Exporters Association of Iran (IROPEX), Bahram Shakouri.

Government officials claim that the decline is in line with the policies outlined in the Comprehensive Steel Plan devised by the ministry of industry, mine, and trade in a bid to reduce export of the raw material in support of domestic steel industries. While the plan could be regarded as partly responsible for the export decline, it is not the main reason and the administration appears to be using the opportunity to highlight its role. Meanwhile, steel market analysts believe the golden age of iron ore is over and the global producers and consumers should expect the prices to remain around $60 per ton for the next ten to fifteen years.  

  Industrial Sector Still in Doldrums

The Comprehensive Steel Plan, which calls for the expansion of processing units in steel production chain, is an appropriate policy, according to many steel experts, but it needs time to bear fruit. Many market experts and economists believe that while the current administration has been fairly successful in curbing the inflation, the industrial sector, including the steel industry, still remains in the doldrums. The manufacturing sector has not yet recovered from the shock it received during the two terms of Mahmoud Ahmadinejad’s presidency. Therefore, achieving the target set by the mining and industrial officials to consume the entire produced iron ore domestically requires at least three years.

Shortages in the steel sector, particularly in raw materials, become even a more serious issue when one takes into account the country’s 20-Year Vision Plan, based on which at least 55 million tons of crude steel should be produced annually by 2025. Therefore, officials are expected to address the inadequacies and overcome the hurdles.

  Raw Material Shortage

As the officials know best and have acknowledged, the shortage of coal, scrap iron and iron ore pellets is seriously threatening the steel sector. Adding more than 37 million tons to the country’s annual production within the next ten years requires the steel sector to substantially expand the subsectors.

While the iron ore pellets manufacturing units in the country are developing sluggishly, the steel industry is faced with shortage of over 8.5 million tons of iron ore pellets per year. Currently only 1.5 million ton of the raw material is imported every year, leaving the sector short of at least 7 million tons more to meet its needs.

Similar predicaments exist in the scrap iron sector wherein the raw material is often supplied through traditional methods due to lack of proper supervising authority. Domestic supply has never been able to meet the steelmakers’ demand for scrap metal over the past years. The situation deteriorated when the supply reduced following the downturn in the construction sector. The import, on the other hand, is not economical as it should be done using the free market currency exchange rates, which is more than 20% above the official exchange rates.  

Another raw material in short supply is coal. Domestic coal miners are not motivated to increase exploration and production due to the numerous problems faced by the country’s coal industry over the past decades. Experts predict that coal imports will increase considerably in the near future.

The absence of sufficient mining explorations is seen as the root cause of shortage of raw materials in the steel sector. Therefore, authorities have started vast exploration operations over 200,000 square kilometers of the country’s land in the northeastern province of Khorasan Razavi. Officials have also promised similar operations to be carried out in other areas of the country, with the aim of providing the steel sector with enough iron ore reserves. If they fail to do so, the country should be prepared to meet the same fate as India. While India’s iron ore export was 110 million tons in 2009, today the country is among the importers of the raw material.

Last but not least is the increased royalties imposed on the mining companies. As of the beginning of the next Iranian year (March 21), all iron ore mining companies will have to pay 25% royalties on their incomes. The amount is too high for some mining companies, especially those from the private sector, and mining experts warn that it may push the small and medium-size companies toward insolvency in the near future.