The Ministry of Industries, Mining and Trade on Saturday announced that cement production stood at 20.8 million tons in the first four months of the current Iranian year (started March 21), indicating a drop of 14% compared to the same period of last year.
These figures have been published as mounting evidence that the cement sector has fallen victim to falling oil prices and squeezed regional state budgets.
Iran ranked first in cement exports worldwide by selling more than 19 million tons last year. In terms of production, the country ranks first in the Middle East and fourth in the world.
According to the USGS Mineral Resources Program, Iran stood on par with Turkey in the production of the essential building material in 2014 (see graph).
Despite the difficulties sanctions have caused for producers, output figures reported a strong growth of more than 100% over the past decade. This growth was driven by three factors. One was the booming domestic construction industry. Not only did the private construction sector centered on Tehran flourish, but lavish oil revenues provided the country with the opportunity to expand infrastructure projects on a grand scale.
Cement is classified as a strategic product by the government, which has done its best to attract capital assets in the sector. A 2011 report by the US Geological Survey confirmed that Iran has “state-of-the-art cement manufacturing technologies.”
Lastly, Iran found a devoted trading partner in Iraq, which in the same period pulled politically closer to Tehran and used a strong oil-driven state budget to rebuild a war-torn country.
Cement exports to Iraq have boomed since 2008, shooting up from nil to almost 10 tons in 2013 (see graph).
“Iran supplies nearly half of Iraq’s total cement consumption,” said Majid Qorbanifaraz, an official at the Trade Promotion Organization. “Iraq annually consumes 19 million tons of cement, of which 10 to 12 million are produced inside the country and the rest is imported from Iran.”
In terms of value, that implies exports of various cement products worth over half a billion dollars, according to the Tehran Chamber of Commerce, Industries, Mines and Agriculture.
Although paling in comparison to Iraq, other major cement export markets include Azerbaijan, Turkmenistan and Afghanistan. About one-fourth of total output is exported to more than 20 countries.
However, short-term forecast for the cement sector looks precarious, as the main engines of the industry are running out of steam. The drop in oil prices to around $45/pb has caused regional governments, including Iraq and Azerbaijan, to launch austerity programs and cut spending in different sectors, including construction and infrastructure where cement is widely used.
Grappling with an ongoing war, the Iraqi government has had to put a break on all but essential infrastructure projects as state coffers are emptying.
In Iran, before the drop in oil prices, a sharp contractionary economic policy was put forward by President Hassan Rouhani to tame inflation. So lower oil revenues further affected infrastructure spending. The government budget for infrastructure development rose from 380 trillion rials in last year’s budget to 430 trillion now. This nominal increase of 13% implies an absolute drop as inflation stands at around 15%.
The government austerity has banded with sanctions to reduce private construction investment in Tehran to a trickle. Although transactions in the real estate sector are predicted to tick up slightly in the second half of the current year, it is widely believed that construction will not register substantial growth.
Over the past 16 months, production has steadily declined (see graph). Experts forecast that if current trends continue, Iran’s global production ranking will drop from the current fourth to the fifth or sixth spot in the coming years, according to Eghtesad News.
At the same time, the sanctions regime prevents the government from diversifying its international client base.
The Iranian government has a tough time finding new international partners for the 20-plus tons of cement it produces for export annually. With domestic demand currently stuck at between 50 and 55 million tons, finding new exports markets is of great importance in Tehran’s aim to boost production to 85 tons.
On the other hand, Chinese and Turkish cement is increasingly used by Iran’s neighbors, particularly in the Caucasus and Central Asia. Ankara and Beijing have been able to attract the investment necessary to expand their production while operating in a liberalized trade regime.
Another case in point is Afghanistan, where Pakistani cement producers continue to compete with Iran. Abdolreza Sheykhan, head of Iran’s Cement Association, told Fars News Agency: “This competition is mostly driven by prices, as the quality of Pakistan’s cement exports is average to low.”
While some analysts believe that the lifting of sanctions would increase the value of the rial, making cement exports uncompetitive, others point out that Iran’s elevated international trading status will make Pakistan’s position in Afghanistan untenable.
Additionally, Pakistan’s cement industry has been ravaged by power cuts and adverse government policies, raising expectations that Iranian cement will even penetrate that market after sanctions are removed.
