Iran’s third largest steel producer is looking to use financial instruments to bolster its standing and ease sales and funding.
Esfahan Steel Company is in talks with Iran Mercantile Exchange to offer financial instruments that would help the company manage sales risk and better market its products.
Iran is increasing steel exports and courting foreign investors in an ambitious bid to quadruple steel output in a decade, though the target is under revision by the government.
IME head Hamed Soltaninejad met with ESCO’s CEO Ahmad Sadeqi on Saturday to discuss introducing futures, options and other financial instruments for steel products, IME international affairs and PR reported.
The two companies have close ties. Mansour Yazdizadeh, the marketing and sales deputy of ESCO, also sits on IME’s board as the exchange’s chairman.
ESCO, affiliated to the Ministry of Industries, Mining and Trade, is Iran’s third largest steel producer after Mobarakeh Steel Company and Khuzestan Steel Company, and Iran’s biggest producer of structural steel.
Sadeqi said the IME could use its position to market ESCO’s products in international markets.
ESCO exported about 400,000 tons of steel to 25 countries, including France, Turkey, India, China and Saudi Arabia, during the first half of the current Iranian year (started March 21). The steelmaker produced 2.7 million tons the year before.
IME’s Certificates of Commodity Deposit can also improve sales for steelmakers. CCD securitizes a company’s inventory and offer buyers easy ownership of goods without the usual hassles of storage and insurance. Goods offered as CCDs are stored in IME’s certified warehouses.
Islamic futures, called Salam, can also be offered for steel products. But to get trading volume up, it would be logical for the IME to give steelmakers specifications for the steel in Salams, thus standardizing them for the benefit of liquidity.
The exchange has already created Salams for PVC and iron ore. Miners Golgohar and Chadormalu have sold their iron ore on the IME, earning 830 and 800 billion rials ($23.3 and $22.5 million at market exchange rate) respectively, in the process.
So, offering futures on processed steel will be easy.
The steel and iron ore sector is a strategic industry for Iran. If there isn’t enough steel in the country, the construction industry will grind to a halt and another 50 or so related industries will be hurt. It will also lead to huge unemployment.
However, IME needs to attract traders to make these instruments worthwhile. Without adequate liquidity, these instruments and their sales will stall and that’s not what ESCO and many other companies are after.
A future step could be offering leverage to prop up trading, as mentioned earlier, standardizing contracts and making products from different companies interchangeable, which could ease trading.
