Economy, Business And Markets

Where is Iran’s Steel Industry Headed?

Where is Iran’s Steel Industry Headed?Where is Iran’s Steel Industry Headed?

The development of steel industry all around the world is based on the production of pig iron or sponge iron. For centuries and millenniums, people have produced iron all around the globe. The development of this production largely depends on the availability of required resources, which are mainly iron ore (Fe2O3 or Fe3O4) and a reducing agent to reduce iron oxide to iron. In other words, we need something to separate the oxygen atoms from the iron atoms. This reducing agent is CO (carbon monoxide).

While the basic chemistry might seem interesting to chemical engineers, the main implication of this for the industry is that steel and iron production can be easily developed in regions where three elements are readily accessible: iron ore, carbon and energy. The latter two are found in fossil fuels such as natural gas or coal. Therefore, cheap iron ore and fossil fuels are the cornerstones of steel production development.

The dominant paradigm in the past century was wherever you could find these elements, steel production was expected to prosper, until China stepped in and changed everything. Although access to raw materials might seem a competitive advantage, today the global steel industry is arranged in such a fashion that simply having the raw materials does not put you in a favorable position in the steel production competition.

For instance, China and Japan with annual production of around 800 and 100 million tons per annum respectively, which are the two largest producers in the world, are not in a favorable position with regard to raw materials. China does possess many iron ore mines, but they are at no means cheap compared to the iron ore they buy from Australia. Japan, on the other hand, is a pure importer of raw materials and has no advantage whatsoever from this perspective. Australia is another country with vast reserves of iron ore and coal, but it does not have a developed steel industry.

So what constitutes an advantage in today’s steel production? It is three words, “economies of scale”. China is able to produce over 800 million tons of steel annually cheaper than any other country. The steel sector in many countries are threatened today by cheap steel of China. Australia and Brazil are breaking records in production costs of iron ore every day. According to International Steel Statistics Bureau, they export more than one billion tons of iron ore, which give them an aggregated market share of more than 70 percent in global seaborne iron ore trade.

While all these countries where scaling up production, Iran, possessing vast amounts of natural gas and iron ore reserves, was going in the opposite direction, planning many small steel plants scattered around the country. Iran, whose steel industry is facing a critical dilemma today, has to decide whether it wants to rely on domestic demand for steel and keep supporting its steel sector with tariffs and quotas or stick its neck out and be a major player in the global steel market.

In recent years, Iran has pursued a provincial steel project with an aggregated production capacity of 6.4 million tons of steel, which is supposed to be constructed in the form of 8 steel plants with a capacity of 0.8 million tons each around the country. According to a report recently published by the Mining and Industries Commission of Iran’s Parliament, completing these projects has no economic feasibility due to their poor placement and small scale.

The report stated that the industry standard dictates that plants, which produce under 2.5 million tons and in some cases under 5 million tons per annum are not economically feasible. In addition to the provincial steel projects, two largest steel producers in Iran, Mobarakeh and Khouzestan steel companies, were planned to raise their aggregate capacity by 3.5 million tons, which did not happen.

After the presidential election in 2013, the Ministry of Industries, Mining and Trade has focused on the development of steel sector. The ministry is now talking about a rise in capacity with a more aggregated approach and efficient scales. Iranian Mines and Mining Industries Development and Renovation Organization, IMIDRO, has stated plans to build 11.6 million tons of capacity in southern coasts of Iran with investments from domestic and foreign companies. A contract to build a sponge iron production plant in Mokran, located in the Chabahar free zone, with a total capacity of 3.2 million tons per annum has been recently signed. The ministry states that Iran aims to reach a 55-million-ton steel production capacity, including 14 million tons of steel export by 2025. This is while according to the parliament’s report, Iran’s current capacity for crude steel output is around 14.5 to 16 million tons per annum, which should have been 32 million tons if things had been going according to plans.

Nonetheless, it seems Iran’s steel industry is slowing down against the global trend and starting to gain momentum in the right direction. One of the promising agendas for Iran’s steel industry is the development plan of domestic rail transportation systems through a material increase in the governmental budget. The development in rail transport infrastructures would require a massive consumption of steel. At the same time, this development would largely facilitate the flow of raw materials throughout the country, which consequently enables the development of steel plants with large scales. In the current state of global steel industry, with historical low prices, large players around the globe seem to have a growing appetite for the unexploited potential of Iran’s steel industry.